Internet May Be The Largest Industry In China Not Dominated By State-Owned Firms

The New York Times has an interesting article today on thriving state-owned companies in China-“China’s Policies Ensure State Enterprises Grow“.

The article makes no mention of China’s Internet industry, which will generate 6-7+ billion dollars in revenue this year from gaming, advertising and other sources, is growing 20% or more per year, and which has publicly listed companies with a combined market capitalization approaching 100 billion dollars (partial list here), and much more if you include the value of private firms like Alibaba Group and its Taobao subsidiary. A few billion dollars in annual revenue and 100 billion dollars or so in market capitalization still pales compared to China’s overall economy and to some of these state-owned behemoths. But as the Internet increasingly becomes embedded into hundreds of millions of people’s daily lives, its influence on Chinese society and China’s economy will be much greater than its current revenue would suggest.

In addition, foreign investors have large stakes in several of the large Chinese Internet firms, including Alibaba Group (Yahoo and Softbank together own a majority) and Tencent (South African media firm Naspers owns 35%). I think the government did not understand the potential or the importance of these small startups when the investments were made several years ago; it is highly unlikely foreigners could take such large stakes now.

State-owned firms are trying to gain share online, with ventures by CCTV, public listing of the new media arms of state media firms etc., but absent regulatory intervention or M&A it is going to be very hard for the state-owned firms to catch up to the private Internet sector.

Please tell me what you think in the comments.

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5 thoughts on “Internet May Be The Largest Industry In China Not Dominated By State-Owned Firms

  1. Interesting point. In a way, it seems like an anomaly, given that a certain part of the industry is about information, and that means it could be considered a sensitive, national security industry that would justify close Party and government oversight, like other similar industries like media and energy. Right? Could it be that it is an accident of history that the ruling party just didn’t get how important the internet was and let it get away from them? (That’s basically the point you are making.) Or was it a conscious decision not to regulate this new area because of the economic benefits of deregulation?

    Western observers of the internet probably don’t have this perspective, that the “birdcage” of internet freedom is actually a lot larger than it should have been given the Party’s interest in having (actual and potential) control of information industries.

  2. Interesting point. In a way, it seems like an anomaly, given that a certain part of the industry is about information, and that means it could be considered a sensitive, national security industry that would justify close Party and government oversight, like other similar industries like media and energy. Right? Could it be that it is an accident of history that the ruling party just didn’t get how important the internet was and let it get away from them? (That’s basically the point you are making.) Or was it a conscious decision not to regulate this new area because of the economic benefits of deregulation?

    Western observers of the internet probably don’t have this perspective, that the “birdcage” of internet freedom is actually a lot larger than it should have been given the Party’s interest in having (actual and potential) control of information industries.

  3. I am a typical “cheapskate” Chinaman. Things I can touch and feel or can taste and eat I will pay good money for and in cash. Stuff over the Internet I expect to be free. If a product is sold only online I do without. Except for my ISP my Internet expenses are practically zero.

  4. Hi Bill — first comment for me, having just discovered your very interesting site — keep up the good work!

    Unless things have changed dramatically “backstage” recently — and changed in ways that seem highly implausible based on your writings and the what has been discussed on Popup Chinese (also recently discovered), perhaps there’s no real disjunction between your remarks on China’s Internet (content) sector and the NYT’s musing about SOE growth. A few years back when I enjoyed VIP backstage access to the core network infrastructure systems in BJ-SH-GZ et al., each of the older companies in your stock chart, as well as every other major portal and online service that existed at the time seemed to operate as a de-facto junior partner of one or the other of China’s two major facilities-based telecom/Internet access providers. That is to say, their purpose seemed to be to occupy telco server space and generate requirements to keep telco engineering staff busy, and also to produce stimulating content to generate steadily increasing user demand for the telco’s volume-priced Internet access services, in return for which they earned a share of the revenue stream generated by that demand for access.

    At the time this arrangement made sense from a technical/hosting perspective, given the near-absence of the kind of diversely interconnected independent data centers that tend to be the home base of choice for ICPs in every other large Internet market in the world. But then that observation suggest that unless there has been a stealth revolution in telecommunications (de)regulation and an equally quiet explosion of investment in independent, mix-and-match network infrastructure elements, Internet exchange points, web hosting facilities, etc., it’s not clear that things are much different– or how they could be much different — today. Thus, notwithstanding all of the undeniable dynamism, innovation, user appeal, and investor enthusiasm that’s produced by the companies you cover, perhaps they’re also quietly producing just as much (or more) for their supporting SOEs (?).

    Anyway, if you have any firsthand insights that you can share, I’d love to see an article on current “typical” commercial and technical (i.e., revenue and technical administrative authority sharing) arrangements between Chinese ICPs and network facilities operators…

    Thanks in advance!

    xiaoyu

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