China: Falling Hard For Web 2.0

Youngsters are flocking to homegrown versions of MySpace and YouTube

It was the sort of break most Net startups would die for. Chinese tv actress Zhang Yu said notable directors had made her audition on the "casting couch" before giving her roles. To back up her claims, Zhang in November posted videos of two encounters on a Web site called Yoqoo, one of dozens of Chinese YouTube (GOOG ) and MySpace wannabes. Thanks to the racy footage--heavily edited to keep things from getting X-rated--traffic on Yoqoo tripled to about 7.5 million video streams a day.

But in China, Yoqoo had little chance to capitalize on the publicity. Shortly after the videos went live, Yoqoo--which is pronounced "yo ku" and means "good" and "cool" in Chinese--got a quiet but firm warning from the government's Net cops. "Relevant authorities indicated that this has gotten so much public media attention that it would be helpful for us to remove the videos," says Yoqoo founder Victor Koo. While he insists "there was nothing pornographic" about the content, Koo quickly complied.

The episode shows the promise and the peril of user-generated content and social networking in China: You can get monster traffic with the right video, but you could get in big trouble for showing it. Still, the mainland remains fertile ground for so-called Web 2.0 startups. The country has more than 130 million Internet users, up 30% in 2006. To serve them, China has sprouted scores of homegrown companies hoping to become the next MySpace, YouTube, or Digg. Soon they'll be joined by the real thing. News Corp.'s (NWS ) MySpace is in negotiations to set up a Chinese-language version of the social-networking phenomenon. And Google is taking a stake in video-sharing site Xunlei.


Chinese teens and twentysomethings, brought up on the bland fare doled out by state-controlled media, are flocking to these sites. "You have this pent-up energy," says Eric Feng, the 28-year-old founder of Mojiti, a Beijing-based startup that allows users to add text and graphics to video clips. "They want to express themselves, but they have so few outlets to do it," says Feng. That desire for self-expression has spurred the explosion of sites specializing in sharing music, videos, pictures, and writing.

U.S. investors like the sites, too. Greenwich (Conn.)-based General Atlantic last March plowed $48 million into Oak Pacific Interactive, the Beijing holding company that operates, China's most popular social-networking site. Qihoo, which specializes in searches of blog postings, got $25 million in November from Sequoia Capital, Redpoint Ventures, and Highland Capital Management. MySpace co-founder Brad Greenspan has invested in or formed partnerships with more than 20 Chinese sites through his company, A big reason for the interest: Web 2.0 startups don't have to spend a lot of money developing expensive content that pirates could rip off, says Bill Tai, a partner in Menlo Park, Calif., with Charles River Ventures, which has backed WangYou, a Beijing startup. "There is no proprietary technology," Tai says. "That's shifting the risk profile in a very positive way."

But as locals andforeigners alike quickly learn, there are still plenty of risks to Web 2.0 operations in China. In the U.S. a naughty video might anger a few parents or religious groups; in China, a far tamer clip could spur censors to shut down your company. While YouTube monitors videos for pornography and violations of intellectual property, in China the self-censorship goes much further. For instance, WangYou gets about 6,000 video files a day, and the company can't afford to let a single one go live without checking it first. "All of this content has to be screened and scrubbed before it gets uploaded to the Web site," says Chief Financial Officer Edward Haynes, a 42-year-old Long Island native who worked as a banker at HSBC (HSBC ) before helping to launch WangYou in 2005.


Like other companies, WangYou has various ways of keeping the peace with the authorities. Users must pledge to abide by its rules, which include bans on pornographic and anti-government materials. A team of about two dozen in-house censors screens videos 24/7, and users who flag problematic clips posted by others are rewarded with points that can be redeemed for goodies such as ringtones. But for many, the reward is simply the ability to continue posting to the site. Users "don't want their community to be destroyed by somebody putting up inappropriate content," says Buddy Ye, WangYou CEO and co-founder.

Happily for Ye, most of his clients seem more interested in sharing music, photos, and poems than political ideas. One WangYou fan is 28-year-old Li Mengyang. A producer at a Beijing TV station, Li has posted 200 of his own songs, plus some short stories, on the site. In early 2006 he also began hosting a WangYou literary discussion group. Li says he is happy that taboo postings are filtered out: "I don't want to see that." He adds that despite the censorship, there is more freedom online than at his day job in television, "where some creative ideas simply can't make it" because programming chiefs are afraid of turning off conservative viewers.

Keeping the censors happy is relatively easy; finding a way to make money is harder. China's online ad market is expected to total just $800 million in 2007, vs. some $19 billion in the U.S. To boost revenues, video-sharing site is developing software that can deliver video recommendations--and commercials--based on users' earlier choices. "We can figure out what kind of TV commercial you would be interested in," says founder Andy Fan. Mofile, which has about 6 million registered users and shows some 4,000 videos a day, hopes to launch the new service in early 2007.


Other sites are looking to connect with China's 400 million cell-phone users. WangYou, for instance, lets people send photos from their Web pages to handsets, and gets a cut of the call charge from the phone company. Because China has so many more mobile-phone subscribers than Net surfers, sites that target pc users "may lose out to companies who have worked harder on social networks through the cell phone," says Timothy C. Draper, founder of Silicon Valley venture capital firm Draper Fisher Jurvetson, which invested in mobile social network eFriendsNet.

Despite the deep pockets of MySpace owner News Corp., Chinese Net executives say they're not too worried about its arrival. U.S. Internet companies, after all, haven't fared particularly well in China. Yahoo! (YHOO ), (AMZN ), and Google have been outmaneuvered by local rivals, and eBay Inc. (EBAY ) on Dec. 19 announced it was shuttering its Chinese site and forming a joint venture with Beijing-based Tom Online Inc. Given that track record, and the potential for missteps in handling the censors, locals may well have an edge, says Joseph Chen, CEO of Oak Pacific, which controls six Web 2.0 sites. What keeps Chen up nights are not thoughts of U.S. marauders but the ever-expanding hordes of homegrown rivals. "We've heard of 50 MySpace copycats and 150 YouTubes" in China, says Chen. "That's what we have to deal with."

Corrections and Clarifications "China: Falling hard for Web 2.0" (Info Tech, Jan. 15) misstated the name of the venture capital firm backing Internet company Qihoo. The correct name is Highland Capital Partners (unrelated to Highland Capital Management mentioned above).

By Bruce Einhorn, with Olga Kharif in Portland, Ore.

— With assistance by Olga Kharif

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