Chinese net firms innovate behind Great Firewall

SHANGHAI/BEIJING, CHINA: Long derided as little more than copycats, Chinese Internet firms are coming of age with innovative business models, showcasing how companies need to have different strategies in emerging Internet markets.

Companies such as Baidu, Alibaba.com and Sohu Inc have all been decried at various times as rip-offs of Yahoo, Google and eBay, taking a page from such global leaders to make big bucks in the relatively protected confines of their home market.

But as China's Internet landscape develops, its unique mix of censorship, regulation and user quirks have helped these Web babies morph into unexpected innovators, analysts said.

"One of the keys for foreign companies to succeed in China is to understand Chinese consumers and how they are different, to understand China's special characteristics," said Wang Hanhua, head of Joyo-Amazon, the online retail joint venture Amazon bought into in 2004.

China's Internet economy was worth 41.7 billion yuan ($6 billion) in the third quarter this year, according to data firm iResearch. Of that, ecommerce made up one-third, online advertising 24 percent and online gaming 20 percent.

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Creative payments

Payments is one area where China Web firms have been particularly innovative, especially as most Chinese don't have credit cards and earn considerably less than consumers in the West.

Web firms have come up with a host of solutions, from prepaid cards purchased at convenience stores to collecting fees through customers' cellular bills. About 75 percent of e-commerce customers in China pay for their goods on delivery.

E-commerce leader Alibaba, whose Taobao service won a high-profile war with eBay earlier this decade, found a better formula for success by providing basic listing services for free and relying on ads for revenue.

Taobao's sister company, B2B marketplace operator Alibaba.com found a niche in other services, such as guaranteeing bank loans for small enterprises.

"Innovations are not in fundamental technology but more in service and applications," said Pacific Epoch analyst Fiona Zhou.

Online game firms such as Shanda, Tencent and NetEase have refined the micro-transaction business model in online gaming, making money from cash-starved teen-agers who pay a small fee for item upgrades.

The model is slowly catching on in Western game markets which are still operating largely on a time-based subscription business model.

Tencent is the most popular Chinese portal, providing its own blend of social networking services, instant messaging, games and news to 600 million users on its popular QQ platform.

Display advertising is another area of distinct tastes. Chinese netizens like visually exciting Websites with numerous blinking, moving parts, whereas Westerners prefer sparer designs.

Kaixin, China's Facebook wannabe, has taken this lesson to heart by avoiding banner ads in favor of advertizing embedded in its hugely popular social games.

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Not afraid copyrights

Chinese firms have also been much more bold about venturing into the contentious arena of copyright protected material -- an area avoided by many firms in Western markets where laws offer strong protection and penalties for violations can be high.

By comparison, copyright laws in China are mostly new and untested and enforcement uneven. And even when a verdict is favorable, penalties are often just a slap on the wrist.

Baidu first pulled ahead of Google in China by allowing searches for music, a top activity on the Chinese Internet but one fraught will legal implications that kept Google out of the market until 2008.

Other Chinese sites like Youku, a top video-sharing service, are trying to shed their image as copyright violators by offering licensed movies and imported soap operas. The offering of such licensed materials could someday make such sites look more like paid TV services than traditional video sharing sites.

Unlike YouTube, Youku couldn't draw on a tradition of home videos. It must also police the 5 percent of user-generated content it does get to weed out politically sensitive material.

Youku also produces its own content to drive viewership and ad revenues. Millions of viewers await each episode of "I Have Something To Say", a regular 10-minute compilation of opinions from the man on the street on hot, sometimes edgy topics.

"As broadband conditions improve over time, we've moved from purely short-form content to more and more long-form content," said Youku founder Victor Koo,

China's strict censorship policies and blockage of popular global Websites such as Facebook and Twitter also offer a unique opportunity for domestic players to thrive and innovate.