HolidayBuyer's Guide

Web 2.0 madness grips China

Cheap start-up costs and increasing penetration of Net-enabled devices are fueling a rush into Web sites, online games and novel ad approaches. Photos: Web 2.0 mania in China

BEIJING--Forget Silicon Valley--if you want to see a place enthralled with Web 2.0, come to China.

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. Baidu, 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.

"China is a developing country, and so now what people want are brands and consistency. Clothes, food, beverages are interesting."
--Gavin Ni,
CEO, Zero-2-IPO,

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 censors, 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 piracy.

"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); Maxthon (a browser maker 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.

Focus, which runs video ads on public LCD screens, gets credit by many for upping the excitement around Web 2.0. The key is that the company's screens are located where lines congregate, which is to say everywhere in China: bank lobbies, shopping centers, convenience stores, inside elevators, and the lobby next to the elevators where a person can wait a minute or longer for a car.

The company formed in 2003 and held an IPO in 2005. The stock went out at $17 a share and now sells for around $44. Revenue in the first quarter came to $58.1 million, up 75 percent from a year ago, while profit rose 73 percent to $16.3 million.

The rapid success and somewhat unusual delivery model for ads "changed the mindset" of both entrepreneurs and local advertisers, who were more focused on print and TV, said Ian Chin, president of Wealink, a Mandarin language version of LinkedIn. "You have to wait so you have eyeballs."

Word got around fast. "After they went public, the Focus executives would hit the button for Floor-1 (the floor below the lobby) instead of L (for lobby)," said Chin, who works in the same building. Instead of stopping in the lobby to exit the building, the executives were going a floor lower to the garage, where their new cars were parked.

Gavin Ni, CEO of Zero-2-IPO, a publishing house that tracks the Chinese market, asserts that a lot of the activity isn't so much around technology, but the relatively untapped nature of the domestic market.

"China is a developing country, and so now what people want are brands and consistency," Ni said. "Clothes, food, beverages are interesting."

Cultural nuances
The success of many local companies has come at the expense of multinationals. Google is a distant second to Baidu. While a preference to "buy local" can't be dismissed, many Chinese say that international vendors ignored cultural nuances.

Google, for instance, will split Chinese names into separate terms in a search, which skews the results, said Max Yuan, CEO of Incesoft, adding that Chinese search engines like Baidu do a better job. To prop up their efforts in China, Yahoo teamed up with Alibaba, while Amazon bought local online bookseller Joyo.

Business models also need to be tailored to local conditions too. The 83,000-plus screen network owned by Focus actually isn't a network at all. If the screens were connected, it would constitute a TV network and the government would insist on monitoring the content. Thus, the ads don't come from a central server. People on bicycles go to the screens every week and replace the memory card in the back, which bureaucrats have no problem with, Shiong said.

In video, KU6.com grew by tapping in the ubiquitous desire to make money. Like Revver in the U.S., KU6.com gives a portion of its ad revenue to people who submit videos. But then it goes one step further. The top 10 money earners and top 10 video contributors are listed on KU6's home page, which turns contributing to the network into sort of a video game. The site provides data on the top earners for the day, the current month and since the site began. Contributors get 10 percent to 50 percent of the ad revenue.

Li offers different types of ad presentation, with some advertisers opting to have their ads run before the video instead of after, which the most popular format. The company also holds contests: Yili, a dairy company, gave a 100,000 renminbi ($13,000) prize to the person who came up with the best ad. The contest drew more than 500 videos made by amateurs and professionals and generated 18 million page views. The top earner has pulled in $5,700 since September--more than many new college graduates earn in a year.

The top contributor for May posted 7,089 videos during the month. "That means this guy posted over 200 videos every day," Li said. "I don't pay this man's salary or provide an office for him. I just share."

Then there are the "soft" ads. Li gets contributors to make ads/product placement videos for advertisers. In one, a surly teenager walks alone in the streets talking about loneliness and carrying an MP3 player.

"Samsung. Look!" Li laughs.

Another factor fueling the boom is that Chinese media companies are inexpensive to create and run. A growing start-up with 40 to 50 employees might burn through 500,000 renminbi ($67,000) a month, Shiong said.

By contrast, chip companies or manufacturing outfits require buildings, intellectual property, land and often lots of employees. These companies also have to try to sell products internationally, unlike media and software companies that can stay local.

"The amount needed is really low. Survivability is not an issue," he said. "The problem is scalability."

And would-be media giants know that they can't rest for a moment.

"Either die or make money," said Li.

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