China Gets In on the Web Business

At the end of 2009, Google enjoyed a spot as the promising, second-largest player in China's burgeoning online search industry. The Internet at that time lacked competition from government companies, which in China's state-dominated business landscape was "extremely rare," Tucker Grinnan, head of Asian telecommunications research at HSBC in Hong Kong, told NEWSWEEK at the time.

What a difference a year makes. Since Google's high-profile spat with the Chinese government and subsequent retreat to Hong Kong, the search-engine market in China has further opened to domestic companies. Baidu has strengthened its lead and now controls 73 percent of the market, up from 68 percent in the first quarter. (Google's share has shrunk to 22 percent.) And Web giant Alibaba recently tested a beta version of a search site it is working on with Microsoft's Bing. Two of the most surprising contenders: People's Daily and Xinhua, media arms of the Communist Party. The People's Search Engine at was launched in June, and in August Xinhua announced a collaboration with China Mobile to develop its own search-engine property.

Search is not the only online sector targeted by China's state business empire. A subsidy of the State Post Bureau launched a B2C Web site that offers a wide variety of goods for sale and options to pay water and electricity bills online for customers in wealthy Jiangsu province. Last month, the State Bureau of Surveying and Mapping launched the beta version of a site called Map World that's seemingly intended to compete with Google Maps, which still lacks an online map license in China. Earlier this year, as micro-blogging grew in popularity locally, People's Daily released an updated version of The People's Microblog, which features tweeting government officials. China's state television provider, CCTV, has been moving into online video and broadcasting as well. "There's been a huge shift on the government's side over this past year," says Thomas Crampton, Asia-Pacific director of digital influence at Ogilvy, "in that there has been a huge amount of government investment in the Internet."

These sites, and the investment they've received, imply that the government realizes that the online sphere is here to stay and that the strategy of banning or censoring uppity foreign and domestic companies works best when the government can provide an alternative. Whether there's any market for ideological content is still too early to say; with the exception of online video, none of the government's new Web properties has more than a trifling market share "but I wouldn't write them off," says Crampton.

While there are no available statistics on the market size of China's state-owned Web sites and representatives from People's Daily and Map World couldn't be reached for comment, the situation "is getting better and better" for state-owned Web sites, says Fang Xingdong, an Internet entrepreneur who founded what was formerly one of the biggest blogging sites in China. People's Daily appointed Olympic gold medalist and Cambridge economics Ph.D. Deng Yaping as president of and is backed by influential, state-owned media organizations like the China Film Group.

The sites in general lack the entrepreneurship and vitality of non-state-owned companies, but they have the advantage (for the Chinese government) of orthodoxy and dependability. Map World clearly labels the disputed islands in the East China Sea as part of China's territory, not mentioning that they're currently administered by Japan; the service does the same with Arunchal Pradesh, an Indian state of 1 million people bordering Tibet. In the case of China Mobile, Xinhua provides not the search-engine technology, but the brand. If the provider of the technology 'misbehaves,' China Mobile will switch providers, but "as far as the public knows, [there is] no change" as Xinhua will be the public face, says Mark Natkin of Marbridge Consulting. Baidu "is not a state-owned company," adds Natkin. "It may cooperate with Chinese authorities, but not in the way an SOE [state-owned enterprise] would. It's a NASDAQ-listed company with shareholders to please."

Yet being an SOE in China's Darwinian Internet universe does not provide immunity. The People's Daily microblog was hacked when launched in December 2009, to show messages like "The People's Daily Online has been conquered by the people." The microblog was taken down soon after, and not rereleased for months. The late arrival of state-owned enterprises means that they're going to have to learn how to play by local rules before they can fully implement their own.