Chinese use of the Internet is skyrocketing. This creates opportunities for both foreign and home-grown search engine and Internet advertising companies. Online vendors engaged in direct-to-consumer and direct-to-business e-commerce are also growing. Investors can access the stock of these companies through the Shanghai and Hong Kong stock exchanges, as well as through certain stocks trading in the U.S.
By the end of 2006, China boasted the second largest number of Internet users in the world – at roughly 137 million (10.5% of the total population), a 23.4% increase over the prior year. Men account for 58.3% of all Internet users and women account for 41.7%. 17 million Chinese use their cellphones to go online, while 90 million have broadband access and 27 million have some type of leased line Ethernet connection. Meanwhile, 39 million users still use dial-up for some or all of their Internet access. This trend creates investment opportunities in companies who are leading the charge.
|Beginning of Year||Number of Chinese Internet |
|Internet Users As a Percentage |
of Total Population
With only 10.4% of the population online, there are still huge growth opportunities for Internet companies in China as its network penetration grows.
One important measure of Internet usage is how much time each user spends online. Chinese Internet users spend nearly two billion hours online each week, while the U.S. audience logs on for 129 million hours per week. This means that the average Chinese internet users averages 15.9 hours per week. According to Sohu.com’s CEO, this phenomenon is explained by the fact that “People log onto the Internet and Sohu.com because, in China, there is no Forbes, Reuters or The Washington Post. Print media was all state-controlled and official, and the Internet filled this void.” Indeed, according to China Internet Network Information Center (CNNIC), 67.9% of online use in China is spent reading the news, as compared to time spent searching (65.7%) and e-mailing (64.7%).
|Location||Number of Users (millions)||Percentages of Population|
|Source: China Internet Network Information Center|
For Chinese citizens who lack their own computer, Internet cafes abound. By the end of 2006, China boasted 113,000 Internet cafes; however the government announced that new cafes would be permitted in 2007. The majority of the Internet cafes are smoke-filled rooms with 5 to 100 computer terminals. Many of them are occupied by people under the age of 30, who are checking their messages or playing online games with each other and the outside world. Recent reports suggest that 80% of people under 24 years old of age use the Internet in China. Internet cafes are not limited to Eastern seaboard cities – they can be found as far west as Kashgar, close to China’s border with Pakistan, as well as in most small and medium-sized cities along the way. A breakdown of Chinese Internet users by age is shown below:
Surprisingly, Internet usage in China is not limited to the most highly educated. A breakdown of Internet users by education level is described in the Table below.
|Education Level||Percentage of Chinese Internet Users|
|Below High School||17.1%|
Nor is Chinese Internet usage limited to the wealthy. The majority of Chinese Internet users earn less than $188 per month, as reflected in the Table below.
| Average Monthly Income in Renminbi |
|Percentage of Total Chinese |
|Less than RMB 500 |
|RMB 501 to 1000 |
(USD $62 to $125)
|RMB 1001 to 1500 |
(USD $125 to $188)
|RMB 1501 to 2000 |
(USD $188 to $250)
|RMB 2001 to 2500 |
(USD $250 to $313)
|RMB 2501 to 3000 |
(USD $313 to $376)
|RMB 3001 to 4000 |
(USD $376 to $501)
|RMB 4001 to 5000 |
(USD $501 to $626)
|RMB 5001 to 6000 |
(USD $626 to $752)
|RMB 6001 to 10,000 |
(USD $752 to 1253)
|Greater than RMB 10,000 |
Excluding webpages hosted on academic servers (.EDU.CN), China boasts over 843,000 unique websites and 4.47 billion Webpages.
According to the CNNIC, Baidu and Google, account for almost 90% of all searches conducted in China, with Yahoo, Sohu.com, Sina.com as distant competitors. In terms of brand awareness among consumers, Baidu also ranks first, with 86.5% of consumer knowing the name Baidu. By comparison, Google and Yahoo! rank second (64%) and the third (38.5%) respectively, in brand awareness Sohu.com and and Sina.com ranked fourth and fifth.
Baidu outmaneuvered Google to become the number one Chinese language site in the world and number one search engine in China, representing 62% of all Chinese searches. Many attribute Baidu's success to its MP3 search functionality, which was launched just as MP3 players became popular in China. Music industry executives have accused Baidu of aiding piracy with its MP3 search engine, however their lawsuits against Baidu have thus far been unsuccessful.
Baidu received a jumpstart in its popularity in 2002, when the Chinese government sought to censor Google by shutting off access to Google in China for 10 days and redirecting Chinese Internet search traffic to search engines willing to censor results. The routing of the majority of the traffic to Baidu greatly boosted its popularity.
Some critics of Baidu complain that its search results are heavily weighted towards advertising rather than organic search results. However this has not deterred users and investors. As expected, the Baidu IPO on August 5, 2005 was a huge success. Despite an initial offer price of only $27 a share, the stock rose to $122 by the end of the day. After announcing that its advertising revenue triggered a profit increase of 143% in the first quarter of 2007, the stock was trading at $131.05 as of mid-May 2007.
Despite its power in the field of search, at present more money can be made from selling internet banner advertising and capturing users’ attention for an extended period of time with a portal. Accordingly, Sohu.com has twice the revenue and three times the net profit of Baidu.com. And Sohu.com should grow further as it is the official Web site for the 2008 Beijing Olympics.
A 2006 study of the Chinese internet advertising market by Analysys International predicted ad sales of around $550 million, with banner accounting for 71.3% of the total market and search engine advertising accounting for 28.7% of the total market. By comparison, market research firm International Data Corporation (IDC) found that the online advertising revenue in China reached $640 million in 2006, representing 42.1 percent increase over the prior year. IDC forecasts the market will reach $4.33 billion by 2010.
In 2005, portals Sina and Sohu accounted for a total of 55 percent of the online advertising market, however their market share shrank in 2006 due to heavier foreign and internal Chinese competition. Other portals, like Xinhua, are also major destinations for online advertisers.
Tencent is the leading Chinese instant messaging company, boasting over 220 million active users. Its QQ program dominates 84.4% of the messaging market. MSN is ranked the second, accounting for 13.9% of the market. However MSN does lead among business users– for users of IM tools in their office, MSN possesses 49.5% and 67.5% of the market in Beijing and Shanghai respectively, which are larger than the share of QQ. It is not uncommon to see queries in Chinese chatrooms, such as “Can you give me your QQ number?”
China has been averaging about $500 million per year in online business-to-consumer sales. The top merchants by market share, as of the first quarter of 2007, are Dangdang (18%), Joyo (12%), Cncard (6%), Newegg (3%), M18 (3%), China-pub (2%), 7cv (2%), 800buy (2%), Redbaby (1%) and 99read (1%). However these top ten merchants accounted for only half of all online sales. Many smaller vendors are also prospering in this market.
By the fourth quarter of 2006, online business-to-business sales within China reached RMB $27 million, while online business-to-business sales from China to overseas buyers reached nearly $52 million. These quarterly results represent a nearly 40% rise from the previous quarter. The largest market share, 68%, is held by Alibaba.com, followed by Global Sources (12%), HC360 (5%), Emedchina.net (3.5%), ChemNet.com (2.8%), and 315.com.cn (2.3%). Meanwhile, Sina.com has partnered with five foreign music labels (Sony BMG, Universal, Warner, EMI and Rock Records) in a bid to create China's largest online music portal. At the same time, Universal Music Group and Warner Music Group are suing Alibaba, which runs Yahoo! China, for a total of 5.5 million renminbi for their economic losses.