AOL Allies With Chinese PC Maker in Internet Deal
It was depressing enough that the global tech wreck had turned some of China’s superstar dot-coms into fallen heroes. Now, America Online is on its way, spelling more doom for the struggling survivors.
On Monday, the world’s largest Internet service provider confirmed weeks of speculation that it is partnering with China’s biggest computer maker, Legend Holdings.
Both companies will invest $100 million, but Legend will control 51% to comply with Chinese laws that limit foreign ownership of Internet providers.
“It creates a chance to combine our assets with Legend’s unparalleled experience and leadership in bringing the power of the online medium to the world’s largest marketplace,” AOL Time Warner Chief Executive Gerald Levin said Monday.
AOL shares rose 74 cents to close at $51.79 on the New York Stock Exchange.
The new partners plan to develop interactive services for Chinese consumers, but they will have to start slowly. The government in China has far more rigorous restrictions on the Internet than the U.S., particularly on politically sensitive topics, pornography and other content. In the offline world, the Chinese government has at times banned CNN and Time magazine, both owned by AOL Time Warner.
So in the beginning, AOL will focus on providing consultation and technical assistance to Legend, which controls about 39% of the consumer PC market in China. Over time, the new partners hope to develop an Internet service, which would likely be pre-installed on Legend machines.
Analysts say AOL will face a markedly different environment in China, where Internet usage is growing, but profits are hard to find.
But as one of the first major Internet companies to get its foot in the door in China, AOL gains an important edge against other media titans, including Viacom, Walt Disney and Rupert Murdoch’s News Corp., which also have been eyeing the populous nation. Earlier this year, News Corp. reportedly paid $60 million for a 3% stake in China Netcom Corp., a state-backed broadband provider.
For existing Internet and dot-com companies in China, the U.S. invasion means more competition and consolidation.
“They have all been beached seals for some time,” said Graham Earnshaw, head of Sinomedia, a translation and Web site design house in Shanghai. “Some of the big guys still have money in the bank, but nobody is going to give them any more. They are all living on borrowed time.”
That’s a pretty bleak picture considering the Chinese Internet was wildly believed to be a golden goose by investors around the world just a year ago. Few expected it to lay rotten eggs. But it did.
The three Nasdaq-listed companies, Sina.com, Netease.com and Sohu.com, are all hemorrhaging money, slashing jobs and barely able to escape delisting from Wall Street. Rumors abound that merger talks are underway, as last-ditch efforts to salvage a sad situation.
That’s why the AOL-Legend alliance is so intimidating and puzzling.
“If existing companies are still losing money with no clear sign of relief, what happens to a new entrant?” asked Porter Erisman, vice president of marketing for Alibaba, a Hangzhou, China-based business-to-business Web site.
Perhaps that’s the question many start-ups and their investors should have asked themselves when they got in the game. But apparently all they could think about was China plus the Internet equals the world’s largest opportunity.
By ignoring the biggest unknown--how will they make money?--the dot-coms quickened their own demise. The pitfalls were obvious from the start. Advertising was the biggest revenue source, but it wasn’t profitable. E-tailing was promising but impractical. There also is the unpredictable regulatory environment which could cripple any business any time.
Still, the irrational exuberance continued, helping the dot-coms to rise and fall in China much faster than they did in the West.
The myth was no different from the one that says getting rich is as easy as selling to each person in the world’s most populous country one toothbrush, one bottle of Coke and one car.
“It was like two investment bubbles colliding,” Erisman said. “People were ready to ignore the challenges and jump right in.”
That raises the question of how AOL will make money. The typical Chinese kid certainly won’t want to pay the $20-plus AOL charges to hook up in the U.S.
Many believe the 800-pound gorilla is here to grab market share first, think profit later. They can’t afford not to, because the U.S. market has peaked and the biggest potential market is still China, myth or not.
AOL, which has about 5 million members overseas in 17 countries, struck a similar deal in India earlier this year.
A year ago, it was hard not to buy into the hype. Every bus traversing China’s major cities was wrapped in Internet advertising. Young college graduates turned down stable jobs for the freedom and higher pay of start-ups. The term “dot-com” was so popular it might as well have been a Chinese word. Venture capitalists worried about missing the gold rush. Chinese-born, American-educated MBAs had the perfect pitch.
“These dot-com companies’ business plans consisted of one phrase: ‘1.3 billion,’ ” said Earnshaw, referring to China’s population and potential market size.
And the money was theirs to splurge.
Etang, a yuppie lifestyle portal that also sells consumer goods in Shanghai, got more than $40 million last year before its founders even figured out how they intended to make a profit. But like their compatriots in the new economy, they were experts at burning money. The company took over the entire top floor of one of the city’s most luxurious office towers. Its baseball-capped chief executive, Tang Haisong, became an instant celebrity.
“A lot of the Internet dream teams worked well on paper when the Internet was driven by perception,” said Erisman. “But they didn’t deliver blockbusters because the market determined who would be profitable.”
Sure enough, within a year, Etang scrapped its anticipated stock market debut, cut at least a quarter of its staff and is planning to switch to more traditional businesses such as media and education.
“I think a lot of people are surprised that we are still alive,” Tang told the audience at a Shanghai Internet conference in March. “I can tell you that we will be here in another three to five years’ time if we don’t run out of cash.”
Before, a lot of blame was put on the Chinese government’s regulatory hurdles, causing companies to miss the window of opportunity to make a killing. Now investors are the culprits. They simply are less willing to throw money at businesses without a clear revenue stream.
“It’s going to be impossible to take companies public out of China for a long, long time,” said Ted Dean, managing director at the consulting firm BDA’s Beijing office.
Even if you don’t own a computer, you know the dot-coms are yesterday’s news. Almost overnight, the ads vanished from the buses, replaced by familiar publicity for shampoo and soda companies. College graduates got their first taste of unemployment.
“They still owe me two months’ salary,” said Wen Xuding, 25, who lost his job at ChinaNow, a promising lifestyle portal in Shanghai headed by a UCLA graduate. It went under early this year because funding dried up.
Even for dot-coms that are still alive, the country’s primitive telecom infrastructure and lack of a national payment and delivery system continue to keep them in the red.
“[A] couple of years ago people thought things would change very quickly and it would change the world. Obviously it didn’t happen,” said Shao Y. Bo, another Harvard alum and Shanghai native who founded EachNet, a Chinese version of EBay.
The paradox is, even if the dot-com revolution is petering out, the Internet revolution is just getting started in China, providing a traditionally closed society with unprecedented access to information and self-expression. The numbers are still eye-popping. At the beginning of 1999, there were 2.1 million users. By the end of 1999 there were 8.9 million. Some estimates put the current number at nearly 23 million.
But all those numbers are estimates that are often meaningless to the dot-coms’ bottom line.
“Even if you get every single eyeball in China, it means nothing because you can’t make money off of it,” Earnshaw said.
Advertising, which provides the bulk of the revenue for most start-ups, simply stopped making sense. About 80% of China’s Internet users are young, educated and cosmopolitan, but poor compared to Western standards. One report said an average Net user spends $5 a month to get online.
“I’ve seen research that expects 85% of the dot-coms to fail,” said Dean. “But the number of users are still experiencing very strong growth. It’s just the entrepreneurial part of this is cut short.”
*
Ni reported from China and Sanders from Washington.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Going Up
Internet use in China is skyrocketing and is expected to continue to grow dramatically in the future.
*
2001: 22.5 million users
Source: China Internet Network Information Center
