Connectivity in China

Stephen DeAngelis

February 05, 2007

One metric of whether a country is becoming more affluent is how much time and money its citizens spend on entertainment. When people are struggling in poverty they think about being hungry not about being entertained. David Barboza, writing in the New York Times, reports that millions of Chinese citizens are now thinking a lot about entertainment [“Internet Boom in China Is Built On Virtual Fun,” 5 February 2007]. The focus of Barboza’s article is Tencent, an Internet company whose all-in-one packaging of entertainment offerings and a mobile instant-messaging service dominates the Chinese market. The founder of Tencent is Ma Huateng (aka Pony Ma), a 35-year-old Chinese entrepreneur.

“In the two years since Mr. Ma’s company, Tencent, went public in Hong Kong, it has grown into a powerhouse that has crushed everyone else in the field. No other Internet company in the world — not even Google — has achieved the kind of dominance in its home market that Tencent commands in China, where its all-in-one packaging of entertainment offerings and a mobile instant-messaging service, “QQ,” has reached more than 100 million users, or nearly 80 percent of the market.”

A hundred million users in a country of almost a billion and half people may not sound like very good market penetration, but that number is growing rapidly and will continue to increase as China’s economy expands. While I see those numbers as good news, the Chinese government is (as usual) not so sure.

“The rise of fast-growing companies like Tencent is … worrying the Chinese government, which strictly regulates the Internet and is wary of the Web’s ability to mobilize huge online political communities or perhaps to nurture underground economies. A few weeks ago, China’s Central Bank — which oversees the country’s $2.6 trillion economy — even went so far as to issue a warning about Tencent’s virtual currency, Q-coins, which allow customers to shop online for games, music and even virtual furniture. A Central Bank official said the agency was studying whether Tencent’s online tokens were a threat to China’s currency, the yuan or renminbi. He also said the authorities would crack down on the coins if they were used to engage in money laundering.”

Last October I wrote about Second Life, an on-line world that has the U.S. Congress pondering what to do about its virtual economy [“Virtually” No Escape]. Unlike Second Life’s currency, however, Tecent’s Q-coins are not redeemable for cash. Barboza notes that Ma doesn’t need criminal profits to make him rich.

“[Money laundering] is far from Tencent’s intention. Already one of China’s wealthiest entrepreneurs — worth an estimated $850 million — the soft-spoken Mr. Ma says he simply wants to let people in China use the Web the way they want. ‘I think every Internet user likes personalization,’ Mr. Ma said during an interview here. ‘In 2005 and 2006, we came up with a new strategy: “Online Lifestyle.”‘ While America’s Internet users send e-mail messages and surf for information on their personal computers, young people in China are playing online games, downloading video and music into their cellphones and MP3 players and entering imaginary worlds where they can swap virtual goods and assume online personas. Tencent earns the bulk of its revenue from the entertainment services it sells through the Internet and mobile phones.”

Barboza’s article makes it clear that most of China’s 125 million Internet users are relatively young. That means the Chinese government will have an increasingly difficult time controlling content as members of Gen X and Gen Y mature and computer usage penetrates an even greater percentage of the population.

“Another distinguishing feature is the youthful face of China’s online community. In the United States, roughly 70 percent of Internet users are over the age of 30; in China, it is the other way around — 70 percent of users here are under 30, according to the investment bank Morgan Stanley.”

Richard Ji, a Morgan Stanley analyst, notes in the article that the primary use of the Internet in the United States is gathering information while the primary use of the Internet in China is entertainment. That, he says, is why Google dominates the U.S. market and Tencent dominates the Chinese market. It’s also the reason that U.S. companies like Google, Yahoo, and eBay have flopped in China. Eventually China will move from an entertainment- to an information-based Internet model and Tencent will either adapt to that change or lose out to companies like Baidu, China’s most popular search engine. The Chinese government will also have to adapt to this new reality and there are encouraging signs change is coming.

“China has allowed access to Internet versions of two of Taiwan’s top daily newspapers after blocking them for years for fear they would spread anti-Communist propaganda, a Taiwan official said on Monday.” [“China unblocks Taiwan newspaper Web sites,” by Ralph Jennings, Washington Post, 5 February 2007]