Commentary: China's dot-com era stumbles

By Louisa Liu, Gartner Analyst

Netease.com's new CEO will try to shift the company toward new, profitable business models, but dot-coms will likely continue to struggle because China's business-to-consumer market remains undeveloped. The bigger players are poised to move in.

The resignations of Chief Executive King Lai and Chief Operating Officer Susan Chen reflect the worry at Netease and other portals that they cannot foresee profitability in the direction they are heading and want to change course to find the right business plans.

	See news story: Two executives resign from Chinese portal

China boasts a large and growing number of Internet users (22.5 million), but the purchasing power of this group is still small--electronic shopping constitutes only 0.018 percent of China's total market. Consequently, revenue from Internet advertisements, which offer the most obvious way to make money, remains weak.

The portals have therefore tried several other avenues, including the following:

• Large-scale and more attractive online advertisements

• Cooperation with traditional companies to launch extensive, coordinated online and offline advertising campaigns (such as Sohu.com and Coca-Cola's "Vibrant Connections Among All of Us" and Sina.com and Robust's campaign)

• Charging for e-mail services and personal home pages, which did not quite succeed

• Short-messaging services and online games in cooperation with telephone companies, which have made some profits

Specialty, or vertical, Web sites have also sought the most effective business models, including OurGame.com (which issues membership cards), Ctrip.com (a vertical portal for arranging all facets of travel), DangDang (an online bookstore) and BOL China (Bertelsmann's China branch, which offers comprehensive services, from purchasing to delivery).

Whether these businesses will succeed in the long run remains unclear. But two things are sure. First, Internet companies with no immediate path to profitability will encounter the conflict between entrepreneurs and capitalists and follow Netease's path. In fact, Lai's fate has already befallen ChinaByte's Gong Yuguo, CIS's Xie Wen, I.com.cn's Zhang Shuxin, MeetChina's Joseph Tong and Sina's Wang Zhidong.

Second, until the business-to-consumer companies show they can become profitable, the biggest players are unlikely to risk heavy investments in China's B2C market. Instead, they will take a wait-and-see approach, depending on their available capital and global strategies. Accordingly, dot-coms will face more struggle and uncertainty.

Moreover, deals--such as the $200 million joint venture to deliver Internet services to consumers that AOL Time Warner and Legend Holdings, China's largest PC maker, announced Monday--will put pressure on the already crowded and weakly financed B2C market.

Nevertheless, because they bring in large numbers of consumers, general portals could make attractive additions to B2C strategies. Therefore, Gartner believes, portals such as Netease, China.com, Myrice.com, Sina and Sohu have become takeover targets for opportunistic, established vendors.

(For related commentary on China's attempt to control the Internet in that country, see TechRepublic.com--free registration required.)

Entire contents, Copyright © 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.