Staking Claims in China’s Uncertain Cyberspace
First came panic, then confusion. But now a cautious optimism is returning in the wake of China’s ban last month on foreign investment in its Internet content providers.
Anticipating long-term growth and a more transparent regulatory environment, Internet firms and investors are moving ahead with plans to stake their claims in Chinese cyberspace.
Among this dynamic breed of Internet start-up entrepreneurs is Fritz Demopoulos, a 31-year-old Los Angeles native who heads Shawei, a popular new all-sports, Chinese-language Web site. Since its launch this summer, Shawei has quickly built a leading position within its specialty content niche.
When China’s Ministry of Information Industry indicated last month that the government might crack down on illegal investors, one major foreign media conglomerate interested in acquiring Shawei cut its offer in half. But after thinking the matter through, the conglomerate’s people came back with an offer even higher than the original one.
Demopoulos was initially unnerved by the ban, which diminished his firm’s valuation by prospective investors. “If investors feel they can’t get their money out, or it’s not safe, they demand a higher return,” he said, adding that given the current opacity of government policies, “I’m kind of a junk bond.”
But Demopoulos, a veteran of Disney Online, Universal International TV Group and News Corp., is determined to keep on. He sells Shawei’s content--translations of foreign news wires plus original material--to other Web sites. His site sports advertising banners for Nike, Intel and Motorola and its chat room is broadcast live with commentary on Shanghai cable TV.
Many analysts see the ban not as a total exclusion of foreign firms but as a move by China’s government to reappraise its policy and strengthen its regulatory powers over foreign investment in Internet businesses.
Ministry chief Wu Jichuan later appeared to backpedal from his initial remarks. “There is no question that we will open up the market to the outside world,” he said, “but there is more work to do and more regulations that need to be formulated.”
The information ministry also announced it would release updated, detailed regulations on foreign involvement in China’s Internet sector by the end of this year.
Industry analysts aren’t surprised that Beijing is reformulating its Internet policy. When the Ministry of Posts and Telecommunications (later merged into the Ministry of Information Industry) promulgated the country’s first Internet regulations in 1996, China had very few Internet users and had not yet grasped the importance of Internet-related business to the larger economy.
This year alone, Chinese Internet users doubled in number to 4 million, and analysts estimate China will have more than 16 million Internet users by the end of 2003.
But an uncompromising ban on foreign investment could seriously stunt that growth, sending Internet content providers fleeing to safer quarters overseas and making it harder to provide the localized content that Chinese Netizens crave.
“The smartest kids won’t be drawn to the Net” if foreign capital--and the high salaries that go with it--dry up, said Demopoulos.
Even if Beijing were to enact measures so clearly contrary to its own interests, it remains to be seen whether a total ban would be enforceable.
Most major Internet-related companies in China have some degree of foreign investment. And foreign-funded content providers “range from one-man shows in bedrooms . . . to the largest and most successful of China’s portals,” according to Beijing-based management consultant David Wallerstein.
Foreign equity ownership in these mostly small, private firms “may be murky and almost impossible for any independent regulator to discern,” Wallerstein added.
Although China has long banned foreign investment in Internet service providers and other value-added telecommunications services, Internet content providers have managed to operate in a legal gray area.
One of Beijing’s primary concerns about Internet content is that it contains foreign media reports that Chinese are banned from receiving through print and broadcast channels.
But the Chinese bureaucracy has yet to strictly apply these regulations to the Internet. Most major Chinese Internet content providers include news feeds from foreign wire services, although they are careful to omit political news, particularly about China.
China’s sensitivity over foreign content recently put Yahoo founder Jerry Yang in the awkward position of denying that his new Chinese-language Web site (https://www.yahoo.com.cn), along with its news headlines, directories and listings, is a content provider.
Leading local portal Sohu (https://www.sohu.com.cn), which includes Dow Jones among its investors, also braved the ban by launching an e-commerce service in collaboration with Intel.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Internet Explosion
The number of Chinese logged on to the Internet is expected to more than quintuple in the next four years. Internet usage, in millions:
2003: 16.1 million Internet users*
* Projected
Source: International Data Corp.
Researched by JENNIFER OLDHAM / L.A. Times
* HIGH-TECH SPYING?
Thousands of Chinese are flooding Silicon Valley firms. Some critics call it a threat to national security. A1
