Short overview of China Internet market and ongoing trends

1. China Market Overview:
One Billion Customers in 20 minutes
Andy Tian
A d Ti
XPD Media Inc.
andy@xpdmedia.com
2008.11
2008 11

2. Agenda:
State of economy
The Internet market
Opportunities for entrepreneurs and investors
2

3. China economy to grow 8‐9% in 2009
Global GDP Forecast
Gl b l GDP F t
Adj
Adjustedd
to ~8%
late Oct
3 Source: Mary Meeker’s Tech Trends Presentation, Nov 5th, Web 2.0 Conference

4. Key factors driving and protecting China’s growth
China US
>30% consumer saving rate1 Close to zero saving rate
Liquid: China has $1.9 trillion Highly leveraged: over
cash reserves $10 trillion national debt
Fixed RMB protects China from
global currency fluctuation
Robust domestic demand, Declining consumer spending
replacing export as growth
engine
i
$568 Bln in infrastructure
spending allocated for 2009
p g $700 Bln just to bail out banks
(1) National saving rate is even higher at close to 50%, mostly by the government
4

5. China is saved by an “unsophisticated” mortgage market
Chinese banks only started lending mortgages in the last 6 years
By US standards, the lending practices are very unsophisticated
By US standards the lending practices are very unsophisticated
– 30% down payment required for first mortgage, 40% for second mortgage
– Lack of centralized credit bureau places burden of proof on the applicant:
among other documents, applicant needs a signed and stamped letter from
among other documents applicant needs a signed and stamped letter from
employer stating their salary can cover mortgage payments with significant
margin
By 2008, more than 50% of properties are still purchased with cash
Derivatives are new to China, heavily regulated and monitored; mortgage‐backed
instruments are almost non‐existent
To encourage spending, banks have only recently lowered down payment
requirement to 20%
5

6. Not all is rosy, China actually has already gone through a similar
financial crisis triggered by bad corporate loans
Traditionally Chinese banks have lent vast sums to state‐owned‐enterprises based on
policy, rather than evaluation based on performance
Result: bad loans accounted for as much as 23% of large banks
To date, China has already spent several hundred billion dollarss bailing out it s top
To date China has already spent several hundred billion dollarss bailing out it’s top
banks
Selected Bank Bail‐outs (incomplete)
Date Bank Amount (USD)
2004 Bank of China $22.5 Bln
2004 China Construction Bank $22.5 Bln
2004‐2005 Industrial and Commerce Bank of China $162 Bln
2006 China Everbright Bank $2.6 Bln
2008 Agricultural Bank of China $19 Bln
2008 China Development Bank $20 Bln
6 Source: public news articles via Google

7. China has the most Internet users, at 263M in Jun 2008
Mln China Internet Population
500
400 382
20%
294 ~19%
19%
300
penetration in
US: 223M 210 2008
200
137
111
94
100 80
59
23 34
0
2000 2001 2002 2003 2004 2005 2006 2007 2008E2009E
7 Source: 2008 CNNIC China Internet Report

8. Chinese Internet users: young and entertainment driven
Age spread of Chinese Internet users 2008 Jul User Activities Online
100 Average 2.7 hours online
d
per day
31.4% >30
80 Online music 85%
Online news 82%
18.7% IM 77%
60 25‐30 Online video 71%
Search 69%
40 30.3% Email 63%
18 24
18‐24 Online games 58%
E-commerce 58%
20 Blog/space
19.6% < 18 updates 42%
0
8 Source: 2008 CNNIC China Internet Report, 2008 KPMG Destination Digital

9. Internet will play an increasingly important role in China
Lack of consolidated retail infrastructure
Ecommerce
E
Lack of domestic mass entertainment
Internet as the most influential medium
Online advertising
Increased competition and spending in
telecom industry with 3 fully licensed
operators
g g
Online gaming
Chinese consumers are always looking for
a bargain
9

10. Ecommerce: fastest growing sector, the engine of Chinese
Internet
China Ecommerce Volume User behavior In 2007: a snapshot
Bln USD
60.0 46 Mln
46 Ml users shopped online
h d li
139%
54.0
125%
120% 117%
107% 48.9% ‐ clothing, home decorations
79% 77%
32.4% ‐ books, music and videos
32 4% b k i d id
40.0 69%
28.9% ‐ cosmetics
31.9
71.3% used online payment
% d li
20.0 18.0
8.0
4.5
2.8
0.6 1.1
0.0
YoY growth %
10 Source: iResearch Ecommerce Report

11. Online advertising: ad pricing and delivery still immature, rapid
growth driven by ecommerce
China Online Ad Market 2007 Online Ad Market breakdown
Bln USD Bln USD
4.0 1.5 YoY growth
3.2
74%
% 78%
65%
Brand 65%
49%
40% 0.7
1
2.3
2.0
20
Search 108%
1.4
0.5 0.4
0.8
0.5 Other
0.3 0.3
0.0 0
2004 2005 2006 2007 2008E 2009E
YoY growth %
11 Source: iResearch, 2008 KPMG Destination Digital

12. Online gaming: biggest Internet sector in China at $2.5 Bln
China online gaming market $2 Bln, 80% of total market in 2008 is
Bln USD
free-to-play games driven by virtual
5 goods,
goods making China the largest virtual
59% 65%
52%
4.3 goods market in the world
35%
25%
4
3.44 These free-to-play, massive online
games feature
3 • Very large user base: peak
2.55
concurrent users reaching > 2M
2 1.68 • Long lifespan: leading games are
over 3 years old
1.02
1
0.64
• Focus on social interactions: #1
reason for users to play games is
0 to socialize with friends
2005 2006 2007 2008E 2009E 2010E
YoY growth %
12 Source: iResearch 2008 China Gaming Industry survey

13. This means opportunities for entrepreneurs and investors
Key trends going forward
Focus on verticals
Focus on local
Ecommerce Meta-search and recommendations
SME tools and platforms
Better targeting
Online Focus on local
Advertising More efficient ad marketplaces
Ad tools and platforms
g j
More casual games than just MMORPG’s
Lighter weight, more accessible games
Gaming Integration of gaming with communities and SNS
Addressing international market from China
13

14. Though lots of challenges abound
Fierce competition: lots of copycats for any given business model
Early user population: herd mentality and rampant disregard for IP
Major differences in user behavior and expectations
Major differences in user behavior and expectations
Exits are hard: “if you don’t make money, we don’t want you; if you make
money, we might buy you; then again we might just copy and crush you”
i h b h i i h j d h ”
Language and local relationships
14

15. Last words from the wise…
Companies with cogent business models that provide
consumer value should survive / thrive –
consumers need value more than they have needed it in a
long time…
and the Internet should be the best place to find it…
p
…especially for China…
15 Source: Mary Meeker’s Tech Trends Presentation, Nov 5th, Web 2.0 Conference