Chinesepod - Web 2.0 in China: Buy or build?

Opinion / China Watch

Web 2.0 in China: Buy or build?

By Sage Brennan (MarketWatch)
Updated: 2006-12-04 09:31

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Shanghai -- We have recently been hearing that Web 2.0 acquisitions in
China might heat up in December and January, as larger Internet and media
firms begin to decide who the leaders are and what to do about them.

It's about time.

This comes down, of course, to the classic build or buy question. Take
the gajillions of online video-sharing-YouTube-clone-community companies
in China, for example.

There are the usual reasons big companies might buy one of the leaders in
the space, like Toodou, Yoqoo, 56.com, or mofile: they don't know the
technology or market as well as the startups, burn rates are low, to get
more entrepreneurial leaders into the upper-middle ranks, to buy a
recognizable brand, to add stickiness to existing services, etc.

For Baidu.com, Inc. , acquiring one of China's many YouTube clones would
make sense for the above reasons, plus the fact that Baidu engineers
could then optimize the acquired site for Baidu search, something that
none of the Chinese video startups seem to have done very well on their
own.

It would also makes sense for News Corp.'s MySpace unit, which does not
have a presence in China, to buy a video community company (and also tie
up with a selection of other companies), after a long line of Internet
giants -- the most recent being Google Inc.-- have shown how tough it can
be to dislodge a local competitor.

The Wall Street Journal reported last week that Myspace is getting help
from Boston-based venture capital group IDG in its China-entry, which
brings Toodou, Qihoo, Pica and a bunch of other early stage Chinese
companies squarely into the rangefinder.

But they won't ...

However, having said all this, I firmly believe that TOM Online Inc.,
Sina Corp., Sohu.com Inc. , NetEase.com, Inc., Baidu, Alibaba, and
especially Tencent could easily fire up video-sharing services that steal
a huge chunk of users from all of the top YouTube clones in China within
a few months.

Chinese Internet users' stickiness has been proven to have limits, after
all. To wit: 40% Yahoo-owned Alibaba's Taobao service pillaged eBay
China's user base in an astonishingly short time.

Also, I am not entirely convinced that the management of acquired
companies in China can ever truly be integrated into a larger entity
without the acquiring company frittering away most of the value for which
it has paid so dearly, one way or another. Perhaps more on this subject
another time.

Tencent 2.0?

With a user base that is within the same ballpark as the overall Internet
population of China, Tencent's "QQ" instant messaging application has the
power to elevate a new online game into the top 10 from a standing start
(which it has done), or make a movie of my dog trying to dig a hole back
to America into the most viewed home video of all time (full disclosure:
Bailey has never been to the US, but she really likes to dig holes).

The Coca-Cola Co. has just signed up to sponsor Tencent's "QQ Pig"
virtual pet in 2007, the Year of the Pig. I would wager they paid a hefty
sum for the privilege, and that the exposure will be worth every QQ coin.

Tencent has already launched a personal video sharing service, and I will
be interested to see how it develops. If it's like most other services
the company has introduced, before we even notice anything changing the
entire match will have already been played.

Oak Pacific Interactive (also the owner of the MySpace-like Mop.com)
bought Uume, one of China's early social networking sites that used
video-sharing as a hook, but has apparently decided not to try to promote
the video-sharing service because of all the competition in the sector.
Oak has since slashed staff of its Uume unit down to a handful. Hmm.

Will any of these Web 2.0 companies hit the public markets?

We're using video sites as an example, here. Any of the "2.0" style sites
that don't have a rock-solid hold on its users will probably see them
sucked away by China's big Web sites. If they have their users
well-hooked, and if they play their cards right, they have a chance to
build the next major Internet company in China.

That, of course, is what the venture capitalists who have been chasing
Web 2.0 valuations into the troposphere will tell you: China's Internet
is all about community -- nobody cares how great your technology is, just
get users to find enough value in the interaction you provide and you are
half-way to an IPO.

I hope the VCs are right; I really want a few more China-based Internet
companies to go public so we can poke fun at them every week. Mop.com and
Uume's, parent, Oak Pacific Interactive, has been rumored to be planning
a listing in December, which would be a good one to watch.

Outside the Internet space, hotel management firm Jinjiang Group will IPO
in Hong Kong on Dec. 15, following Home Inns and Hotels Management Inc.'s
successful November IPO on Nasdaq and subsequent run-up. So much is
broken in China's hospitality industry, it's not hard to choose something
simple to fix. And these hotels are nearly always full -- Home Inns
boosted the number of properties under management in Q3 by around 30%,
but only saw occupancy rates slip a couple of points.

Sage Brennan is research director of JLM Pacific Epoch, which covers
China's emerging media, entertainment and technology industries. He does
not hold positions in any of the companies covered in this report. E-mail
him at sage.brennan@pacificepoch.com.

Sage Brennan is research director of JLM Pacific Epoch, which covers
China's emerging media, entertainment and technology industries. He does
not hold positions in any of the companies covered in this report. E-mail
him at sage.brennan@pacificepoch.com.

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