Tuesday, January 17, 2006                                                Section: Technology / Page: 1

China grapples with Web 2.0 era

Michael Logan

When Internet giant Yahoo bought Flickr.com last March, at least five entrepreneurs flooded the mailbox of Shanghai-based venture capitalist Adam Bornstein with pitches for similar photo-sharing services.

Yahoo's acquisition of the start-up had stoked Silicon Valley's hunger for other so-called "Web 2.0" investments, and the trend was quick to spread to China.

But Mr Bornstein did not fund any of the proposals and has yet to see a Web 2.0 pitch he likes. Many of the "Flickr-esque" services offered features such as online photo storage but lacked crucial Web 2.0 elements like tagging or communities.

Questions about adding features such as Really Simple Syndication (RSS) were met with blank stares.

Yes, the Web 2.0 buzz had come to China and talking about Web 2.0 wins audiences with venture capitalists, but it seemed few mainland start-ups had fully grasped the importance of the internet's next stage of development.

"I think people are trying to piggyback off that but people don't really understand what Web 2.0 is. They don't really understand the value," Mr Bornstein said.

That value, according to Wikipedia - an online encyclopedia and Web 2.0 site because it relies on its readers for entries and editing - is in mass user participation, "an approach to creating and distributing Web content itself".

Web 1.0 was top-down, about companies creating content and services. Web 2.0 is bottom-up, about users creating content and providing input to help organise and distribute information.

But beyond just a lack of understanding of Web 2.0's principles and working, there are other factors that are also inhibiting its spread on the mainland.

James Liu, chief strategy officer for ChinaInterActiveCorp (CIAC), said: "Advertising for the internet market in China is still relatively small."

CIAC owns Mop.com, the largest social networking site in the mainland.

Many Web 2.0 companies in the United States derive their revenue from that country's huge online advertising market. Yet in China, advertisers spent just US$330 million online last year, according to one estimate. This in part might explain why blogging portal Bokee was recently forced to lay off 25 per cent of its workforce.

Factors that have slowed the development of Web 1.0 services such as e-commerce are also hurting Web 2.0's development.

"The absence of a payment gateway is a hindrance in China," one analyst with an American brokerage said. "Those with the payment systems" - such as scratch-off cards and a distribution network - "will have the upper hand."

Yet another factor that could impede the spread of Web 2.0 on the mainland is its open and democratic nature, which is likely to unsettle mainland authorities who have already closed several high-profile blogs kept by journalists and blocked Wikipedia in China.

Consider Web 2.0 company Google: its search results are highly relevant because it treats hyperlinks from one site to another as votes for that site. Now Google the word "failure" and see what you get. The top result is the biography of US President George W. Bush, thanks to the effort of thousands of bloggers who have linked to page under the term "failure".

But using Web 2.0 for political protest will not go down well in China. When you give mainland users the ability to create content - or the ability to help organise content by asking for their input - you will need to keep close tabs on how they use this power.

This is especially so as services move from text, which is easy to scan for objectionable terms such as "democracy" and "freedom", to audio and video clips, which are difficult to monitor.

Andrew Yan, managing director of venture capital firm SAIF Partners, said self-censorship might keep internet companies from deploying new services. "It's much harder for them to pre-screen video - technically, it's very difficult," he said.

For companies such as CIAC, the solution is to hire a large team of human editors to sift through the vast text, audio and video posts submitted to Mop.com. This can be done economically because the team is located in central China, where wage rates are lower.

"With censorship, it's nothing new. It hasn't prevented the China internet market from moving forward," Mr Liu said.

Indeed, as long as users steer clear of politics, the central government appears to have no problem with entertainment that features voting and user participation.

Mr Bornstein pointed to mainland television reality shows such as Super Girl that ask viewers to vote for their favourite amateur singers via text message.

"What you may get are these lollipop entertainment sites that don't touch upon politics," he said.

"[Web 2.0 in China] may mimic all those crap variety entertainment shows."

Despite all the obstacles facing Web 2.0, there is plenty of hype and hope for Web 2.0 companies on the mainland. Last month, Mop.com bought Donews.com, a technology news portal that relies on more than 32,000 editors and reporters for contributions. This provided one of the few domestic examples of a Web 2.0-related trade sale.

Social networking website PengPeng.com reportedly is raising a second round of investment after receiving US$12.5 million from SAIF Partners early last year. Meanwhile, SAIF has poured money into other Web 2.0 properties such as Bokee.

Marginal companies are also adopting the Web 2.0 label. Globehr.com, a mainland  human resources website, claimed it had an advantage over larger rivals such 51job.com, Zhaopin.com and ChinaHR.com because of its social networking features.

But Mr Yan played down the notion of Web 2.0 as an investment theme in China, preferring to focus instead on revenue and earnings.

"People make a big deal out of Web 2.0, but it's just a natural part of the internet's revolution," Mr Yan said. "It's a direction that internet companies are moving toward. There's more emphasis on community and interactivity. There's no breakthrough technology. There's no new protocol."

That view was echoed by Fritz Demopoulos, co-founder of the China-based travel search engine Qunar.com.

"I believe ... the whole morass of Web 2.0 is just features that we include, if we think it makes sense, on our site," he said.

"At Qunar.com we have RSS feeds like everyone else. We have a blogging feature as well, but we just think that complements our position in the overall market."

Yet there is some debate over which companies will take the lead in the next stage of the internet's development in China: the established players of the Web 1.0 era such as  NetEase.com and Sina.com, or the newer players such as Bokee and Mop.com.

Many of the established portals are adding features such as blogs to improve the stickiness of their sites, but Mr Yan doubted whether these information silos could keep pace.

"Because their traditional model is a portal and centralised information provider, they don't have a competitive advantage in the Web 2.0 space," he said.

The analyst at the American brokerage disagreed. Instant messaging provider Tencent Holdings offers blogs and can charge for extra features such as avatars and background music. It can do so because it has built a vast distribution network for its scratch-off payment cards - something start-ups lack.

The middle ground is perhaps the Flickr model: develop a Web 2.0 service and then do a trade sale with a larger company. No doubt a few of China's Web 2.0 companies, just like those in Silicon Valley, will be aiming for a buyout rather than a listing.

"I think [a Web 2.0 service] makes sense as a feature, but can you have a business that's just a feature, or is it a part of a larger offering?" Mr Demopoulos said. "I think Yahoo has been very smart about adding features either through acquisition or developing them."

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