US internet companies are desperate to get into China and they are paying huge sums for a toe-hold in the market. Yesterday Yahoo! confirmed it is to pay US$1 billion for a 40 per cent stake in Hangzhou-based online auction and e-commerce company Alibaba.com. In buying into China, Yahoo! is following hot on the heels of rival eBay, which last year paid US$150 million to acquire full control of Shanghai auctioneer Eachnet. Both companies have ambitious plans for the fast growing Chinese internet market, which earlier this year became the world's second largest after the US by user numbers, with over 100 million logged on. Yahoo!'s latest purchase comes on top of the US$120 million it paid in 2003 for Chinese-language search engine 3721.com. That business will now be folded into Alibaba to give the company a full suite of internet services, including search, an online payment system, auctions through Alibaba subsidiary Taobao.com and a well-used business-to-business market place. Whether Alibaba deserves the US$4 billion valuation the deal places on it, however, is open to question. That is a third more than the massively over-inflated value the market is placing on Yahoo!'s dominant rival in the Chinese search engine market, Baidu.com, after its red-hot initial public offering last week. Put another way, it is US$40 for every single internet user in China and more than US$500 for each of Taobao's registered users. Alibaba makes its money by charging businesses for touting their wares over its websites. Last year the company generated cash revenues of just US$68 million - or US$46 million when adjusted to generally accepted accounting principles - from its domestic and international business-to-business services, an average of only a few hundred dollars for every paying customer. The company claims it broke even in 2002 but declines to disclose any profit figures. Taobao and Alipay generate nothing. Both services are given away free and will be for at least another year. Of course, Yahoo!'s investment in China, like eBay's, is premised on future growth rather than present profitability. With the business-to-business market growing fast, Alibaba expects its cash revenues to increase 50 per cent this year to more than US$100 million. That figure will get a boost next year only if Alibaba can work out how best to charge Taobao users. Chinese web usage is expanding by about 25 per cent annually (see chart), and the China Internet Research Centre expects internet auction transaction volumes to double this year, topping 20 billion yuan in 2007. Even then, if Alibaba and eBay divide the market equally between them, and Taobao commands a 2 per cent commission, it will generate only an additional US$26 million in revenues. Unless Yahoo! can persuade investors to stump up in a Baidu-style IPO, it may have a long wait for any return on its investment.