Why Yahoo! Investors Need to Know Sky Cat

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Everyone knows Yahoo!(YHOO) has a big stake in Alibaba Group, and everyone knows Alibaba CEO Jack Ma wants it back. What you might not know is that the most valuable aspect of Alibaba's entire empire is a business called Tmall.

At least, it used to be called Tmall. Overnight, the Chinese company announced it was taking on a new corporate identity with the name Sky Cat. And this simple name change could have big implications for Yahoo! and its investors.

Alibaba Group has three key businesses: Taobao, Tmall, and Alipay. Alipay came to most Americans' attention last spring when Jack Ma decided to separate it from the group, supposedly in order to meet some Chinese government licensing requirement that restricted foreigners from owning a payment-oriented company.

Alipay is a great property. It's the leading online payments company in China and facilitates transactions on both Taobao and Tmall.

Taobao is usually what most Americans think of as the crown jewel of the Alibaba Group empire. They think of it as the eBay(EBAY) of China. However, this isn't exactly true.

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eBay makes most of its money off of transactions. Taobao makes most of its money off of ads. Very early on, several years ago, Taobao was in a dogfight with eBay over who would own the Chinese market. eBay bought a local Chinese company and tried to apply the same! U.S. mo del to China. Ma decided that he would keep his transaction costs very low in order to win market share.

It worked. Chinese consumers flocked to Taobao -- and they haven't stopped. When eBay withdrew from the Chinese market a few years ago, some wondered if Ma would raise his prices. He didn't, choosing to keep Taobao's market share above 70%.

Instead of making money off these transactions, Ma makes a lot of money from advertising. Taobao is the biggest ad-revenue-generating company in China after Baidu(BIDU).

But there's another purpose of all that Taobao traffic. Ma has recently built up a new property over the last few years called Tmall. Think of it like a Chinese Amazon(AMZN). It is a large virtual mall where you can browse through thousands of vendors' storefronts. Ma helped transfer a lot of the Taobao traffic over to Tmall, and consumers have been pleased with the prices and selection -- they keep coming back. Tmall has been growing its traffic and merchants over the past three years, and it takes a very healthy bite out of each transaction.

Furthermore, as Tmall's traffic has surpassed that of other e-commerce merchants, an interesting dynamic has developed. All these smaller merchants need more revenue, as they struggle to keep their costs under control as they grow out their businesses. Therefore, they have become more and more dependent on Tmall for helping to bring that traffic. If you want to get your brands and store in front of Ma's traffic, you will have to pay up for prime positioning. Tmall should continue to grow and will eventually surpass Taobao in size.

The decision to change the name to Sky Cat may be a signal that Alibaba Group plans for a separate listing for this entity in the near future.

For Yahoo!, this could mean that Alibaba is set on either proceeding with the cash-rich split to acquire back m! ost of Y ahoo!'s stake in Alibaba Group, or -- if it gets frustrated with the process -- it could seek to buy all of Yahoo! in order to get that stake back.

Ma, however, is unlikely to just walk away from the table. Every day that goes by is another day that Yahoo!'s stake in his business increases in value ...

At the time of publication, Jackson was long YHOO

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