How the Chinese Internet Needs to Up Its Game

Back in March I thought that Google pulling out of China would hurt Google’s Chinese employees and shareholders more than anyone. The search engine was a distant number two in the market to Baidu, and many of the people already using Google in China, I assumed, were doing so through VPNs anyway, meaning the government blocking it wouldn’t immediately change much in terms of users’ experience. Beyond that, I figured startups in China’s thriving Web scene would rush in to fill any void.

But I underestimated one big thing: The impact that the lack of Google would have on China’s Web businesses. By essentially handing Baidu a short-term monopoly on keywords, user acquisition costs have gone through the roof, infuriating many of the people who were originally sympathetic to Google’s case just a few months ago. “They should have just not come into the market to begin with if this is how they were going to act”: if I heard that statement once in the last two weeks I spent in China, I heard it a dozen times.

This wasn’t all Google’s fault. Frankly put, the company didn’t have enough market share to wreck things on its own. But it was icing on the cake of an increasingly unsustainable situation. Market forces—ie, so much venture capital backing so many new Chinese Web ventures—were already making the cost of acquiring traffic through popular online channels in China expensive. (For instance, there are said to be literally hundreds of Groupon-clones in China vying for traffic all of the sudden.) Now, sources say prices are almost totally out of reach for anyone but the most well-funded companies.

Marc van der Chijs co-founder of Tudou and CEO SpilGamesAsia told me a year ago buying traffic via keywords and listings in directory sites like Baidu-owned was a no-brainer. But he says within the last year, the prices have gone up as much as 10-fold. So high, van der Chijs finally walked away, glad he grabbed some users while they were affordable.

He’s not alone. I talked to about a dozen startups who said they are spending the bunk of their money these days on user acquisition. It’s creating some concern that newer, scrappier ventures are locked out of a market increasingly dominated by Web giants like Sina and Tencent.

The desktop directories at a Chinese Internet cafe show a similar picture. They are hopelessly crowded with hundreds of games and entertainment sites. (See the screenshot I took at a cafe in Xi’an to the right. It’s a small sample of the offerings jumping out at you as soon as you log on.) One of the newer online gaming success stories of China, Giant Interactive, caught everyone off-guard back in 2006 by using a veritable army of thousands of hip kids to travel around to Internet cafes like this one and talk up its game, offering specials and teaching people to play, side-by-side. Giant went public on the New York Stock Exchange in late-2007 largely off the success of that one game, ZT Online.

But even such extreme measures are a challenge now, since increasingly the Chinese Web is spreading beyond Internet cafes. “That’s why so many companies are trying to have a social media element, so people will invite their friends and we can get more users for free,” says Song Li, the founder of a few online ventures including online dating site Zhenai and location-based microblog Digu. Indeed, that’s a big reason Giant invested heavily in social network, said Giant’s CFO Eric He in Shanghai last week. (Valley-based Redpoint Venture is also an investor in

This is the first we’re seeing of Chinese sites having this much trouble finding eyeballs, and it’s a sign of maturity in the development of the Chinese Web. These days there are enough good services, content sites, games and social networks that a lot of people’s basic Web needs are being met. As a result, the audience is becoming sophisticated and harder to lure.

The problem is scale. When the US went through this problem, it was around the early 2000s. We had a lull in new sites being created thanks to the dot com crash and around 150 million people were online. In China, there are dozens of new sites being created per day and the Web audience is surging past 400 million users. (At least that’s the number being bandied around these days. The claims for the number of people online in China seems as ever-inflating as the price of a Baidu keyword) It’s a chaotic landscape of constantly shifting sands—even when you don’t consider concerns about changing government regulations.

Some entrepreneurs are getting creative. For Zhenai, Li is starting to experiment with television for the first time, both traditional ads and what he refers to as “product placement.” TV dating shows are all the rage in China these days, and they follow a specific script. A stage full of girls question and critique a would-be suitor saying things like “If you don’t drive a BMW, don’t even think about.” As I understand it, the girls take themselves out of the running, round-after-round by turning off their lights. At the end, the poor guy finally gets to a make a choice out of the ones still illuminated.

Shows like these have concerned a lot of older Chinese citizens about the lack of morals among the youth who seem obsessed with money, sex and things, but Li sees something more subtle at work here. Shows like these are an outlet for a wave of women who came into the work force as China was opening up its economy. Even at young ages they are educated and economically self-sufficient, so they’ve decided not to settle for a man for the sake of security. This group had been teased in society and called “The Left Behinds.” These game shows are a way of reclaiming their independence, their choice not to marry. And other women like them are living vicariously. There are about a dozen iterations of these shows showing throughout China’s fragmented TV networks.

Dating sites like Zhenai see opportunity here. Increasingly, these sites are helping with the casting and when girls from a given site gets picked, the site is listed under her name, like a product placement ad. Hopefully, if she’s alluring enough, that drives more would-be daters to the site. But setting up casting calls and culling through millions of members is a lot of work to find a telegenic few.

Is it worth all that work for the traffic? Even Li isn’t sure. But give him credit for trying. The Chinese Web became lucrative because of entrepreneurs who excelled in distribution and monetization. These guys can do better than continuing to buy inflated keywords. They have to– all inflated markets pop at some point. The companies that have found a more lasting way to build their audiences will likely be the ones who build the second generation of Chinese Web giants.