Internet giants deepen push into China

by David Shabelman in San Francisco
Updated 06:11 PM EST, Aug-12-2005

The California gold rush had nothing on the stampede by U.S. Internet companies to stake their claim in that modern-day commercial phenomenon: China.

Yahoo! Inc.'s $1 billion bet on Chinese Web auctioneer Alibaba.com Corp. and its swashbuckling CEO Jack Ma is only the latest move in what is a growing wave of American Internet companies entering the nascent, but already vast, Chinese online market.

In 2005, U.S. companies have spent $1.5 billion acquiring Chinese technology companies, compared with $513 million for all of last year, according to market researcher Dealogic. Across industry, U.S. companies have spent a total of $6.9 billion on Chinese companies in 2005, compared with $4.8 billion for 2004. China has roughly 120 million Internet users, second to the U.S. with 200 million, although China is expected to surpass that number within the next two years.

"As a U.S. Internet company, you have to have a China strategy," said Matt Comyns co-founder of Internet advisory firm BlackInc China. "You can't just cede the market to local players or just say, 'It's too complicated,' because in three or five years that business could be bigger than your U.S. business."

Indeed, in taking a 40% stake in Alibaba, Yahoo! is choosing to raise the stakes on its closest competitors. Google Inc. last year invested $5 million in Chinese search engine Baidu.com Inc., which on August 5 launched a highly successful initial public offering, and in July opened a research and development center in China. EBay Inc., which first entered China in 2002 with an investment in, and subsequent acquisition of, auction site EachNet Inc., said in January it would invest $100 million in its Chinese operations; it also expects to launch its PayPal payment service in the country by year's end. Online job recruitment firm Monster Worldwide Inc. in February spent $50 million to acquire a 40% stake in ChinaHR.com Holdings Ltd., and Barry Diller's IAC/InterActiveCorp recently spent $167 million for a 52% stake in Chinese travel service eLong Inc. Meanwhile, Microsoft Corp. in May said it would form two new ventures for its MSN Internet service in China and also bought the assets of Chinese mobile-phone software provider TSSX.

"In the Internet sector, the winners and losers are chosen rapidly," said David Liu, managing director of technology investment banking with Jefferies Broadview. "If you're a successful Internet company in the U.S., you have to be forward-looking and have some kind of strategy in China no matter what the downside is."

That downside consists of investing in a country that remains under authoritarian rule and in an economy that, although growing rapidly, continues to lag behind that of more developed countries.

Liu expects some of the major Chinese Internet companies, such as online portals Sina Corp. and Sohu.com Inc. and wireless content provider NetEase.com Inc., either to be acquired by or to form partnerships with U.S. companies. Sina already has teamed with Yahoo! to offer auction-related services, NetEase and Google have a content distribution partnership, and Sohu has a content deal with Walt Disney Co.'s Internet subsidiary.

"Technology is a winner-take-all type industry," Liu said. "I don't see any reason why the Chinese market would play out any differently than in the U.S."

And while the headlines have focused on the activities of high-profile Internet players in China, opportunities also exist for smaller industry companies to establish their own operations or team with Chinese firms, Comyns said. BlackInc, for example, has advised online consumer information firm About.com, a unit of The New York Times Co., and consumer banking firm Bankrate.com Inc. on doing business in China.

"In many cases a lot of these Chinese companies, even if they're competing with you, are happy to partner with you," he said. "I don't think the Chinese Internet companies view the U.S. Internet interest as a negative."

Technorati Inc., a San Francisco company that provides real-time indexing of Web content for blogs, among other services, is working with BlackInc to explore ways to tap the Chinese market. Richard Ault, director of product marketing for Technorati, said the company earlier this year began noticing a marked increase in blog activity in China, driving it to take a closer look at business opportunities in China.

"People in China aren't building home pages, they're coming online and starting blogs," Ault said. "Everything I've seen in the past two years says China's economy is going to experience a high-tech leapfrog. They're not going to have a Web 1.0 ramp, they're going to be leapfrogging to 2.0 because the infrastructure is going to be more sophisticated than what was built in the U.S."