What Is Bill Gates Planning for China?

Now that AOL has partnered with Legend, how will Microsoft respond? It isn't saying, which may mean a surprise is in store

By Bruce Einhorn

They're bitter rivals in the U.S. So it shouldn't come as a surprise that Microsoft and AOL Time Warner are competing intensely in China, too. But it appears that Bill Gates and crew are at risk of falling behind in the Middle Kingdom with Microsoft's MSN Internet portal. That's because AOL has hooked up with Legend Holdings to form a joint venture that the two companies hope will put them at the head of the China's portal pack.

What's Microsoft's response? Right now, MSN doesn't operate a Chinese-language portal in China, although Microsoft services like Hotmail are popular among Chinese users. The company wants to do much more, since Gates has long made wooing China's leaders a top priority. Already, Microsoft operates research-and-service centers in Beijing and Shanghai, cultivates friends among the country's small-but-growing software sector, and pushes hard to get the government to crack down on counterfeiting.

MSN has to fit in with Microsoft's overall China program, says Celia Chong Wu, the regional general manager for MSN's business division in Asia. While the AOL-Legend partnership has spurred a flurry of rumors about consolidation in China's Internet sector, especially among the three ailing Nasdaq-listed startups -- Sohu.com, Sina.com, and Netease.com -- Microsoft's Wu denies that the U.S. giant feels any pressure to respond quickly. "We want to be very careful," she says. "We don't want to do anything unless it's carefully thought out."


  This much is clear: Microsoft is planning something big. Wu is reluctant to reveal much about the company's intentions for China, saying simply, "It's all being internally discussed." It is possible to figure out, however, a few things based on her cagey answers. For instance, the three local portals desperately need a financial life raft, and some analysts have been saying Microsoft might be just the player to rescue one or more of them.

While rumors a few months ago had MSN taking over Sina.com, Wu now says the speculation was "unfounded." Moreover, she admits that any of the three main portals are unlikely partners for Microsoft. Just as AOL elected to bypass the Big Three portals and go with state-backed Legend, Microsoft is similarly unlikely to take an interest in small companies with little to offer by way of advancing its bigger goals in China.

"Anything that we do in China would have to make sense for the Microsoft business as a whole," Wu says. The company would have to decide whether any MSN partner in China would be able to help Microsoft develop its latest strategy, the .Net initiative that strives to sell services such as messaging, e-mail, and authentication. "What we want to consider is how much can we leverage the entire business in China," explains Wu. "We want to look at it holistically, in terms of the Microsoft business in China."

And can any of the three Nasdaq-traded local portals offer anything like that? "The three have great market share," says a diplomatic Wu. "What other value they have, I don't know."


  Given the sorry state of the online advertising market in China, the value looks to fall even more. According to Microsoft, the total amount spent on online ads in China this year will come to about $80 million. That number is growing, but not as fast as many people would have predicted a year ago. All in all, not much of a problem for a Microsoft or an AOL, which can afford to be patient. But for a Sohu, Sina, or Netease, which depend on online ad sales in China for the bulk of their revenue, any slowdown could be fatal.

To illustrate some of the perils of building such a business in China, Wu and her colleagues at MSN point to another much-hyped Asian Internet market, South Korea. By now, it's well known that the Koreans have taken to the Net with a passion. The country has 19 million Internet users, the highest percentage of high-speed Internet users in the world, and a large chunk of Korea's total stock trading comes from people buying and selling online.

Yet even a growing Internet population doesn't guarantee that the online ad market will keep pace. Yes, the Korean Internet scene is booming. But the online advertising market has not kept pace with the growth, says Joe Doran of Microsoft's international marketing consumer group. This year, the total amount to be spent on online ads will likely be $48 million, vs. the $100 million revenue that people had expected for 2001 a year ago.


  The average rate that advertisers pay per thousand of Internet viewers ranks among "the lowest in the world," says Doran. "I can safely say that it's less than a dollar, while in the U.S. the average is closer to $10."

Doran and Wu insist that MSN remains committed to Asia, despite the disappointing numbers. After all, the region has the world's two largest countries -- China and India -- as well as some of the most affluent consumers outside of the West and Japan. As a sign of the company's determination, Doran and Wu point to the launch of a Microsoft portal in India last September.

That marked the company's sixth Asian location after Hong Kong, Malaysia, Singapore, South Korea and Taiwan. Since Bill Gates is not the sort to allow a rival like Steve Case to get an edge on him, it's a safe bet that MSN is looking to make it a lucky seven by adding China to the list.

Einhorn covers technology for BusinessWeek from Hong Kong. Follow his column every week, only on BW Online

Edited by Douglas Harbrecht

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