Chinese Net coveted by foreign companies

Foreign dotcoms are increasing efforts to acquire leading ChineseInternet companies - a trend that will continue over the next fewyears, according to the latest findings released on Monday by US-based financial consulting firm Morgan Stanley.

"They (dotcoms) are pretty active and this trend will slow downsomewhat next year but will pick up again in following years," saidMary Meeker, global Internet analyst of Morgan Stanley.

Meeker, together with Richard Weidong-Ji, who is a vice-presidentof the company, covering China's Internet and media sector, are co-authors of this year's China Internet report.

Foreign dotcoms are accelerating their acquisition of localInternet companies, with specific targets in mind, said the report.

Apart from EachNet.com, 3721.com and Joyo.com - which have alreadybeen bought by foreign websites eBay.com, Yahoo.com and Amazon.comrespectively - quite a few Chinese Internet firms leading insegmented online businesses are partly owned by their foreigncounterparts with further buying moves expected, according to thereport.

These potential deals involve Alibaba.com, the country's No 1online B2B (business-to-business) service provider, in which Yahoo!has a 40-per-cent stake; and China's No 2 online travel serviceprovider eLong.com, in which US online travel service giantInterActive has bought a 30-per-cent stake.

Search engine Google.com is widely believed to have designs onBaidu.com the No 1 paid search engine provider in China in which itcurrently holds a minor stake of 3 per cent.

Meeker pointed out that the wave of acquisitions is related to thechallenges that foreign dotcoms are facing in China, where domesticcompanies have "a local advantage".

The advantages include lower regulatory barriers, leaner reportingstructure and highly localized management, better local content andservices, as well as closer relations with mobile carriers.

"Foreign companies, unfortunately, have not achieved a similarsuccess in China as in their home countries," said Meeker.

Yahoo's deal with Alibaba indicates that "its (Yahoo's) strategyis not working in China and it has to find another way around," shesaid.

Meanwhile, eBay EachNet an eBay company has experienced a marketshare erosion in e-commerce to Alibaba/Taobao, and Dangdang.com de-crowned Amazon/Joyo in online traffic leadership.

Top players in major segmented Internet businesses - onlineadvertising, online gaming, mobile value-added services, instantmessaging and online auction, are all Chinese dotcoms, said thereport.

More importantly, these leaders dominate the market with a bigshare. The top two or three players in four out of the five segmentscommand a combined share beyond 50 per cent, by revenue, users orgross merchandise value (GMV), it said.

Regarding online auction, in particular, top player eBay EachNetand the No 2 Alibaba/Taobao together hold 94 per cent of the totalGMV.

However, the leadership position may not necessarily be secure,said the report.

"We can see narrowing gaps or changes in leadership in majorsegments," said Meeker.

In mobile value-added services, sales revenues of TOM Online was1.8 times that of Sina.com during the second quarter of this year,surpassing Sina for the first time.

In online gaming and online advertising, the sales revenues ofemerging operators are also rapidly catching up with that of theleading players, said the report.

According to Meeker, these top players entered their segments byadopting the business models that proved successful in the UnitedStates, and to later challengers, their "ability of innovation is thekey," she said.

In addition, the report notes that Chinese dotcoms in publicmarkets are often valued at a discount due to factors such as policyrisks (content censorship and revenue sharing changes), fiercecompetition, management risks, and business models that areunfamiliar to global investors.

But their real revenue is significantly higher - "30 or 40 times,"than the announced headline revenue, as a result of differentcalculation methods in purchasing power and corporate value to theindustry, noted Meeker.

Moreover, Chinese Internet firms have much higher margins thantheir global peers - 37 per cent in China in comparison with anaverage of 18 per cent in the US.