A rising middle class, cheap start-up costs, increasing penetration of PCs and Internet-enabled cell phones, and an ability to tap the local market better than multinationals like Google or Amazon.com, among other factors, is fueling a rush into Web sites, online games and companies with novel advertising pitches.
Margins are tight and competition is intense, but there's a huge payout for the winners.
One of those winners is Kevin Li, founder of video-sharing site KU6.com. Li is probably the most enthusiastic person I've ever met.
He bounds past workers installing ceiling tiles and fixing the elevator to greet me. "You're the first visitor in our new office. Ha ha!" he exclaims, adding that the old office was a rented house.
Li has a lot of reasons to be excited. Last September, when it launched, KU6.com was one of more than 200 newly minted video-sharing sites in China. Now, it's one of the fastest-growing survivors. The site attracted 2 million unique users a day in the last week of May, Li claims, and unique users have been growing by 200,000 a day on average per week. KU6.com, which broke even in three months, is the 46th most popular site in China, according to Web site ranker Alexa.
In 2006, advertisers included HiSense, an electronics manufacturer, and PC giant Lenovo. Now the list includes Disney, Nokia, McDonald's, Motorola, Nike and Ford., which controls about 70 percent of the search market in China, has struck a two-year partnership with KU6.com and invested in the company. VC firm Draper Fisher Jurvetson also recently invested.
Our tour begins with a visit to the sales team, which includes a former top salesperson for Chinese portal Sohu.com. Then we maneuver past workers installing doors to meet the technical team and the CTO, who formerly worked for a national defense agency.
Then it's off to see the new video studio, where advertisers and top contributors to the site will come to film clips.
Where does the company name come from? "KU6," he blurts out and gives me a hand gesture, similar to the "Hang Loose" sign from Hawaii. "KU" means cool, he explains, and six is a lucky number. The hand gesture means six.
And who are all the young kids in the main room hunched over PCs? They review the videos submitted by users to ensure they don't contain inappropriate violence, sex or political messages. If the video won't raise flags with, KU6.com posts it.
"This is China, after all. Ha ha!," Li explains.
Chinese companies have also discovered along the way that it's a way to have a software industry without having to worry so much about.
"Online gaming is a huge success. If you tired to sell a PlayStation 2, all the games would be pirated. With online gaming, you control things on the server side," said Ted Dean, managing director of BDA, a consulting firm specializing in Asia. "A pop star can make more money on a ring tone that China Mobile sells for 2RMB (about 26 cents) than a top 40 single because the CD is going to be copied."
More-traditional software companies are benefiting as well. Incesoft Technology makes a plug-in for messaging applications that lets users conduct natural language queries on a few subjects. Type in a request for flights to Shanghai, and your IM client fetches a page that lets you buy tickets from select airlines. It retrieves songs and weather reports too. Incesoft makes money by sharing revenue with content providers. MSN and Yahoo have both signed deals with the company.
The investment portfolio of WI Harper Group highlights the phenomenon. In the U.S., the company has primarily invested in chip and networking companies. In China, most of its investments revolve around media or consumers. The list includes Focus Media Holdings (LCD advertisements), Panorama Media Holdings (commercial photography), Daqi (monitors bulletin board sites to gauge corporate reputation);that makes money through revenue share) and NuChannel Holding (digital magazines).
"In China, a lot of things we do are consumer driven, and a lot of it is (business) model driven rather than technology driven," said WI Harper partner Wayne Shiong.