SHENZHEN - From whatever perspective, the
picture of China's Internet sector looks quite
rosy. The number of Chinese "netizens" amounts to
137 million, more than 10% of the country's
population. Total business turnover of the
Internet sector in China is estimated by experts
to be some 500 billion yuan (US$65 billion),
accounting for 5% of the country's gross domestic
product in 2006.
Also, more than 80
Chinese websites recently squeezed themselves into
the Top 100 listing by Alexa, which provides
information on Web traffic to other websites.
There could be more
in
the future with the sharp increase of local
netizens.
Behind this rosy picture,
however, growth in the profitability of many
Chinese Internet companies appears to be losing
steam - they reported narrower profit margins last
year. Only a few, such as Baidu.com and
Tencent.com, have seen profits continue to rise.
Take the popular Sina.com, for example.
The annual net income of the Nasdaq-listed Chinese
portal was at or near $200 million annually over
the last three years - $200 million in 2004,
$193.6 million in 2005 and $212.9 million in 2006.
Sohu.com, Sina's peer portal at Nasdaq,
reported slipping annual net profits of $35.6
million in 2004, $29.8 million in 2005 and $25.9
million in 2006. As the shrinking profits were
actually recorded with growing revenues of $103
million, $108 million and $134 million
respectively in the last three years, it appears
that the company has lost its profitability
momentum.
According to financial reports
released recently, China's major Internet service
providers (ISPs) to mobile-phone users, such as
Kong.net and Hurray!, saw profits sharply cut in
the fourth quarter of 2006. Kong.net's net profits
slipped 42% in the last quarter compared with the
same period last year, despite an overall increase
of 37% in total income in 2006.
Kong.net
and Hurray! are two of a few Chinese ISP listed on
Nasdaq. The financial status of Hurray! in 2006
was worse, with its net income slipping by 68.8%
from $18.6 million in 2005 to $5.8 million last
year. It fourth-quarter income of $1.6 million
also dipped some 48% than the same period of 2005.
Zhou Yunfan, chairman and chief executive
officer of Kong.net, said last year was tough for
service providers in China because of policy
adjustments by the government and major
mobile-phone operators, which actually launched a
campaign in the second half of last year to
tighten controls over value-added services to
mobile-phone users, imposing a spate of new
restrictions on ISP companies doing business with
phone users.
The ongoing campaign by
mobile-phone operators, which is aimed at
eliminating irregular business practices, burst
profit bubbles of many ISP companies last year,
including Kong.net and Hurray!, and will lower
their earning expectation this year.
Kong.net Sun Hanhui's financial controller
revealed in a press conference that China Unicom,
the country's second-largest mobile-phone
operator, will ask for a larger share of 30% of
the revenues from the value-added services of
online service providers, with the new policy
taking effect on April 1. Previously, it would
take 20% from incomes generated by online service
providers. The change, according to Sun, will
further reduce his company's profit margin.
Smaller Internet companies featuring
emerging Web 2.0 interactive services may have
suffered more than the established portals from
the red-hot competition in the Internet sector.
Oak Pacific Interactive, the founder of China's
influential Web 2.0 site Mop.com, laid off some
10% of its 1,500 employees last year. The company
accepted venture capital of $48 million from
General Atlantic and others last year, after its
dream for an initial public share offering failed
to come true.
Web 2.0 refers to a
perceived second generation of website-based
services that emphasize online collaboration and
sharing among users.
"When there are too
many newcomers [in the sector], there is a bubble"
in Web 2.0, OPI CEO Chen Yizhou was quoted by
Internet business magazine CIWeekly as saying. His
company downsized the Web 2.0 business and
repositioned itself into a comprehensive portal
specializing in news and online games.
Encouraged by the success of YouTube,
similar video websites mushroomed in China to some
500 last year, but none of them have been able to
break even so far, according to analysts.
It is also reported that the total volume
of venture capital invested in China reached a
record high of $1.2 billion from January to
September 2006. In contrast, the share to the
information-technology sector hit a record low of
54%, reflecting a shifting of venture capital to
traditional industries.
"I have been proud
of China's Internet sector, which [has grown]
without government support and bank borrowings in
the first years. But now it is not the Internet
[sector] I have been familiar with anymore," Xie
Wen, the co-founder of CIS.com.cn and an Internet
expert, was quoted by China Business Post as
saying. Xie said the Internet business in China
was no less effective than its US counterpart
before 2003, either in terms of its influence or
creative business models such as ISPs, online
games and e-commerce, but he believes it is
lagging far behind now.
Since 2003, many
Chinese companies have been involved in using
malicious software and cheating to increase
website traffic or short-message-service users,
instead of investing in research and development
to boost their business. "These tricks were
adopted even before, but [they were not used] as
openly as [they are] now," Xie said.
Besides Xie's criticism, more industry
insiders agree that China's Internet market is in
a bottleneck after experiencing explosive growth
three years ago.
Among the mainstream
profitable business lines, the growth of online
advertising is becoming stabilized; wireless
value-added services are severely regulated by the
government; online games are struggling for a way
out between giving their services free and
imposing charges on customers; the growth rate of
search engines has slipped in three consecutive
quarters since last September; and those using
emerging Web 2.0 and wireless Internet are still
looking for ways to make money.
The
potential of the Internet was adequately explored
during 10 years of rapid growth in China,
according to Rao Zhan, an analyst for Beijing ISP
Kingsooo. The majority of Chinese netizens are
under 30 - they are not yet the backbone of
society, which restricts the application of online
community services, Rao said.
But the
latest survey by China Internet Network
Information Center seems to suggest there is still
room for the mainland's Internet sector to grow.
According to the survey, the number of
Chinese netizens amounted to 137 million at the
end of last year, with 59.4 million computers
online. As many as 82.5% of netizens are under age
35 and some 70% earn less than 2,000 yuan ($258) a
month, the survey showed.
"Don't
understand computer or Internet" is the major
reason many Chinese avoid going online, according
to the survey. Besides, the penetration rate of
the Internet is larger in urban areas and eastern
China than in rural areas and central and western
China. It concludes that there is still plenty of
room for development for broadband, wireless
Internet, VoIP (voice over Internet protocol),
e-commerce, search engines and online games in
China's Internet sector.
Critical about
the current status of Internet companies, Xie
agrees that more innovations will emerge from the
"new industry revolution" and it is too early to
cap its growth potential.
Lu Bowang, an
Internet analyst, commented: "The large number of
emerging websites will create new myths. But the
premise is that they must take a down-to-earth
approach and forget making quick money."
According to an estimate by the Ministry
of Information Industry, the number of Internet
users is expected to reach 200 million by 2010,
with average annual growth of 8%.
Candy Zeng is a freelance writer
based in Shenzhen.
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