Wednesday, September 5, 2007

China Internet - Jeff Lindsay Perspective

China will shortly overtake the US in total number of broadband connections at over 60 million. And while broadband penetration is slowing in the US, it is still growing very strongly in China. The China Internet Network Information Center estimates that the number of Internet users in China (currently 137 million) is growing annually at 23%, compared with 12% in the US.

Jeff Lindsay of Bernstein Research writes that GM seems to be doing better in China than Google. Chinese Government officials are easy to spot – they all drive black Audi A8s. There are a large number of Hyundais and Nissans, but the most popular cars seem to be Chryslers and Caddys, both of which are perceived as being especially powerful and luxurious to the Chinese consumer. Google on the other hand seems to be slipping in popularity – now down to 9.4% market share according to Analysis International, losing further ground to Baidu. The reason for this is because most people in China prefer the localized results from Baidu. High school and college students are the primary market for Google, mostly for essays and term papers where Google’s search capabilities have an edge. In fact many Google users in China actually search in English. Outside of academia and the ex-pat community, most people find local news, music, MP3s (which seem to be enormously popular) on Baidu. Some adjustment to local market conditions would seem to be needed here by Google.

The Chinese authorities are proposing to implement a new policy of pop up warnings every 30 minutes to Internet users. Apparently two cartoon characters "Jing" and Cha" which make up the Chinese word for "Police" will appear warning users to stay clear of “unapproved” websites. They are on the lookout for websites that promote criminal activity, secession (independence for Tibet and/or Taiwan), superstition, gambling and fraud. The police also provide a mechanism for users to report such activities directly.

For web sites outside of China there is a delay of about 3-5 seconds – like dial-up and occasionally the pages won't load. This is the effect of the Government firewall that checks every single web page coming from outside China. However, Chinese web sites load immediately without these delays. The most noticeable absence is the BBC. It seems that the BBC has been blocked by the Government in China. Others like the New York Times, The London Times, the Manchester Guardian, The Daily Telegraph and the Economist online are allowed. The main disadvantage for western Internet companies was to be on the outside of the firewall, because this gives a noticeable time lag in loading web pages. Google recognized this and hosted Google China servers locally on the inside of the firewall. To get permission to do so, Google voluntarily and controversially agreed to self-censorship. As per Jeff, many more websites are blocked in the US by corporate policy than seem to be censored by the Government in China. One can access MySpace in China but not at work in the US, the same for Facebook, Hotmail, Gmail and Yahoo! Mail. One can access the New York Post in China but not at work in the US. Similarly, the British tabloid press (The Sun, Star, Daily Mirror and Express) are open in China but blocked by US Corporates.

Almost all the US Internet players seem to be losing market share in China, and none seem to have either the respect or name recognition that they have in the US. Surprisingly, MSN and Yahoo! are favorites. Many Chinese people have email accounts with both players and generally like their local offerings. Google and eBay are both being mauled. In Google’s case, it is employing Chinese nationals and making acquisitions. EBay seems to have given up and may cut its losses and exit China. The leading search site in China is Baidu, which according to Analysis International has a 23.5% market share of search revenues compared to Google's 9.2% and Yahoo China/AliBaba's 6.4%. In e-commerce, eBay's market share has collapsed to 7.2% (from 34% in2005) according to Analysis International. Based on a general scan of the Chinese business press, the US players generally do worst on several fronts: (a) bad or nonexistent customer service, (b) unrealistic pricing, (c) no competitive response when losing market share, (d) staffing with second raters from abroad and/or giving too little autonomy to local managers.

Prominent Chinese destinations include: Baidu (BIDU); Sohu (SOHU) whose property seems to be the Chinese equivalent of FaceBook with virtually every single Chinese high school and university student listed; Sina (SINA) a news and information portal; and TaoBao, eBay's nemesis that is part of AliBaba. owned by NetEase (NTES) seems to be very popular and is believed to be the fastest growing source of new web mail accounts. China will become the largest and fastest growing Internet market in the world over the next 5-10 years, likely matched only by India. Players that stay the course and establish a beach-head stand to benefit from the massive growth of these markets. Conversely, players that do poorly or exit China do so at their long term peril. All international players should reexamine their strategies, and think seriously about hiring the very best locals, and putting their best US staff there on the ground to make sure that they do not miss out on the next Internet frontier.
Thanks Jeff Lindsay, Bernstein Research, August 2007