Ties That Bind - Bay Area Council Economic Institute

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Ties That Bind
Companies also earn money from text and multimedia messaging, wireless internet over mobile
phone, music downloads and custom ring tones. Tencent, an instant messaging web site, sells
users phones linked to its QQ.com services, and charges for games, online dating services and
data storage. Its ad revenues more than doubled in 2005 and ad rates rose 50%. At the same
time, however, hunger for broadband content has driven up the prices internet services pay domestic
and foreign providers of music, movies and games.
Search and Sell
Monetizing search poses special problems: Until 3G wireless is fully built out, search is done
over mobile phone largely through non-internet directory trees, with users guided through unwieldy
voice and keystroke menus. Business-to business (B2B) and business-to-consumer (B2C)
services are slow to develop because most of China’s 22 million small businesses in 31 provinces
are still “unmapped,” in stalls or storefronts without signs or building address numbers, on
unnamed streets.
Online commercial transactions are growing, but online payment is still in its infancy. McKinsey
& Co. estimates that only about 50 million Chinese earn the $5,000 a year or more that provides
them with true disposable income. As noted earlier, Chinese consumers have traditionally been
debt-averse and pay their bills in full each month. As a result there are only about 12 million
credit cards in circulation, compared with 800 million debit cards tied to a bank account. Few
banks or phone companies have had the capability to manage electronic fund transfers via computer
or phone, without partnering with portals or search engines.
Growing Pains
Successful, rapidly expanding services are testing the operational limits of broadband networks,
and the patience of the Chinese government. Massively multi-player online role-playing games
(MMORPGs)—NetEase.com Inc.’s Fantasy Westward Journey, Shanda Interactive’s Legend of
Mir II, Tencent’s QQ Fantasy, The9 Ltd.’s World of Warcraft—have at times drawn as many as
600,000 concurrent players onto computer and mobile networks for a single game, raising actual
or potential quality of service problems. Music download revenues in China last year exceeded
the total revenues of the entire traditional music industry; a single top-selling song was downloaded
15 million times on China Mobile’s network alone over a six-month period.
In November 2005 China’s central bank, the People’s Bank of China, set a maximum internet
payment transfer amount of 1,000 renminbi ($123.53) per transaction and 5,000 Renminbi
($617.65) per day, to reduce the potential for e-commerce fraud. In July 2006, China Mobile—
urged by the Ministry of Information Industries after a flood of complaints—established rules to
curb fraudulent mobile phone marketing and billing practices. The government has also taken
steps against portals for spam, internet pornography and fortune telling ads.
Gradually, however, the obstacles are being overcome and a uniquely content-rich Chinese internet
is emerging—but not without a lot of help from Silicon Valley.