The ups and downs of

In the midst of economic downturn, the Internet is reveling in a mind-boggling boom in China: with huge numbers of customers that are the envy of online merchants and service providers around the world; and their spending keeps growing.

According to the China Internet Network Information Center (CNNIC), China had 513 million Internet users by the end of 2011, up 12% from a year ago, and 350 million of these used their cell phone to access the Internet, up 17%.

However, the agency warns growth is slowing by the Chinese norm. And while sectors may lose out, the sheer size of online shopping, payment transaction, banking and entertainment should keep the momentum going in the next few years.

Let’s take a look at what went up and what went wrong in 2011.

Tuan Gou

The drama of group discount shopping (“tuan gou” in Chinese) stunned the industry in 2011. The number of tuan gou sites shot up to more than 5,000, then shed off nearly 2,000 within a year. Market research firm Analysys predicts thousands more will head to extinction in 2012 after running out cash reserves.

The cruel reality: tuan gou generated RMB21 billion ($3.4 billion) in sales last year, but 80% of it went to the top three sites. What’s more worrisome, unruly competition wiped out most profit.

Groupon, a high flyer in the US, became the infamous casualty in China. Dubbed, Groupon entered China in all ballyhoo and sales expanded quickly to 50 markets. However the honeymoon ended prematurely.

In May, Gaopeng was sued for selling fake watches which set off a national outrage. By November, heavy losses forced the firm to close 80% of its sales offices and slash one third of its staff. Since then Gaopeng has lost its charm and dragged the entire tuan gou market into hot water.

Tuan gou’s future may be in limbo, but overall online shopping remained rosy. In 2011, nearly 200 million people shopped online shopping, up 20% from a year ago. Together they spent RMB774 billion ($123 billion), up a whopping 67%. Interestingly, nearly 77% of purchases took place in C2C compared to 23% in B2C which indicates most online shops are small and cater to boutique hunters.

Within B2C, companies that rent out space (such as are more popular than merchants on their own platforms. Although online shopping accounts only 4% of China’s total retail value, its advantage in variety and savings will drive growth strong.

Another potential area is mobile shopping. According to CNNIC, of 200 million online shoppers, only 23 million used their cell phones to buy goods in 2011. However, analysts believe the mobile Internet market will experience explosive growth in the next few years driven by handset browser, smartphone penetration and social networking.

As more companies take service into the cloud, mobile shopping will become more viable and secure. A related sector is mobile payment. There are 30 million registered customers in 2011 or 8% of total cellphone users. The potential is enormous once operators and banks sort out the standard, security issues and collaboration. In fact, mobile Internet has become the new magnet for VC and entrepreneurs drawn by its growth potential.


The search market size soared 70% in 2011 to RMB18.8 billion ($3 billion). iResearch predicts 40% CAGR during the next five years driven by e-commerce and demand for information; more important, many businesses have shifted their ad budget from traditional media to online search for more exposure and better targeting. The search market is dominated by Baidu with 76% market share, Google runs a distant second with about 20%.

Online advertising overtook newspaper ads for the first time in 2011, ringing up nearly RMB52 billion ($8 billion), most growth was from online shopping as its share jumped to 17% from 10% a year ago. About 80% of advertising revenue went to the top 15 companies/sites; the largest gain in advertising was Baidu with RMB14.3 billion ($2.3 billion), followed by Taobao and Google.


These days, the new craze is travel (and shopping), so comes the primetime of online reservation and tour packages. The market is relatively young and presents a tiny 5% of travel industry in the country. Statistics show more than 42 million people spent RMB167 billion ($26.5 billion) on online reservations in 2011, up 61% from 2010, in which 45% went to hotels, 41% airfare, 14% in vacation packages. CNNIC says the sector will see double-digit growth in the next 2-3 years, especially for vacations while revenue from online airfare sales will remain flat.

Interestingly much of the trend was bolstered by female customers who spent more time browsing travel sites/pages than males by a margin of 30%. In addition, data show young people (20-29 years) are the largest target group in the online travel business, they spent far more time online looking for the best deals, followed by 30-39 age category; the two groups are also most likely to splurge on accommodations and luxury goods.


Growth of online music (including sharing and download), games and publishing slowed significantly in 2011 due to lack of new attractions. The exception was video. More than 320 million people watched some video online, and the number is expected to exceed 440 million in 2012.

To a certain extent, the boom of online video reflects the strong desire for information and other content under government censorship. However, online video producers and operators are yet to figure out how to make money from the newfound fame. According to iResearch, revenue in 2011 was about RMB6.3 billion ($995 million) which could double in 2012 lifted by more advertising, sales and acceleration of IPTV.

The Chinese Internet is a “hangout” for young people, and many of them are game fanatics. The size of online gaming was RMB41 billion ($6.6 billion) in 2011, up 17%, and nearly 70% of it went to the three largest game developers Tencent, Netease and Shenda.

However, after nearly a decade of strong growth, interest in online gaming has tapered off and is being distracted by social networking, mobile games and microblog (“weibo” in Chinese; Twitter is barred in China). Traditional games will slowly lose steam to a new generation of services.

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