Tencent, internet and trends to watch in 2007 - the WTO-column

(This is a revised edition of a story I earlier published on my weblog)

2007 is going to be a dramatic year for the internet industry in China. Some of the current trends are very positive, others will lead to disaster and consolidation. Do not expect a boom or but story: both are going to happen.

• Shenzhen-based company Tencent is the internet company to watch. Starting from a successful instant messaging operation called QQ, it now claims to have more than 200 million accounts. Over the past year it has used its leverage over the 136 million Chinese internet users by expanding successfully into webloghosting, where it is now the number one in terms of users. It has pushed sohu.com out of the top-3 internet portals and has recently started to move into video-sharing. Its virtual money system has been so successful, it is now threatening effectively the state monopoly on issuing money. Tencent combines three elements that explain its success: it has a huge reach, it is able to expand that reach into different sectors of the internet, and can monetize its operation. Only Alibaba.com and Sina.com seem to be able to do the same with a certain degree of success.
• The amount of money internet users spend online is rather marginal. Although the Internet Society of China cheered that over 2006 internet users spend almost 50 percent more compared to 2005, the total of three billion US dollar in 2006 is still fairly low. Of the 170 Renminbi per user per month, 120 Renminbi go to the telecom companies, leaving 50 Renminbi or 6 US dollar per month per user for games, online purchases or other activities.
• Although Chinese spend about 20 percent of their media time online, only a fraction of the advertisers' budget goes to online operations. Clear figures are not available, but experts estimate that 0.6 percent or 1.5 billion US dollar of the USD 250 billion budget for China is spend online. Media experts say it is not a problem of huge advertisers who not want to spend more of their budget online, but but the problem occurs at the level of the internet companies. When those advertisers go to bigger players like Baidu.com, they can only get a few banners and no real added value. As the budget for advertisement will be going up in 2007 ahead of the Beijing Olympics that problem has to be addressed. Only the huge players in the top-5 of the industry as mentioned in my first point will profit from that change, if they can offer a decent media package. Other players will most likely not profit as larger advertisers will prefer to talk to the big guys.
• The future looks grim for those who are not part of the internet top league. Too often their success is now measured in units that have no value: the number of webloggers, page-views, IM-accounts or video-downloads. When a valuation is not backed up with a unit that as a value - as in Renminbi of QQ-coints - they might be ripe for the dustbin of the second internet bubble.
• First indications in the US market are that a market adjustment is just around the corner. Some analysts suggest that making money with user-generated video's is an illusion and that is bad news if you are a stand-alone video-sharing operation, of which China has over 60, 17 of whom received in total USD 100 million in VC funding over the past two years. An embattled video-sharing service in the United States is offering ten US cent for every download to the filmmakers. Such a strategy would be impossible in China, market leader Tudou would have to pay more than one million US dollar per day, and seems a sign of senseless desperation as we know it from the end of first internet bubble. Then, it took one year before the crash in the US reached China. Now, it will be shorter and I expect VC's pulling plugs within six month after the US bubble starts bursting.
• Mobile communication is going to change the online world as we know it. The fight for the consumer might get fierce, as a part of the revenue available will go to possible new subscriptions and new mobile devices. Without a decent strategy for mobile delivery, a position in the top-5 internet companies will be impossible. The fight - for example here between Tencent and China Mobile - has already started. As the official launch of both 3G and Mobile TV has been delayed till 2008, mobile content and services providers will be at the mercy of quasi monopolist China Mobile. Its "duplicate and destroy" model will bring havoc to the industry.

Fons Tuinstra