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)