Internet: both bust and boom - the WTO-column

(I made a revised edition of this story here)

Bringing bad news as if it is good news is an art. So, I was first put on the wrong leg when I read the announcement of the internet society of China that China's internet users had spend almost 50 percent more online in 2006. Most of the media focused on that positive message. But when you look a bit further, the message become more troublesome.

In total the internet users have spent 23 billion Renminbi or three billion US dollar online over 2006. That means they have spent an average of 170 Renminbi per month. Of that money about 120 goes to the telecom providers, who seem to be the main beneficiars of this market. Games, online shopping and other online expenditure have only 50 Renminbi or six US dollar per month left. That means the industry needs a lot of years with an average growth of 50 percent, before this market can become mature.

The online industry gets an additional three billion US dollar from the advertisement industry, less than one percent of the total budget. Of course, the industry complaints about this low percentage since the Chinese spend on average 20 percent of their media time online. But, there are no reasons to expect a massive change here yet.

Waiting for the internet users to spend more money will certainly take too long; so, we hope for for more financial support through advertisements to reasonable levels that align more with the media-time Chinese spend online. But that is going to cause a massive consolidation of the internet industry with few winners and many losers, comparable to the first internet bust at the beginning of this century.

Most of the little advertisement money that is being spent on the internet goes to the big three: Netease, Sina and Sohu. When I read the figures over 2006 correctly Tencent has joint the leaders in the industry. But how to define market leadership in this market?

Alibaba is flushing Ebay out of the market by offering their auction services for free. Market leader in the video-sharing market Tudou celebrated it has now more than 10 million downloads per day.

When we want a mature valuation of the internet market and its leaders we might have to go back to one of the most important lessons of the first internet bust: eyeballs do not equal revenue. And whether those eyeballs are now called weblogs, IM-accounts or video downloads, they still do not equal revenue. I would plead for a more traditional approach of a market leader an focus on revenue. Taking a more traditional approach and defining market leadership in terms of revenue is needed for another reason. The industry is consolidating both in a technological and commercial approach. Portals, IM-services and weblog hosts are moving fast into the territory of their neighbors.

Comparing the strength of companies, based on their financials, might also make it easier for marketeers to move into this industry. Life has been very easy for them in the past when 80 percent of the advertisement money went to TV-commercials. But when that shift takes place that money will go in large parts to the top-5 internet companies in the industry, not to the hundreds of smaller players down the line.

That will lead to a massive consolidation of the internet industry, possibly already this year, driven by VC's who want to see their money back. It is not going to be nice.

Fons Tuinstra