Making sense of China’s Internet
By James Christopher ‘Chris’ Westland
29 Jan 2009
In late 1957, at the height of the Cold War with China and Russia, US president Eisenhower launched an aggressive military challenge to America’s rivals which spawned the Advanced Research Projects Agency (ARPA). ARPA quickly moved to focus on computer science and information processing, in particular connecting mainframe computers at different universities around the United States so that they would be able to communicate using a common language and a common protocol. ARPAnet morphed into the Internet, which moved from military to commercial prominence in the 1990s. By 2008, in an ironic turnabout, China’s population of Internet users in this one time Cold War arena surpassed the US at 298 million users, growing at 40 per cent annually, and rapidly migrating off to non-traditional platforms such as telephones and personal digital assistants.
China is different—its language, culture, business practices and competitiveness. And it is huge, the most populous country on earth, and now, the biggest user of the Internet. America’s early dominance of the Internet has not given it automatic licence in China, and many early entrants to Chinese Internet business have found the challenges, along with the rewards, much greater than elsewhere in the world.
US technology, so pervasive in most of the rest of the world, has met substantial local competition in China. There, Chinese Internet companies have successfully adapted to China’s unique environment to fuel the fastest Internet growth in the world, despite widespread censorship and control of the medium. China boasts 250 million Internet users as of early 2008, the most in the world. Fortunes have been made, but more importantly, society and business are being transformed along the unique lines of Chinese Internet development. This will substantially flavour the character of Chinese business and politics in the 21st century.
Foreign firms have, to their chagrin, found that copy-and-paste strategies that take business plans that have worked in the West, often do not work in China. Yahoo, Google and Microsoft have discovered this. It is not clear whether many of these firms, though, have truly gauged how and why their Western success stories can’t be duplicated in China. The stories will help the reader gain a first-hand understanding of how their Chinese counterparts combined successful components from their Western counterparts, innovated to accommodate the unique characteristics of the Chinese market.
Where giants stumble
Industrial powerhouses such as Microsoft, GM, Coca-Cola and Procter & Gamble learnt hard lessons over decades of investment and operations in China. Newcomers in the Internet sector, such as Google, have found that they had to play a different game. Yahoo, eBay and MySpace have been there, competing with local Chinese companies such as Sohu, Sina and Tencent, who have also faced their own challenges climbing the learning curve. The speed of Internet industry change and growth has denied these companies the leisure to experiment and learn, while intense competition and technical complexity assured that missteps would be costly.
Search engines and other Internet businesses often compete on scale. Their entry into a market is an all-(read: the entire population)-or-nothing affair. This is a result of what economists call network effects. The value of Internet businesses tend to increase proportional to the square of the number of users, but only after they have reached a critical size.
Google China is emblematic of the idiosyncrasies of China’s Internet business. Founded in 2005 by former Microsoft executive Kai-fu Lee to bring Google’s Chinese search in line with China’s Golden Shield Project (a.k.a. the Great Firewall), it was approaching a 25 per cent share of search by 2008 (Sources: Sherman So & J. Christopher Westland (2009) Red Wired: China's Internet Revolution, Cyan: London, forthcoming in the Summer of 2009). Unfortunately, this was only a distant second to local company Baidu with more than 65 per cent market share. “Many of our friends told us ‘you guys need to get out of China’” recalls Jun Liu, head of research at Google China.
Google China has stuck it out, with new Chinese language offerings such as Google Music Search, and special versions for Google Map for the Chinese Spring Festival travel season. But Baidu still leads in brand recognition, even if consumers do feel that Google provides better results. But the strain has taken a toll on Google with a number of its key players defecting to local companies—James Mi, director of corporate development, Alan Guo, chief strategy initiator, and Tina Tao, Kai-Fu Lee’s personal assistant. “I always encourage people to leave Google China to start up new companies,” Lee counters, “and I’ll feel proud if their business plan turns out to be great”.
Yahoo is another American Internet icon (founded by Taipei-born Jerry Yang). Yahoo’s recent performance has been even less encouraging. Its search market share in China plunged from 21 per cent in 2005 to 5 per cent at the end of 2006. This 16 per cent of market share lost by Yahoo might have been swept up by Google China were it not for a Microsoft’s lawsuit against Kai-fu Lee over his departure which limited Google China’s growth until 2007.
Both Google and Yahoo were foundering in China at the end of 2005. Yahoo indirectly decided to relinquish the business to someone with a better understanding of the Chinese markets. Just one month after Lee handed his resignation letter to Microsoft in 2005, Jack Ma, founder of Alibaba was offered Yahoo’s China business. Ma, a former college English teacher, built Alibaba into a business supply powerhouse. Ma subsequently entered the online auction business, stealing market share from eBay’s, and reducing them from a commanding lead of 80 per cent of the China consumer auction market to less than 10 per cent.
Unfortunately, Yahoo’s China business proved more difficult than his prior ventures, and was not without missteps. Ma’s acquisition ended Yahoo’s promising joint search engine development with Sina.com. It drove away key engineers from 3721.com core technology (who defected to Zhou Hongyi’s Safeguard 360) and it ended up handing most of their market share to competitor Baidu, who advanced to 53 per cent of China’s search market share by the end of 2007. And things got even worse for the US search giants.
Battle on the Great Firewall
Prior to Lee’s founding of Google China in 2005, the US-based Google.com had only been accessible 90 per cent of the time, but a number of services were not available at all (Official Google Blog: Google in China, January 27, 2006). Unfortunately, founding Google China did little to improve the situation. Alan Guo, chief strategy officer at Google China, reports that by September 2005, Google China’s search share had dropped 18 per cent.
Google’s efforts to comply with China’s Golden Shield Project (a.k.a. the Great Firewall) were disastrous. Browsers would lock up for several minutes after they tried to search with keywords banned by the Chinese government. If more than one user shared an IP address, all would lose access, and statistics showed that 5-10 per cent of its users at any time were prevented from using Google.
Many of these technical problems arose from Google’s insistence on having one common indexing database around the world, rather than redirecting to a local Chinese index. Unfortunately, the tensions throughout 2006 took their toll on Google, which had to worry about shutting down, and the ministry of information licensing throughout the year. They temporarily used Ganji.com’s licence until 19 July 2007, two years after Lee joined Google, when he finally made the announcement that China’s ministry of information had granted it a licence to operate.
Google’s Great Firewall problems provided a welcomed respite to competitors Tencent, Baidu, and even to Alibaba. But after receiving the licence to operate in China, Google refocused on its core competence, delivering a great search experience with measurable results. “I’d have been dead if I had been asked to start to try social network services,” Lee joked.
This quickly paid off. Baidu found it more and more difficult to scale its manual ‘optimisation’ procedures, while Google’s automated and scalable results got better and better. Google quickly expanded its reach and offerings through partnering with Sina, China Mobile, China Netcom, and Tencent, along with vertical sites.
These days, Google’s biggest obstacle in China may not be Baidu, but rather Mountain View, where Google’s headquarters are located. Charles Zhang, founder and CEO of Sohu, contends that “none of the global Internet companies can excel, because of their long decision chains and lack of local prospective”. Lee agrees. He had some success in dragging people out of Mountain View and redirecting them to that unique icon of the Chinese Internet, Chinese Internet bars. Conveying the importance of this unique Chinese institution between Beijing and Mountain View became Lee’s obsession.
In April 2006, Google China arranged a small group of Google’s Mountain View executives to visit some of China’s Internet bars, and by 2007, Google began a new project to develop products targeting Internet bars. Internet bars are often the first place for young Chinese to access the Internet. Project manager Wang Hua espoused some straightforward guidelines: “Put yourself out on the street; find your target users, do some tests, get your clues, and build your test into a strong case with cross-department collaboration. Never try to start big. Never try to change consumers’ minds. Prove your idea with small successes.”
Wang monitored traffic at Internet bars across China, with interesting results. Statistics showed that areas near schools did not have as much of high traffic as expected and that certain collaborative products would be spread out of the bars in the area. It made Google the default homepage on the computers’ browsers in the partnering Internet bars and limited the right to install software or set parameters on these machines. So far, Wang’s experiments have pushed traffic up substantially, putting Google China back in competition.
Google also started to co-brand products. Google Kingsoft Ciba is one example, which embedded Google’s toolbar in Kingsoft’s products. Google helped US-based Amazon.com acquire Kingsoft’s Joyo.com, which caused Google China’s English-Chinese translation to experience an increase in traffic. Another co-branding with Top100.cn, one of the largest online music libraries in China, allowed for free online distribution of songs similar to Baidu’s offerings. The labels can share the money from the advertising Google places on Top100.cn.
These and other activities are ones which Google’s global management at Mountain View would never have considered on their own, but which have been pivotal for the survival and expansion of Google’s business in China.
Creative commons
Creative minds are rarely tidy, and so it goes for creative companies. While Google slogs forward, four of China’s most innovative dot-coms continue to distinguish themselves with the introduction of novel services. True, China’s leading portals share lots of ‘me-too’ content, but leaders such as Sina.com, Sohu.com, NetEase and Tencent forge ahead with add-on services.
For example Sina’s celebrity blog has become its primary traffic driver, which alone pushed Sina.com to conquer nearly one-third of China’s online advertising market in 2008. Meanwhile, in Shanghai, rival Sohu’s online game, TLBB, attracted 23 million gamers across Asia. Elsewhere, NetEase’s e-mail controls more than half the market, which generates much of NetEases advertising revenue. And Tencent’s QQ messaging service has 80 per cent of user market share, helping them to create the largest ‘online park’ in China, with new offerings in the US on PCs and iPhones. China’s search wars have left plenty of space for local rivals, who arguably understand the ‘social’ part of social networking better than their global rivals.
James Christopher ‘Chris’ Westland, PhD, CPA, is professor and head, department of information and decision sciences at the University of Illinois—Chicago.
