By Charles
Chao
It has been 20 years since the first e-mail was sent from China.
However, the Internet has been in popular commercial use in the
country for just 10 years. The past decade has seen the number of
Chinese Internet users grow from 620,000 in 1997 to 162 million at
the end of June 2007. In that same time the number of websites in
China soared from 1,500 to 1.31 million. In 2000, only three
Chinese portal websites – sina.com, sohu.com and netease.com – were
listed abroad, with a combined market value of less than US$500
million at the end of the year. In 2007, more than 20 Internet
companies with various business models were listed abroad apart
from portal websites, boasting a total market value of over US$50
billion.
Despite the bubbles and market shakeups in the past decade,
China remains one of the countries where the Internet enjoys the
most rapid development. Internet users in China are expected to
outnumber those in the United States by the end of next year or
even earlier, making China the country with the largest
Internet-using population. The Internet has evolved into an
important industry in China, exerting a great influence on people's
daily lives and everyday economic activity and helping promote the
country's economic development and social progress.
Encouragingly, Chinese Internet users will account for less than
15 percent of China's total population even if their number exceeds
the number of their US counterparts next year. There is much room
for China's Internet industry to achieve long-term and sustainable
growth.
Information and entertainment have been the dominant themes of
Internet services in China in the past decade. The development of
e-commerce has lagged behind online entertainment. Internet
applications in business enterprises and government agencies are
still in the primary stage. The most widely used applications are
for news browsing, information searching, instant messaging, video
watching and online gaming. Accordingly, advertising and online
gaming have been the main business models of China's Internet
industry over the past decade. These two services are responsible
for more than 80 percent of the industry's revenue at present. They
will continue to be its main profit models in the foreseeable
future. Of course, as the Internet is used more widely in the
corporate world and as the general climate for e-commerce further
improves, e-commerce is set to become another major source of
profits for China's Internet industry and undergo explosive
growth.
Now I would like to elaborate on the present and future market
potential of the Internet in China from the following
perspectives:
I. Online advertising
Online advertising has been one of the major profit models of
China's Internet industry. It has maintained rapid, sustainable
growth in the past decade. China's online advertising market grew
from less than US$20 million in 2000 to US$900 million in 2006 and
is expected to approach US$1.5 billion this year. Chinese Internet
users are comparable to their US counterparts in terms of the
frequency and time using the Internet, news browsing, information
searching and instant messaging. Although Internet users only
account for 12 percent of China's total population at present, up
to 40 percent of the residents in affluent cities access the
Internet. In other words, the Internet, as an advertising media,
already covers a wide range of consumers. However, its advertising
revenue is far disproportionate to the attention given by Internet
users. Online advertising only takes up less than 5 percent of
China's advertising market at present. It therefore has great
potential for growth.
Revenue in China's online advertising market is generated mainly
from graphic ads for clients advertising for their brands and
search ads serving small- and medium-sized enterprises. Graphic ads
are the major form of online advertising today, contributing to
more than 70 percent of its revenue.
Chinese Internet users depend even more on the Internet as a
source of news and information than Internet users in the United
States and many other countries. The Internet has claimed more
public attention than many other media outlets in China including
newspapers and magazines. Unlike in the United States, the
Internet's role as a media outlet is particularly pronounced in
China. The Internet emerged in the country at a time when its
traditional media began to embrace the market mechanism. The
Internet media, with portal websites as representatives, chose to
seek development by cooperating with the traditional media from the
very beginning. China's Internet media and traditional media have
long been integrated and have grown in collaboration. Featuring
sophisticated technology and premium forms of communication, the
Internet has become one of the most important news and information
outlets in China.
For example, the full coverage of the recently concluded 17th
National Congress of the Communist Party of China (CPC) at sina.com
received dozens of millions of page views. The homepage of that
section received more than 4 million views on October 22, the day
when members of the new Standing Committee of the Political Bureau
of the CPC Central Committee made their debut. The numbers testify
to the fact that Chinese Internet users are increasingly turning to
the Internet, instead of TV, newspaper or radio, to learn about
current international and domestic events and news.
Over the past two years, user-generated content, with blogging
and webcasting as telling examples, has made great headway in
China, ushering in an era of interactive, personalized Internet
media. By integrating user-generated content with traditional web
content, China's Internet media has remarkably increased their page
views and attraction.
Given its prominent role as a media outlet, the Internet serves
as a major carrier of brand ads. Graphic ads and other kinds of
online ads targeting brand advertisers will continue to show an
upward trend in the coming years.
Web search has been increasingly used in China in recent years.
It has become one of the major demands of Chinese Internet users.
Some 70 percent of Internet users in China use search tools.
Revenue from search ads has skyrocketed in the past two years. The
growth rate is well illustrated by the performance of the share
price of baidu.com, China's largest search company. However, search
ads are still in the primary stage of development in China. Less
than 10 percent of China's business enterprises run websites, and
the application of e-commerce is quite basic. However, things are
changing rapidly. In the few years to come, search ads will enjoy a
much higher growth rate than online ads as a whole. As a result,
their share in the online advertising market is set to
increase.
According to a survey of the China Internet Network Information
Center, more than 70 percent of the 162 million Chinese Internet
users have broadband Internet access. The wide adoption of
broadband has greatly expanded and extended the application of the
Internet in China. Video has become a new focus of attention in the
broadband era. Video applications including live broadcasting,
video on demand, webcasting and video chatting are the most
important areas of growth in China's Internet industry this
year.
Unlike in the United States, online video will not be able to
create huge commercial value in China immediately. China's web
infrastructure has yet to be improved. Among China's Internet
users, there is not a leisure class that can contribute large
quantities of user-generated video content. Moreover, the Internet
media have yet to find an advertising solution that does not affect
the users' video watching experience. Given these drawbacks,
China's online video is still in the incubation stage. However, we
are full of confidence about its future. To date, the Internet
media have obtained advertising market share mostly from the print
media. With the development of online video ads, they will be able
to make inroads into the TV advertising market, which is
responsible for over 70 percent of the revenue of the entire
advertising industry. The potential is not to be
underestimated.
II. E-commerce
As I have just mentioned, Internet application in the corporate
world, or e-commerce, is only in the primary stage in China.
However, the value of the Internet to business operations has been
made evident by the recently-listed Alibaba Group, China's largest
e-commerce company. Internet companies in China face a major
opportunity as well as a challenge – how to provide dozens of
millions of Chinese enterprises, especially small- and medium-sized
enterprises, with the Internet services they need in the spirit of
promoting IT and Internet application in the Chinese business
community.
Efforts have been made to nurture the markets for
business-to-business and consumer-to-consumer e-commerce in China.
Despite the continued expansion of the markets, revenue levels are
still low. However, judging from the exponential growth of the
number of transactions concluded on some e-commerce platforms
including taobao.com and many electronic payment platforms,
e-commerce is set to embrace explosive growth in China soon. The
development of e-commerce will in turn fuel the growth of online
advertising, especially search ads.
III. Online games
Speaking of the opportunities for the development of the
Internet in China, we should not give short shrift to online games.
Online gaming is more developed in China than in the United States
and European countries. It has been the most profitable market
segment in China's Internet industry over the past few years.
Online games are expected to generate more than US$1.5 billion in
revenue this year. Several high performance online gaming companies
have recently gone public or are going to do so soon. The number of
online gaming companies in China is expected to rise in the coming
years.
In a sense, online games provide an inexpensive means of
entertainment for Chinese Internet users, and online gaming
communities are extremely sticky. So, the future of this industry
looks quite promising. It is projected to post an annual compound
growth rate of more than 30 percent in the next five years.
IV. Cell phone Internet access
As is known, China has 162 million Internet users. How many
people in China use cell phones? Many of you may know the answer –
nearly 500 million. That is to say, cell phones are far more
popular than personal computers in China. So, the business
opportunities created by cell phone Internet connections are much
greater in China than in the United States. Given the large number
of cell phone users in China, people accessing the Internet via
cell phones will easily outnumber those accessing the Internet via
computers once wireless Internet infrastructure is put in
place.
At present, most of the cell phones used by Chinese consumers
have a GPRS feature. The problem is that a GPRS connection is not
fast enough for those who wish to access the Internet via cell
phones. The third generation (3G) cell phone network currently
under construction is expected to inject a great impetus to the
development of cell phone Internet use in China.
Cell phone Internet service providers focus on attracting
customers with free services today. However, they have shaped some
prototype business models. Cell phone-based targeted ads and cell
phone e-commerce are currently hot destinations for venture
capital.
I think many of the business models in the Internet industry are
universal. However, specific development models and the favorable
time for development may vary from country to country because of
the countries' different cultures, consumer habits and stages of
economic and social development. We must understand these
differences before we find out the real demands in the Chinese
market and come up with valuable services.
| Profile of Mr. Charles Chao
President and Chief Executive Officer, Sina.com
He joined Sina.com as vice president of finance in September
1999, concurrently serving as the company's co-chief operating
officer in charge of website operations, marketing and online
advertising sales. Prior to joining Sina, Mr. Chao served as an
audit manager with PricewaterhouseCoopers LLP, a Big Four
accounting firm. In that role he provided auditing and business
consulting services to hi-tech firms in California's Silicon
Valley.
Mr. Chao holds a masters degree in accounting from the
University of Texas at Austin, an MA in journalism from the
University of Oklahoma, and a BA in journalism from Fudan
University in Shanghai. Mr. Chao is a certified public accountant
and a member of the American Institute of Certified Public
Accountants.
|
(China.org.cn November 28, 2007)