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UNCLAS SECTION 01 OF 02 GUANGZHOU 000283 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, S/P, INR/EAP 
STATE PASS USTR CHINA OFFICE 
 
E.O. 12958: N/A 
TAGS: ECON SOCI CH
SUBJECT: CHINESE INTERNET PORTALS SPINNING A LARGER WEB 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly. Not for release outside U.S. government channels. Not 
for Internet publication. 
 
¶1.  (U) SUMMARY:  China's online community is not simply a group of 
young men hanging out at home, at a university center or (less 
frequently today) in an internet cafe, whiling away the time, 
playing games, viewing the equivalent of Youtube (or Youtube itself 
when it's not blocked) and even occasionally searching for 
informational purposes.  It has expanded, two of the nation's most 
successful Internet portals tell us, to include women and older 
users.  Even during this economic downturn, the market for online 
programs and services has grown as new users log on for the first 
time.   To meet their demands, Chinese companies have begun to 
develop original games and other applications for the first time in 
their history.  Chinese Internet portals have adopted different 
business models, but the key question in this maturing market is 
whether will can differentiate themselves one from the other or 
whether their growing similarity will essentially offer users little 
real choice in services.  END SUMMARY. 
 
Reaching More Women ... 
 
¶2. (SBU) Tencent and Netease, two of China's largest Internet 
companies, have traditionally targeted young men as their primary 
audience, but this is gradually changing.  While males between ages 
18 and 25 still represent a majority of users, Internet use has been 
rising among other segments of the population.  Over the last 2 
years Netease has seen 20% growth among female users, who now make 
up 43% of the total, according to Netease PR Specialist Grace Liu. 
As more women go online, Netease and its competitors are working on 
developing new games and applications that are aimed specifically at 
a female audience.  Netease, which is traded on the NASDAQ stock 
exchange, is one of the largest online gaming companies in China and 
also operates the popular Internet portal 163.com.  Founded in 
Guangzhou in 1997, Netease now has offices throughout China and has 
become the country's most profitable Internet company.  Company 
executives told us their headquarters remains in Guangzhou. 
 
More Middle-Aged Users,... 
 
¶3. (SBU) Liu also told us that 20% of Netease's customers are over 
38, and Tencent Administration Director Pauline Song says that 
middle-aged Internet users are increasing quicker than the company's 
traditionally young target audience.  Tencent, which is 
headquartered in Shenzhen, operates China's most popular Internet 
portal site and the popular 'QQ' instant messaging software. 
Tencent and Netease are both planning to expand their audience among 
adult users, but using very different strategies.  This year Netease 
will introduce a new marketing campaign to attract more mature 
users.  Tencent, on the other hand, still relies primarily on a 
younger audience.  They plan to introduce new products which will 
appeal to their current users as they age.  Recently, they 
introduced money management software for young adults who have just 
entered the workforce.  In this way, Tencent hopes to broaden its 
customer base, maintaining younger audiences while aging along with 
current users. 
 
And More Rural and Home Users 
¶4. (SBU) Netease has also experienced a 50 percent increase in 
Internet use outside of major cities.  Tencent's CEO Ma Huateng 
attributed this change largely to the Chinese government's efforts 
to expand Internet access in rural regions.  This initiative will be 
expanded in the future, and the Internet portals' pool of new users 
will continue to grow. 
 
¶5. (SBU) Users in smaller cities and rural regions are more likely 
than their urban counterparts to use Internet cafes, but the 
importance of Internet cafes in China has subsided in recent years. 
According to Ms. Liu, home Internet use has become so accessible in 
most areas that it now accounts for 70% of total Internet users, 
with only 10% logging on from Internet cafes.  The rise in home 
Internet use has also increased the number of children getting 
online, as those under 18 are not allowed into Internet cafes. 
 
Full Speed Ahead, Despite the Downturn 
 
¶6. (SBU) South China's Internet portals are still growing rapidly 
 
GUANGZHOU 00000283  002 OF 002 
 
 
despite the economic downturn that is affecting so many other 
industries.  Pauline Song of Tencent says that online gaming has 
grown faster during the downturn than before.  Both Tencent and 
Netease have moved ahead with ambitious expansion plans.  Tencent 
plans to open its new 39-storey headquarters in Shenzhen this year; 
the new building will be fully occupied almost immediately.  This 
year, Tencent will also open a game development office in Boston, 
Massachusetts.  Netease is moving forward with plans to build a new 
R&D center that, the company tells us, will more than double its 
current workforce; Grace Liu emphasized that the firm's plans have 
not been affected by the downturn at all.  With growth in Internet 
use remaining so robust, both companies are confident in the future. 
 
 
An Eastward Journey; Video Game Development Comes to China 
 
¶7. (SBU) In 2001, executives from Netease traveled to Japan to meet 
with executives from Sony with the goal of acquiring the rights to 
release Sony gaming software within China.  According to Liu, they 
were turned down.  After the refusal, Netease opened its own design 
department and began to develop original games and software, making 
them one of the first Chinese companies to do so.  Tencent and 
others have followed suit and are now developing original 
applications rather than simply translating and repackaging imported 
ones.  In June 2008, Netease released the online role-playing game 
"A Westward Journey," the first game they had developed entirely 
in-house.  The game, which incorporates elements of Chinese history 
into the storyline, currently has 220 million registered users. 
According to Tencent's Pauline Song, Internet gaming in China was a 
nearly USD 300 billion industry in 2008 and will grow even larger 
this year.  Foreign gaming companies are no longer ignoring the 
Chinese market.  Blizzard, an American software company, has signed 
a deal with Netease to introduce some Blizzard games, including the 
popular "World of Warcraft," in China this year.  While they will 
continue to import foreign games, with the success of "A Westward 
Journey" both Netease and Tencent are focused increasingly on 
producing original software for the Chinese market. 
 
Similar Goals, Competing Models 
 
¶8. (SBU) While Tencent and Netease compete to attract the same 
users, they have adopted very different business models for 
generating revenue.  Over the 12 years since they were founded, both 
Netease and Tencent have gone from upstart companies with a few 
dozen staff members to international giants with thousands of 
employees and users numbering well into the hundreds of millions. 
Tencent, whose success was built on its "QQ" instant messaging 
software, has followed a model similar to that of Yahoo in the U.S. 
The company offers a wide variety of services, ranging from email to 
music sharing for little or no cost, and relies largely on 
advertising for revenue.  Netease, on the other hand, offers some 
basic free email services, but charges for most of its content.  The 
company's largest source of revenue by far is subscriptions to 
online games, which accounts for over 80% of the total.  The two 
companies may be becoming more similar, however.  In 2007 Netease 
introduced a free search engine and blogs to its website while 
Tencent has recently begun developing subscription-based online 
games similar to those Netease has already released. 
 
GOLDBERG