AOL and China: Out One Door, In Another?

As it makes a strategic withdrawal from Hong Kong, the Web giant may have plans to return with the help of Legend, its new mainland partner

By Bruce Einhorn

For America Online in China, it's a case of the best of times and the worst of times. In early June, AOL Time Warner made a splash by announcing it had formed a joint venture with Chinese computermaker Legend Holdings to offer Internet services in China. Chairman Gerald Levin appeared at the signing ceremony in Beijing.

Yet around the same time, away in Hong Kong, AOL was quietly preparing to wind down its first attempt to launch a Chinese-language service. In late June, the company sent an e-mail message alerting its Hong Kong members that AOL Hong Kong would stop offering Internet access on July 1.

What happened? AOL Hong Kong officials insist that the launch of the Legend joint venture has nothing to do with the collapse of the Hong Kong partnership. Rather, AOL International Vice-President Greg Consiglio says the Hong Kong service died because local partner China Internet Corp., a sister company of Nasdaq-listed portal and Web-services provider Chinadotcom, decided to terminate the partnership. AOL, he adds, was happy with the progress it had made in Hong Kong. "It certainly has met our objectives," says Consiglio.


  Yet AOL didn't quite take Hong Kong by storm. While neither side will reveal how many people actually signed up for AOL Hong Kong, the service seemed to have a hard time making a dent in the highly competitive market. Chinadotcom lost $60 million on sales of $120 million last year and has seen its stock price plunge 96% since its high on March 3, 2000.

So when it came time to figure out how to stem the red ink, the AOL service became expendable, says Chinadotcom spokesman Michael Mccomb. "We have strong feelings about the brand," he says, but adds: "It didn't fit with our core business going forward."

AOL is putting a brave face on the Hong Kong setback. It's offering customers the chance to access AOL content for a monthly fee of just $3.80. The trick is that people first need to sign up with some other company to get their Internet access. Now that CIC has pulled out, AOL Hong Kong will no longer provide access.

However, broadband is becoming increasingly popular in Hong Kong. About 10% of the online population has the high-speed service, which companies such as Pacific Century CyberWorks offer for around $25 a month. So AOL figures it's better to offer only what it calls a "Bring Your Own Access" plan.

Maybe. But I suspect AOL was hoping for a lot more when it launched AOL Hong Kong in late 1999. Back then, the partnership seemed ideal: Chinadotcom had a host of Internet-related businesses as well as high-powered guanxi, or connections, thanks to its founding shareholder Xinhua, Beijing's official news service. Hong Kong's booming Internet market seemed ready for Chinese-language versions of AOL's content. And the U.S. company was looking for a way to begin to understand Chinese-language Internet users in preparation for entering the mainland market. Setting up AOL Hong Kong seemed like a good way to get a foothold in China.

10% STAKE.

  As a sign of AOL's commitment, the U.S. company was also a shareholder in Chinadotcom. The Hong Kong-based Internet company operates portals in China, Hong Kong, and Taiwan, as well as Internet advertising and Web design businesses. When it went public on Nasdaq in July, 1999, Chinadotcom became the first major Chinese-language portal to do an initial public offering, and for a while it was a shareholder darling. Shortly before the IPO, AOL bought a 10% stake in the company for $34 million.

The two sides certainly tried to make AOL Hong Kong work. Using employees of Chinadotcom subsidiary, AOL Hong Kong employed about 70 people at its peak and used a host of marketing gimmicks. For instance, early on in the partnership, AOL Hong Kong invited hundreds of customers to a free viewing of the Tom Hanks-Meg Ryan movie You've Got Mail, a romance about Net surfers exchanging love letters using AOL's e-mail service. Like so many other dot-coms, AOL went heavily for bus advertising. Indeed, even today, with the Internet access service no longer operating, the ads are still there.

Might AOL be interested in extending its new joint venture with Legend into Hong Kong? After all, Legend is China's No. 1 maker of PCs and, as a state-backed enterprise, it is a company with plenty of good guanxi of its own. AOL's Consiglio won't comment on such speculation. "We will assess future opportunities once we have fully transitioned the customer base from CIC to AOL," he says. For now, he adds, "We're focusing on the transition."


  It would be unwise to draw too big of a conclusion from AOL's Hong Kong experience. Just because the Chinadotcom partnership ended so badly doesn't necessarily mean that AOL's Legend joint venture is doomed, too. Hong Kong is a small market of just 7 million people, while China has the world's largest population. Chinadotcom is a struggling Internet company without a lot of old-fashioned, bricks-and-mortar businesses, while Legend is the leading seller of computers in the mainland.

Still, having seen one partnership with a well-connected Chinese company falter, AOL must be hoping for better luck the second time around in its attempt to crack the Chinese-language market.

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

Edited by Beth Belton

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