Identifier
Created
Classification
Origin
09GUANGZHOU283
2009-05-05 08:54:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Guangzhou
Cable title:  

CHINESE INTERNET PORTALS SPINNING A LARGER WEB

Tags:  ECON SOCI CH 
pdf how-to read a cable
VZCZCXRO6200
RR RUEHCN RUEHGH
DE RUEHGZ #0283/01 1250854
ZNR UUUUU ZZH
R 050854Z MAY 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 0557
INFO RUEHGZ/CHINA POSTS COLLECTIVE 0164
RUEHBJ/AMEMBASSY BEIJING 0420
RUEHCN/AMCONSUL CHENGDU 0103
RUEHHK/AMCONSUL HONG KONG 0144
RUEHGH/AMCONSUL SHANGHAI 0106
RUEHSH/AMCONSUL SHENYANG 0110
RUEHIN/AIT TAIPEI 0119
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC 0084
RUEAIIA/CIA WASHDC 0149
RUEKJCS/DIA WASHDC 0145
UNCLAS SECTION 01 OF 02 GUANGZHOU 000283 

SENSITIVE
SIPDIS

STATE FOR EAP/CM, S/P, INR/EAP
STATE PASS USTR CHINA OFFICE

E.O. 12958: N/A
TAGS: ECON SOCI CH
SUBJECT: CHINESE INTERNET PORTALS SPINNING A LARGER WEB

(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for Internet publication.

UNCLAS SECTION 01 OF 02 GUANGZHOU 000283

SENSITIVE
SIPDIS

STATE FOR EAP/CM, S/P, INR/EAP
STATE PASS USTR CHINA OFFICE

E.O. 12958: N/A
TAGS: ECON SOCI CH
SUBJECT: CHINESE INTERNET PORTALS SPINNING A LARGER WEB

(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for Internet publication.


1. (U) SUMMARY: China's online community is not simply a group of
young men hanging out at home, at a university center or (less
frequently today) in an internet cafe, whiling away the time,
playing games, viewing the equivalent of Youtube (or Youtube itself
when it's not blocked) and even occasionally searching for
informational purposes. It has expanded, two of the nation's most
successful Internet portals tell us, to include women and older
users. Even during this economic downturn, the market for online
programs and services has grown as new users log on for the first
time. To meet their demands, Chinese companies have begun to
develop original games and other applications for the first time in
their history. Chinese Internet portals have adopted different
business models, but the key question in this maturing market is
whether will can differentiate themselves one from the other or
whether their growing similarity will essentially offer users little
real choice in services. END SUMMARY.

Reaching More Women ...


2. (SBU) Tencent and Netease, two of China's largest Internet
companies, have traditionally targeted young men as their primary
audience, but this is gradually changing. While males between ages
18 and 25 still represent a majority of users, Internet use has been
rising among other segments of the population. Over the last 2
years Netease has seen 20% growth among female users, who now make
up 43% of the total, according to Netease PR Specialist Grace Liu.
As more women go online, Netease and its competitors are working on
developing new games and applications that are aimed specifically at
a female audience. Netease, which is traded on the NASDAQ stock
exchange, is one of the largest online gaming companies in China and
also operates the popular Internet portal 163.com. Founded in
Guangzhou in 1997, Netease now has offices throughout China and has
become the country's most profitable Internet company. Company
executives told us their headquarters remains in Guangzhou.

More Middle-Aged Users,...


3. (SBU) Liu also told us that 20% of Netease's customers are over
38, and Tencent Administration Director Pauline Song says that

middle-aged Internet users are increasing quicker than the company's
traditionally young target audience. Tencent, which is
headquartered in Shenzhen, operates China's most popular Internet
portal site and the popular 'QQ' instant messaging software.
Tencent and Netease are both planning to expand their audience among
adult users, but using very different strategies. This year Netease
will introduce a new marketing campaign to attract more mature
users. Tencent, on the other hand, still relies primarily on a
younger audience. They plan to introduce new products which will
appeal to their current users as they age. Recently, they
introduced money management software for young adults who have just
entered the workforce. In this way, Tencent hopes to broaden its
customer base, maintaining younger audiences while aging along with
current users.

And More Rural and Home Users

4. (SBU) Netease has also experienced a 50 percent increase in
Internet use outside of major cities. Tencent's CEO Ma Huateng
attributed this change largely to the Chinese government's efforts
to expand Internet access in rural regions. This initiative will be
expanded in the future, and the Internet portals' pool of new users
will continue to grow.


5. (SBU) Users in smaller cities and rural regions are more likely
than their urban counterparts to use Internet cafes, but the
importance of Internet cafes in China has subsided in recent years.
According to Ms. Liu, home Internet use has become so accessible in
most areas that it now accounts for 70% of total Internet users,
with only 10% logging on from Internet cafes. The rise in home
Internet use has also increased the number of children getting
online, as those under 18 are not allowed into Internet cafes.

Full Speed Ahead, Despite the Downturn


6. (SBU) South China's Internet portals are still growing rapidly

GUANGZHOU 00000283 002 OF 002


despite the economic downturn that is affecting so many other
industries. Pauline Song of Tencent says that online gaming has
grown faster during the downturn than before. Both Tencent and
Netease have moved ahead with ambitious expansion plans. Tencent
plans to open its new 39-storey headquarters in Shenzhen this year;
the new building will be fully occupied almost immediately. This
year, Tencent will also open a game development office in Boston,
Massachusetts. Netease is moving forward with plans to build a new
R&D center that, the company tells us, will more than double its
current workforce; Grace Liu emphasized that the firm's plans have
not been affected by the downturn at all. With growth in Internet
use remaining so robust, both companies are confident in the future.


An Eastward Journey; Video Game Development Comes to China


7. (SBU) In 2001, executives from Netease traveled to Japan to meet
with executives from Sony with the goal of acquiring the rights to
release Sony gaming software within China. According to Liu, they
were turned down. After the refusal, Netease opened its own design
department and began to develop original games and software, making
them one of the first Chinese companies to do so. Tencent and
others have followed suit and are now developing original
applications rather than simply translating and repackaging imported
ones. In June 2008, Netease released the online role-playing game
"A Westward Journey," the first game they had developed entirely
in-house. The game, which incorporates elements of Chinese history
into the storyline, currently has 220 million registered users.
According to Tencent's Pauline Song, Internet gaming in China was a
nearly USD 300 billion industry in 2008 and will grow even larger
this year. Foreign gaming companies are no longer ignoring the
Chinese market. Blizzard, an American software company, has signed
a deal with Netease to introduce some Blizzard games, including the
popular "World of Warcraft," in China this year. While they will
continue to import foreign games, with the success of "A Westward
Journey" both Netease and Tencent are focused increasingly on
producing original software for the Chinese market.

Similar Goals, Competing Models


8. (SBU) While Tencent and Netease compete to attract the same
users, they have adopted very different business models for
generating revenue. Over the 12 years since they were founded, both
Netease and Tencent have gone from upstart companies with a few
dozen staff members to international giants with thousands of
employees and users numbering well into the hundreds of millions.
Tencent, whose success was built on its "QQ" instant messaging
software, has followed a model similar to that of Yahoo in the U.S.
The company offers a wide variety of services, ranging from email to
music sharing for little or no cost, and relies largely on
advertising for revenue. Netease, on the other hand, offers some
basic free email services, but charges for most of its content. The
company's largest source of revenue by far is subscriptions to
online games, which accounts for over 80% of the total. The two
companies may be becoming more similar, however. In 2007 Netease
introduced a free search engine and blogs to its website while
Tencent has recently begun developing subscription-based online
games similar to those Netease has already released.

GOLDBERG