1. GOING .CN
6 Challenges U.S. Web Firms Must Meet To Succeed In China
September 12, 2008
Jamie Hammond
Pavitar Juneja
Matt Luxton
Ben Newhart
Pat Sheridan
Raghav Vajjhala
 2008, All Rights Reserved

2. ACKNOWLEDGEMENTS
Our deepest thanks to Professor Ilkka Ronkainen and the Georgetown University
McDonough School of Business; and to the representatives of the many firms that
generously agreed to meet and speak with us:
• OgilvyOne Worldwide
• Procter & Gamble
• Jun He Law Firm
• University of Hong Kong Law School
• Tencent
• AOL China
• Google China
• Wanmo.com
• Omniture
• Webtrends
• MRM Worldwide
• CNNIC
• UPS
• Baidu
• Nielsen
• iResearch
• Tudou
• Spil Games
• HDT
• Guthy Renker
• MHDirect.com
• Web2Asia
• Plus Eight Star
• China Springboard

3. Table of Contents
GOING .CN .....................................................................................................................................1
1. Introduction: Who This Report Is For ...............................................................................5
2. Executive Summary ..................................................................................................................6
2.1. Six Challenges You Must Meet to Succeed in China ......................................................... 6
3. Background .................................................................................................................................9
3.1. The Internet in China ................................................................................................................... 9
3.2. Advertising in China .................................................................................................................. 10
4. Analysis: The Six Big Challenges ...................................................................................... 12
4.1. Overcome Fear of Labor........................................................................................................... 12
4.2. The Government and the Legal System – Obey, Lobby, but Move Ahead: .......... 13
4.3. Start At Zero and Build Up to What Makes Sense.......................................................... 17
4.4. China’s Got The Most People Online – So What? ........................................................... 18
4.5. Deals are Person to Person, Bargained For, and You Buy What You Can See ... 20
4.6. The Chinese Internet Is What It Is -- It’s Not Going to Morph Into the U.S ......... 21
5. Final Thoughts ......................................................................................................................... 25
5.1. Get Going Now.............................................................................................................................. 25
5.2. Ask Even Deeper Questions First ......................................................................................... 25
APPENDICES ............................................................................................................................. 27
MEETING REPORTS................................................................................................................ 28
1. OgilvyOne Worldwide ........................................................................................................... 29
1.1. Summary ........................................................................................................................................ 29
1.2. Specifics .......................................................................................................................................... 29
2. Procter & Gamble (China) Ltd. ........................................................................................... 31
2.1. Summary ........................................................................................................................................ 31
2.2. Specifics .......................................................................................................................................... 31
3. Jun He Law Firm ...................................................................................................................... 33
3.1. Summary ........................................................................................................................................ 33
3.2. Specifics .......................................................................................................................................... 33
4. Dr. Hong Xue ............................................................................................................................. 36
4.1. Summary ........................................................................................................................................ 36
4.2. Specifics .......................................................................................................................................... 36
5. Tencent Technology Company Limited .......................................................................... 38
5.1. Summary ........................................................................................................................................ 38
5.2. Specifics .......................................................................................................................................... 38
5.3. Conclusion ..................................................................................................................................... 40
6. AOL China .................................................................................................................................. 41
6.1. Summary: ....................................................................................................................................... 41
6.2. Specifics .......................................................................................................................................... 41
7. Google China ............................................................................................................................. 43
7.1. Summary ........................................................................................................................................ 43
8. Web Analytics Dinner ........................................................................................................... 44
8.1. Summary ........................................................................................................................................ 44
8.2. Specifics .......................................................................................................................................... 44
9. CNNIC (China Internet Network Information Center) ............................................... 46

4. 9.1. Summary ........................................................................................................................................ 46
9.2. Specifics .......................................................................................................................................... 47
10. UPS, Official Olympics Sponsor ..................................................................................... 49
10.1. Summary ........................................................................................................................................ 50
10.2. Specifics .......................................................................................................................................... 50
11. Baidu ...................................................................................................................................... 53
11.1. Summary ........................................................................................................................................ 53
11.2. Conclusions ................................................................................................................................... 53
12. Nielsen Online ..................................................................................................................... 54
12.1. Summary ........................................................................................................................................ 54
13. iResearch Consulting Group .......................................................................................... 55
13.1. Summary ........................................................................................................................................ 55
13.2. Specifics .......................................................................................................................................... 55
14. Marc van der Chijs ............................................................................................................. 57
14.1. Summary ........................................................................................................................................ 57
14.2. Specifics .......................................................................................................................................... 57
15. Tao Li, COO of HDT ............................................................................................................ 59
15.1. Summary ........................................................................................................................................ 59
15.2. Specifics .......................................................................................................................................... 59
16. Direct Marketing Roundtable Hosted by Guthy-Renker Shanghai ................. 61
16.1. Summary ........................................................................................................................................ 61
16.2. Specifics .......................................................................................................................................... 61
17. China Springboard............................................................................................................. 63
17.1. 6/5/2008 Skype Interview Summary ................................................................................ 63
17.2. 8/1/2008 Dinner Summary ................................................................................................... 63
18. Conference Call with Kaiser Kuo, OgilvyOne ........................................................... 65
18.1. Summary ........................................................................................................................................ 65
TIMELINE OF ADVERTISING HISTORY IN CHINA ......................................................... 66
ADVERTISEMENT LAW OF THE PEOPLE’S REPUBLIC OF CHINA - 1995 .............. 72
PROJECT WEBSITE ................................................................................................................. 82
Table of Figures
Figure 1 - Growth of Internet Users and .CN Domain Names in China ............................. 9
Figure 2 - Forecast of Online Advertising Spend in China ............................................... 10
Figure 3 - Online Advertising Spend by Industry ............................................................. 11
Figure 4 - Online Advertising Revenue by Company ....................................................... 20
Figure 5 - Historical Trends in Age Demographics for Chinese Internet Users ............... 24

5. 1. Introduction: Who This Report Is For
To see what is right, and not to do it, is want of courage or of principle.
-- Confucius
You are based in the U.S. or outside of China, and oversee international/AsiaPac
expansion for a U.S. online organization, whose revenue is derived primarily from
advertising. You are either in, or are considering entering the Chinese Web market. You
are trying to decide what kind of personnel, organization, systems, brands, and most
importantly, what kinds of websites and corresponding ad sales you want to deploy in
mainland China.
You do not feel compelled to operate in China as you do in the U.S., or for that matter in
the rest of the world. You acknowledge that winning in China requires a very different
approach. Your goal entering China is to gain significant market share and profit. This
means that you are open to empowering your local office in the ways it takes to win
there. In the near and medium term, your brand, your return, and your corporate culture
are all subject to sacrifice -- and you are willing to accept this to achieve your objective
in the world’s largest country and biggest Internet audience.
If this is not you – if you are not willing to make these moves, or you feel compelled to
do a “cookie-cutter” online operation in China as you have done in the rest of the world,
or you are not looking to win in China but rather just have a presence – then you do not
need this report, as your course is largely charted.
Our original intent in writing this paper was to focus solely on advertising models in
China – which ones are succeeding, which are failing, and why. However, we realized
that the access granted so generously to us by so many leading players, compelled us to
take a broader look. We decided to focus on the most formidable challenges in entering
this huge and exciting yet immature and maddening market. That said, you will find key
background and lessons learned about the ad market throughout the report and
Appendices.
Page 5 of 82

6. 2. Executive Summary
2.1. Six Challenges You Must Meet to Succeed in China
After six months of extensive research, interviews, visits to China’s major cities, and
discussions with dozens of leading executives and analysts in the region, we have
identified six main challenges that American firms must overcome to have a successful
ad-supported online business in China.
Please note that this is not a six-step recipe for success in China – in fact, very few if any
U.S. Web firms have enjoyed significant success on the mainland to date– rather, these
are six challenges that must be met on the path to success:
2.1.1. Overcome Fear of Labor
China needs to create millions of new jobs per year to keep pace with its torrid growth.
This need is infused into much of what you see in China, from government policies to the
many employees found in any store or business. In the U.S. Web industry, automation is
a virtue. But in China, it is jobs that are the virtue. For example, Google’s highly
automated ad-buying system competes with Baidu and its hundreds of ad salespeople.
Another example: Two leading Amazon.com-type players in China – Dangdang.com and
Joyo.com (latter owned by Amazon) – both do much of their fulfillment through their
own legions of “bicycle [now car] boys.” Having a lot of employees can mean better
treatment from the government. Hiring a big workforce is considered a given; when
asked for an automated feed of its content, one major Chinese media company told its
American Web partner to simply hire a bunch of people to copy and paste its content onto
the site daily, “like everyone else does.”1
2.1.2. Government: Obey, Lobby – But Move Ahead
Understanding and having ties with governmental bodies in China is key. Much of how
you handle China’s governmental and legal systems will depend on your specific
business. Many people we spoke with referred to this area as important, but they were
uncomfortable discussing it in great detail. Examples abound of the power of the
government online – from the great Firewall, to licensing powers, to the shutting down of
swaths of major sites on seemingly a whim. But many also said that moving ahead is
important. Don’t wait around for the government to figure things out. It can only truly
focus on a few major things at a time – and right now, online advertising is not really one
of them. Even governmental bodies we spoke with inferred this to us.
2.1.3. Start at Zero, Build Up to What Makes Sense
Here we refer to the key decisions on what kind of operation you will have in China. The
concept is to make these decisions based solely on succeeding the Chinese market, rather
than to have them already decided based on operations elsewhere in the world:
• Your offering (guess what: your great American site may not work in China -- so
look for what will work)
1
AOL China meeting, Beijing, July 31 2008 (notes in appendix)
Page 6 of 82

7. • Your brand (yes, even the name you use needs to be questioned)
• Your model (revenue, etc.)
• Your systems (sales, HR, etc.)
• Your leadership structure (autonomy…and very likely a JV)
• Your customers (if you are there to serve a known customer, that’s one thing…)
If you have no leeway in making these decisions, you may want to reconsider your
decision to even enter the Chinese Web industry.
2.1.4. China Now Has the Largest Online Audience – So What?
While China has now surpassed the United States in Internet audience, its advertising
industry online is not much more than 5% the size of ours. When the ad revenues of the
top handful of players are removed from the picture, what’s left amounts to less than 2%
of the U.S. market. Ad models such as the traditional cost-per-thousand (CPM), upon
which many media rely upon in the U.S., and even the phenomenal cost-per-click (CPC)
which has driven Google to more than $16 billion in 2007 revenue, are underperforming
in China relative to the U.S. (moreso CPM than CPC). In fact, the most robust models we
found in China is the relatively rudimentary cost-per-time (CPT), where advertisers buy a
fixed location on a site for certain period of time; as well as pay for performance, such as
Baidu’s selling of natural search results. Don’t base your sales and revenue expectations
on audience size.
2.1.5. Deals Are Person to Person, Bargained For, and You Buy What You
Can See
Spend just a few days as a tourist in China and you will learn these lessons. The trick is
realizing that they apply not just at Beijing’s famous tourist shopping centers the Pearl
Market and Silk Market, but in just about any market in China.
• Chinese firms’ massive labor forces are not just a function of governmental policy
and norms. It is also a function of the importance of personal relationships – guanxi –
in Chinese business. People want to be able to put a face to a transaction – even
online.
• Buying what you can see: The aforementioned CPT buys are a good example. Since
“there are no refunds in China,” buying what you can see is just a given.
• Bargaining: American publishers that won’t go off the rate card, won’t provide
standard discounting, or won’t haggle, are creating an impediment up front that could
be insurmountable.
2.1.6. The Chinese Internet Is What It Is -- It’s Not Going to Morph Into
the U.S.
Many American firms tend to think that as the Chinese Internet matures, it will start to
look more like the U.S. Internet. This is what we first believed as well. The truth is that,
while the Chinese Internet may in many ways be immature, it will continue to operate
Page 7 of 82

8. very differently from the U.S. Here are some examples of how the Chinese Internet
differs from the U.S. Internet:
• The Chinese Internet is cluttered: Maybe it’s the nature of the vastly more complex
Chinese language, or just how media is consumed, but simple clean sites are not
favored here.
• It is more focused on entertainment/gaming: Most consumers go online not for
serious reasons, but to escape.
• It is chock full of rabid communities/BBS: Given what people know about freedom
of speech in China, many would be surprised at how robust Chinese online
communities can be. Are they regulated? Yes. Does the government intervene? They
have been known to. But the largely anonymous BBS message boards (plus to some
extent, user-generated content (UGC), and less so, social networking) are an essential
part of understanding online in China. More on BBS in sections 4.6 and especially
4.6.1 below.
• It is young: In the U.S., older generations eventually got online. That is unlikely to
happen in China. Young people predominate, and only as they get older will
demographics change significantly. That is why some online advertising will not take
in China.
• It is provincial: The central government, as aforementioned, has a great deal of
power in China. But provincial governments are the more hands-on authorities, and
dealing with them is key. They are more powerful than a state government in the
U.S., for the most part.
• It is without ad standards: Advertisers are not happy that ad standards are weak in
China, as it costs real money to deploy a campaign in literally thousands of sizes. But
the arrival of standards is not an eventuality.
• It is mobile: Mobile in China is “a way of life….Your mobile number is your
identity.” We heard such statements regularly from the executives we interviewed.
But is mobile advertising taking off?
• It is in cafes: Internet cafes are a big part of Chinese Web usership, and many of the
trends discussed in this paper are influenced by this. But as broadband to the home
increases, will this change?
Page 8 of 82

9. 3. Background
3.1. The Internet in China2
The Internet in China began as an academic enterprise in the late 1980’s as a joint project
between the CNPAC international access line in Beijing and University of Karlsruhe,
Germany, known to the outside world as CANET3. The formation of the Ministry of
Information Industry, or ‘Super-ministry’ in 1998, helped clear the way of competing
regulatory interests in the telecommunications industry. According to data published by
CNNIC, .CN domain name registrations have increased steadily since domain registration
was turned over to accredited registrars in 2003. In addition to the domain registration
turnover, the cost to register has been dropped to $1RMB, or $0.15 U.S.
CNNIC defines critical mass for Internet penetration as 10%, and that was reached in
2006. As of 2008, China boasts over 300 million people online, up 50% or 90M users in
12 months, and topping the U.S. for most Internet users. This only represents about 20%
overall penetration of the population, concentrating mostly on urban areas and people
under 30.
Government focus is still very much on expanding IP/telecom infrastructure to the rural
areas and getting government agencies online.4 Current eGovernment initiatives still
focus on information distribution with eGovernment transactions still way off.
Figure 1 - Growth of Internet Users and .CN Domain Names in China
2
CNNIC meeting, Beijing, July 31, 2008 (notes in appendix)
3
NETWORKING IN THE PEOPLE'S REPUBLIC OF CHINA (PRC), Franklin F. Kuo, SRI International,
http://www.ibiblio.org/pub/multimedia/pictures/asia/china/about-china-net
4
CNNIC Interview
Page 9 of 82

10. 3.2. Advertising in China
Advertising in China is a relatively new phenomenon, with the first advertisement being
placed in the Tianjin Daily newspaper for Blue Sky toothpaste on January 4th, 1979.
Today, the majority of advertising money is spent on traditional media, such as
television, newspaper and magazines -- this despite the explosive growth of the Internet
in China.5 As measured at the end of the second quarter of 2008, companies were
spending only 3-4% of their total advertising budgets on digital ads.6 A number of
reasons exist for this sluggish adoption of digital advertising in China, the most important
of which are described in greater detail in the following sections.
Even though digital media has not been widely adopted by advertisers, online advertising
spend is expected to rise dramatically in the coming years. From $924M spent in online
advertising in 2007, to a projected $1.4B in 2008 and $2B in 2009,7 the market for online
advertising dollars is poised to explode:
Figure 2 - Forecast of Online Advertising Spend in China
Sina.com, one of the top Websites in China, recently reported that its online advertising
revenue is growing 59% year-over-year, with advertising revenue in the second quarter of
2008 reaching $64.9M (USD), a 39% increase over the first quarter of 2008.8
In terms of who is spending this money, the following three industries lead the charge in
online advertising spend:
• Automotive (26%)
• Computers / Information Technology (22%)
5
Interview with Sean Rach, Managing Director, OgilvyOne Worldwide, July 31, 2008
6
Interview with Rach; Time for China’s Web Advertising Industry to Grow Up?, Silicon Valley Insider,
August 18, 2008, www.alleyinsider.com/2008/8/time-for-china-s-Web-advertising-industry-to-grow-up-
7
eMarketer, May 2008
8
Robust Chinese Internet Advertising Growth Pushes Sina.com Higher, China TechNews, August 7, 2008,
www.chinatechnews.com/2008/08/07/7203-robust-chinese-Internet-advertising-growth-pushes-sinacom-
higher/
Page 10 of 82

11. • Fast Moving Consumer Goods (FMCG) (11%)9
Other industries that are investing in online advertising include Communications,
Entertainment, Retail, Auctions and Classifieds, Fashion, Finance, Real Estate, and
Media. These industries comprised 92% of the total online advertising spend in 2006.10
Figure 3 - Online Advertising Spend by Industry
9
Interview with Michael Jiang, General Manager, Advertising Platform and Products, Tencent, July 31,
2008; Nielsen // NetRatings AdRelevance, China, July 2006.
10
Nielsen // NetRatings AdRelevance, China, July 2006.
Page 11 of 82

12. 4. Analysis: The Six Big Challenges
4.1. Overcome Fear of Labor
China has a labor resource surplus, and the official numbers from the Chinese
government do not capture the true demand for work.11 That said, the government is very
much focused on creating millions of new jobs per year, to help continue the nation’s
epic economic growth, as well as to help prevent unrest (a paramount part of the
government’s mission in many arenas). It encourages large workforces, incentivizes
them, and looks favorably upon them.
Foreign firms can rely on labor costs in China remaining much lower than those in U.S.
While the U.S. average household income in 2005 was $48,00012, the Chinese average
annual household income in 2006 was $2,47113. Even if household income doubles its
increase over the last 10 years (survey results show 70% increase from 1997 to 2006,
doubling that would be a 140% increase), the average annual household income in China
would be $5,93114.
With this surplus, the Chinese are open to the use of brute force labor to help them
overcome challenges in a variety of skilled and unskilled settings:
• Use a laborer with clippers to trim a lawn instead of hiring a lawn mower operator15.
• Build networks of “bicycle boys” to deliver goods and receive payment for orders
placed online.
• Use teams to manually update online content instead of investing in automated data
feeds and more costly technical staff.
• Hire hundreds of salespeople to sell small text ads on search engines.
American companies do not see mass labor as an advantage. Rather, American firms
develop technology and modes of operation that inhibit or prevent consideration of
increased labor as a solution when confronted with a lack of revenue growth, and
systematically avoid exposure to increasing labor costs.
Thus, American Web firms in China have been slow to shed the attitudes and habits
associated with its domestic hiring practices, despite government and economic support
to do so, and thus risk being unable to:
• Take full financial advantage of the Chinese labor markets
11
http://www.tradingeconomics.com/Economics/Unemployment-rate.aspx?Symbol=CNY
12
http://www.census.gov/hhes/www/income/incomestats.html, Income, Poverty and Health Insurance in
the United States: 2006 (P60-233) [PDF]
13
http://www.gallup.com/poll/102871/Chinese-Consumers-Trying-Hard-Make-Ends-Meet.aspx
14
http://www.gallup.com/poll/102871/Chinese-Consumers-Trying-Hard-Make-Ends-Meet.aspx
15
Witnessed by project team during travels in Shenzhen
Page 12 of 82

13. • Mitigate the lack of technical infrastructure
• Connect with new customers through expansion of customer service
• Position their companies for favorable treatment from the Chinese government.
• Compete with Chinese firms that have large staffs to serve their constituents.
Several of the companies we spoke with – including Google China and Omniture –
discussed both the difficulty in hiring enough people, and the difficulty in hiring people
quickly enough. In the case of Google, its efforts to overtake dominant Baidu in Chinese
search are hampered by its inability to have the kind of staff Baidu is able to retain.16
U.S. multinational corporations (MNCs) operating in China should not make the mistake
of believing that as technology use grows more sophisticated, the need for large
workforces will be obviated. For example, a company can either choose to wait for debit
or credit card models to become the standard, or it can invest in manually processing cash
on delivery (COD) model to get goods into the hands of paying customers. (Guthy-
Renker in Shanghai reported that more than 95% of their sales come from COD).
Another example: Automated customer service – voicemail menus, auto responding
support emails – are unlikely to catch on much at all, given the value placed on person-
to-person contact when it comes to commerce (discussed further in section 4.5 below).
4.2. The Government and the Legal System – Obey, Lobby, but
Move Ahead17:
As may be expected, China is a highly regulated society, and companies must jump
through a number of hoops to do business in China. What may not be so obvious,
however, is that even in the face of significant rules and regulations, great ambiguity
exists in what these rules and regulations mean, and how they are enforced. Unlike the
United States, where agencies often opine on how to comply with their rules, and
decisions of appellate courts are binding in similar situations going forward, in China
there are no definitive answers, and companies often have to “make it up as they go” and
ask forgiveness later if necessary. Having close ties to influential government officials
thus can be beneficial, particularly for online content providers who bear the risk of
offending content sensors and being shut down.18
4.2.1. The Basics
In order to do business in China, a company must have a Chinese legal presence. That is,
a company must be incorporated in China, either through a Wholly Owned Foreign Entity
16
Google, Baidu and Web Analytics Meeting Reports, Appendix
17
Due to language barriers, much of this information is taken from personal interviews with members of
the Jun He law firm, the X. J. Wang & Co. law firm, and Dr. Hong Xue, Professor of Law at Hong Kong
University. Appropriate guidance from qualified Chinese legal counsel should be sought before entering
the Chinese market to ensure compliance with applicable laws.
18
For U.S. based companies, such ties may interfere with compliance with U.S. law, such as the Foreign
Corrupt Practices Act. Note that this report does not provide legal advice on compliance with any U.S.
laws, including the FCPA.
Page 13 of 82

14. (WOFE) owned by a non-Chinese parent company, or as a company incorporated, based
and residing in China. Once legally established in country, a company must obtain the
permission of one or more (depending on the nature of the business) government entities,
both national and provincial, to actually do business. Importantly, the scope of these
“licenses” dictates the permissible operations of the company.
A company that wishes to expand its business beyond the originally granted licenses
must, technically, receive permission to do so from the appropriate government
authorities. Of course the expansion of a company’s operations is open to interpretation,
as are the regulations and appropriate authorities that are related to a specific company.
Often, then, Chinese companies will act first without seeking government feedback or
approval, and ask forgiveness later if/when their business expansion is questioned by
authorities. This “act first, ask permission later” mentality reflects the ambiguous, and at
times, informal manner in which business is often conducted in China. This is discussed
in greater detail below.
In the case of digital content, permissions from a number of national Ministries, and
perhaps provincial governments as well, will be required based upon the nature of the
content of an online business. 19 Perhaps the most important permission for traditional
“portal” companies is the license to republish news, which is granted by the Ministry of
Information and Industry (MII). Being such a licensed Information Content Provider
(ICP) permits a Website to publish news stories provided by the State Sponsored News
Agency. Currently, only three Websites in China are licensed as an ICP – sina.com,
sohu.com, and netease.com. Interestingly, each of these sites reportedly has strong ties to
the Chinese national government. 20 See below for additional discussion on the value of
having government ties and lobbying.
The two biggest take-aways from this discussion are:
• doing business as an online content provider can be difficult due to the vast array of
permissions required – the pervasive view is that “the Internet is a dangerous toy”21
which makes receiving permissions (particularly through a WOFE) very difficult; and
• any entity would be well served by retaining local legal counsel with corporate
transactions experience, particularly with setting up WOFEs and digital content
providers.
4.2.2. The Ambiguous Legal Landscape
As mentioned above, the vast array of regulations on both the national and provincial
levels make it difficult for companies to operate with certainty as to what is required.
Many national laws are drafted in a manner that is open to great interpretation, and often
provincial laws, which are supposed to be in harmony with national laws, can and are
19
Google’s history in this regard is interesting, and reflects the ambiguity inherent in the Chinese legal
system. See below for more detail.
20
Sina.Com’s CEO, for example, is married to a daughter of the Chinese Prime Minister. “Chinese
Wedding Pulls Back Veil Of Secrecy on Money-Power Unions,” Wall Street Journal, Oct 31, 2003.
21
Theresa De, Partner, Jun He Law Firm.
Page 14 of 82

15. interpreted in a conflicting manner. Given this, companies often fear asking the
government for an official position, because it may either not get an answer at all, or it
may get an answer it doesn’t like. Thus, it is viewed as less risky to proceed without
legal certainty and deal with the consequences later.
Google China and the Tudou.com (a leading YouTube-type Website in China) provide
two prominent examples of this attitude, and the potential consequences. According to
Dr. Xue, instead of waiting to receive all necessary permissions to operate its google.cn
Website, Google China instead purchased a small company which already had an online
presence. Google simply rebranded it and was off and running. While technically
permissible, the Chinese government was not pleased at Google skirting the official
permission process, and purportedly issued negative press releases warning the Chinese
population not to use Google.22
Tudou.com provides another interesting case study in this regard. In December 2007,
China’s State Administration of Radio, Film and Television (SARFT) and the MII issued
regulations related to online video Websites. Significantly, these regulations required
companies to apply for an Online Audio-Visual Broadcasting License.23 It was widely
believed that leading Websites such as Tudou.com, afraid of poking too much into these
regulations, simply ignored them and continued operating. On March 7, 2008,
tudou.com, which at the time was the largest of the video sharing Websites in China,
mysteriously went blank.24 It has since applied for and received the appropriate license,
and is operating once again.
The Tudou.com situation underscores and interesting dynamic in China for online content
providers of all types – the existence of what we call “the Great Firewall.” It is widely
believed that the Chinese government maintains an ability to censor portions, or all, of
any Websites hosted in mainland China,25 and it clearly controls access to non-China
based Websites from the mainland. Recall the uproar from the media during the
Olympics when, contrary to its commitment of “free and unfettered access” to the
Internet for journalists, the Chinese government continued to block access to some
22
Interview with Dr. Xue, July 31, 2008.
23
SARFT, MII Co-Issue Online Video Regulation, Marbridge Daily, December 29, 2007;
www.marbridgeconsulting.com/marbridgedaily/2007-12-
29/article/7063/sarft_mii_co_issue_online_video_regulation
24
Rumor: China’s Largest Video Site Tudou Shutdown?, Doron Vermaat blog,
thenextWeb.org/2008/03/07/rumor-chinas-largest-video-site-tudou-shutdown. Marc van der Chijs, the
founder of Tudou, disputes these claims when asked by us, saying, “There are always a lot of rumors about
what's really happening in the video space in China (especially rumors created by the competition), and
because there is so much venture capital invested in these sites foreign media pick it up quickly and make it
look like real news. Tudou was not shut down by the government and it did not 'mysteriously' go blank. We
actually even informed all our registered users in advance that we would be moving our servers and would
close down temporarily.” Email Correspondence, 08/28/2008.
25
The techblog86 Website describes one instance where the Chinese government shut down a Website a
mere 25 minutes after it came online. The Website was illegally broadcasting Olympic events. Chinese
Authorities Zap Illegal Website in 25 Minutes, August 13, 2008, www.techblog86.com
Page 15 of 82

16. Websites during the games.26 The tight government control means that, without notice,
an online content provider could find its Website shut down for posting or hosting
content that violates some law or is otherwise offensive to the Chinese government. In
reaction to stern warnings not to permit negative posts about the Olympics during the
Olympic games, at least one Website shut down portions of their sites where users could
upload content rather than risk facing the wrath of the Chinese sensors.27
Given the difficult governmental terrain in China, government relations – what we might
call lobbying – plays an important role. While some companies we spoke with were
uncomfortable discussing this, it is clear that it is useful to have strong ties with the
government to help minimize business interruptions. Sina’s ICP license is a good
example of how close ties to government can, perhaps, assist in cutting through
bureaucracy. UPS has two ex-government officials in its employ.
The point from all this is that companies operating in China must be comfortable with
unclear and confusing laws and regulations coupled with potentially significant
government oversight. Often it is most efficient to simply use your best judgment, move
ahead and seek forgiveness if questioned. At other times, it is useful to lobby, informally
(yet legally), the government for proper guidance and special permissions. In both
instances, however, companies run the risk of adverse government actions, and
companies simply must be comfortable with and prepared for such a situation.
4.2.3. Laws Specifically Related to Advertising
In 1994 the Chinese National Congress adopted the Advertisement Law of the People’s
Republic of China was adopted in 1994, which became effective April 25, 1995. While
not specific to online advertisements, this national law places many restrictions on
advertisements, advertisers, advertising agents and advertising publishers. For example,
advertisements in China cannot contain:
• the national flag, national emblem, or use the national anthem;
• words such as “state-level,” “highest-level” or “best”; or
• any pornographic, superstitious, horrible, violent or ugly information.28
There are further restrictions on the claims that pharmaceutical ads can make.29 In
addition, advertisements must also be truthful, and cannot be belittle the products or
services of other producers or manufacturers.30 Importantly for advertising publishers,
they must “examine and verify the contents of advertisements in accordance with laws
26
See, e.g., China Unblocks “Some” Internet Sites, CNN Website, August 1, 2008,
cnn.com/2008/TECH/08/01/olympics.Internet.ap/
27
Interview with Marc van der Chijs, July 31, 2008.
28
See generally, Chapter II, Art. 7.
29
Chapter II, Art. 8.
30
Chapter II, Art. 7.
Page 16 of 82

17. and administrative regulations.”31 In other words, online content providers can, under the
law, be held accountable for advertisements that they host that do not comply with the
specifics prohibitions on advertisements, even though they had no hand in creating the
advertisement itself.
Online content providers typically mitigate this risk through the contracts they have with
agencies or directly with the companies themselves where the content provider is
indemnified for losses associated with non-compliant ads. Note, however, that a
monetary remedy is of little comfort to a content provider whose Website is shut down
for non-compliance. It is conceivable that the Chinese government could take such a
drastic step in response to ads it feels are too risqué or that it feels are too political in
nature. For this reason, online content providers should prepare to have a review process
in place.
As before, given the complexity of the law and the need for proper contracts, companies
should seek the advice of competent local counsel with experience in business
transactions and contract law.
4.3. Start At Zero and Build Up to What Makes Sense
What kind of operation should you have in China? Make these decisions based solely on
succeeding the Chinese market – question virtually every aspect of your operations --
rather than simply adopt decisions based on operations elsewhere in the world:
4.3.1. Branding & Market Positioning
When UPS entered China, they exported three things about its marketing: the brand
name, the color brown, and their focus on customer service. Everything else was
reconsidered from the ground up to make operations in China work.32 While the recipe
for success may change from company to company, this is the mentality that must exist
from the beginning.
Large MNCs entering new markets typically rely on leveraging the brand to establish
dominance. Cultural differences, however, can greatly affect brand loyalty. The Chinese
generally distrust foreign brands and will choose a local or regional firm over the foreign
competitors. While companies like Google have developed overwhelming dominance in
many parts of the world, in China they are squarely in the shadow of their local
competitor, Baidu. In fact, many first-time customers still struggle with how to
pronounce the word “Google.”
4.3.2. Leadership & Operation Systems
When choosing the right executives to lead an overseas venture, companies often select
those from within their ranks who can best export the company’s vision and culture. In
China, however, it is wise to select someone who knows and understands the Chinese
market best. In a culture where relationship building is the central focus of doing
business, choosing not only a Chinese national, but one who is already a player in the
31
Chapter II, Art. 27.
32
UPS Meeting report, Appendix
Page 17 of 82

18. industry culture, is highly recommended
Executives running operations in China must also maintain a high level of autonomy in
decision-making. The pace of business in China is fast and if leaders’ ability to react is
handicapped by their parent organizations, they are not likely to survive very long. Some
of the American firms we spoke with had important groups in China reporting not to their
Chinese GM, but to the corresponding groups in the U.S.
On a corporate level, a major joint venture must be considered – including ones where
power is relinquished to a local partner. Some executives we spoke with believe this is
the only way to truly succeed in the Chinese Internet, and point to Yahoo’s success with
Alibaba as the prime example.
4.3.3. Revenue & Advertising Models
A lot of Chinese online ad dollars are flowing to more rudimentary models such as cost
per time (CPT). Publishers setting up shop will have a tough enough time attracting ad
dollars – it will be that much harder if they refuse to accept that the success of more
sophisticated models has been limited. The picture is brightening; but sites that want to
win may need to launch with revenue models that look very different from those of the
home office. More on online advertising can be found in section 4.4 below.
4.3.4. Consumers & Customers
Who are you targeting? In China, the online customer landscape is quite different. In
section 4.6, we discuss many of the key differences, and why one should not expect the
landscape to eventually fall in line with that of the U.S. The kinds of advertisers and
consumers you attract in other countries may not be who you can or should attract in
China. Examples: The plurality of Chinese Internet café users form a unique set of
attributes; and generally, older users are few and far between.
All this is not to say that entering China to reach a predetermined set of users (example: a
site about the oil industry that wants to reach Chinese in that industry) is a problem. But
firms should not make assumptions about any audience in China; and firms that can,
should look closely at whether a target different from its U.S. one may be best in the
P.R.C.
4.4. China’s Got The Most People Online – So What?
As China takes the number one spot in total number of online users, why aren’t the ad
dollars following as quickly as one might expect?
4.4.1. Chinese Netizens Are Not Yet Focused on Transactions or Behaviors
That Lead to Transactions, So SMBs Don’t Advertise as Much
One key answer: Domestic consumption is not yet supporting the necessary competition
among small and medium business (SMB) advertisers. Looking at typical user
demographics and usage patterns presented in the recently released CNNIC quarterly
report, we notice the prevailing Internet trends of personal entertainment (music/video),
social communication (BBS message boards, instant messaging), and news. Users are
still weaving the Internet into the fabric of Chinese everyday life. If 10% penetration was
the tipping point for Web acceptance into the society, what then is the tipping point for
Web consumerism? One estimate suggests once 40% penetration occurs, Web
Page 18 of 82

19. consumerism will take off, and traditional media ad budgets will start to move online.33
But another factor is what the Chinese spend online is not money (which, in the
aggregate, they don’t have), but time. Especially in second tier cities and rural areas, the
perception is that everything online is free.34
To increase domestic buying power, the government is phasing in increases to the
minimum wage to triple from current levels in three years.35 The government is focused
on extending infrastructure to the rural areas and developing a plan for ipv6 adoption.
Retail banking and credit card usage are gaining traction as well – however, alternative
currencies such as Tencent’s QQ credits (sold in stores around China for use in Tencent’s
massively popular QQ games) are popular and actually put the Chinese ahead of the U.S.
in terms of adopting micropayments.
4.4.2. Major Ad Buyers are Focused on Brand Awareness
For the reasons given above as well as other factors, major advertisers focus on image
advertising online. While (as discussed below) much of their budgets go toward
rudimentary ad models, the freedom that comes with not focusing on transactions is also
allowing big players like UPS and Procter & Gamble to experiment in other online areas
such as:
• Video and user-generated content (UGC), including UPS’ video-submission
contest for the Olympics campaign
• Microsites (special market-specific promotional Websites to promote their
product offerings, often in several dialects), which both UPS and P&G deploy
• BBS message boards: P&G for one acknowledges that these community portals
are the ‘battlefront in the online space’ for brand advertisers like them.36 Firms
such as Nielsen are now offering a brand protection service that monitors BBS
sites for negative postings and responds with positive spin if necessary.37
4.4.3. Advertisers Don’t Look Much Beyond Market Leaders and Basic Ad
Models
Online ad revenue in China is split among a small handful of firms. While exact numbers
are unavailable, a look at the 10-Ks of the major players backs up this suggestion. This
pie chart is a rough representation:
33
Mark Van der Chris, CEO Spill Group Asia, interview
34
ibid.
35
Wang Xiaochun, Shenzen Bureau of Trade and Industry, remarks, July 29, 2008
36
J. Alfonso (Pon) de Dios, Associate Director, Greater China Media Department, interview
37
Nielsen online interview
Page 19 of 82

20. Figure 4 - Online Advertising Revenue by Company
Data: Analysis International 2008
Here, the top 6 sites in China – Yahoo China, Google China, Tencent, Sohu, Sina, Baidu
– account for a whopping 78% of all ad revenue in the first quarter of this year. Other
estimates put the figure higher – even when not including Google (the only foreign-run
one of the six). The 16% “Other” is spread across thousands of disparate second and third
tier sites.
Much of these dollars are spent on rudimentary ad models such as cost per time (CPT).
Many advertisers rely on agencies with little or no experience online to manage
campaigns for them and these firms have been slow to adopt sophisticated models,
metrics or standards.38 This is the case even though risk taking among advertisers would
not cost much, with ad rates as low as they are.
4.5. Deals are Person to Person, Bargained For, and You Buy
What You Can See
Trust-building is paramount in Chinese business. In many cases, the Chinese demand to
work with those with whom they have a substantive relationship – this is the concept of
“guanxi”. Though many nations have a similar dynamic, it presents a bigger barrier for
outside firms in China. The right amount of guanxi is vital, and can seal a deal for a long
time.
Guanxi relies on face to face meetings, networking, socializing, and frequent contacts.
Emails, presentations, and teleconferences can deliver business content but cannot close
deals.39 Western companies accustomed to virtual deal-making and automation have to
establish a significant and not short-term physical presence.
38
Alex Lee interview, China Springboard CEO
39
Cameron Cowan, Accounts Manager, Omniture, interview notes
Page 20 of 82

21. While this universal Chinese-business theme applies directly to corporate constituents
such as advertisers, it also applies indirectly to online customers. Online businesses must
not assume they can rely on faceless – much less automated – sales and service. As
discussed earlier, employing large labor forces plays a role here. Baidu employs hundreds
of salespeople who deal in small text ads. Major Amazon-type players retain legions of
deliverymen.
The need for human contact becomes even more necessary when considering that in
China, almost every transaction has a bargaining component. So publishers who adhere to
a rigid ad-rate structure will have problems in China. And many agencies – especially
large and large-volume ones -- make their margin on discounts, so even more is at stake
for them if the publisher won’t go off the rate card. Doing this can be very difficult for
foreign firms who don’t do it elsewhere; but as with relationship-building, bargaining is
so ingrained in Chinese business culture that there is no way around it.
The final leg in this stool is that the Chinese are hesitant to buy any goods they cannot
see.40 One of the main ways this manifests itself in online advertising is the popularity of
cost-per-time advertising. With CPT, the advertiser knows exactly where and when the ad
will run. Even though models such as CPC and CPM can be much more effective, the
need to buy what you can see still often prevails. Several of the companies with which we
spoke mentioned the same example: An ad buyer will only buy an ad that he can reliably
point his boss to when the boss visits the Website.41
4.6. The Chinese Internet Is What It Is -- It’s Not Going to
Morph Into the U.S
If the Chinese were simply a certain number of years behind the U.S. in Internet
maturation, as many still believe, then some of the U.S. firms that got in early should be
winning in China by now, and other firms could follow in their footsteps.
Instead, there are no examples of U.S. market leaders in any online category in China.
Instead, there exist many examples of user behavior in China that are not consistent with
U.S. behavior:
• Big Sites Are Cluttered – Popular Chinese portals contain significantly more links
than their U.S. counterparts. For simple comparison, on Tencent’s qq.com, there are
over 900 links. On aol.com, there are 240 links42. Even in Hong Kong, Web
designers favor site layouts with large numbers of links for the Hong Kong users (this
group would be most likely to favor U.S. Internet browsing habits because of the
longer exposure to the Internet, however that is not the case)43. Chinese portal
homepages can scroll on for seven or eight folds, intermixed with text and graphic
40
Guthy-Renker, Ogilvy, July 31, 2008 ( See Appendix)
41
Companies that mentioned this dynamic included Tencent, Ogilvy, Tudou, Plus Eight Star, China
Springboard. (See Appendix)
42
Link count based on find and replace count of href tags from source html on home pages of qq.com and
aol.com
43
Ogilvy trip report
Page 21 of 82

22. banner ads throughout. The look is familiar to that of Chinese press, especially local
newspapers. Currently, there is little or no appreciation for Western-style Web
usability in China.44 Conventional wisdom does hold that improving the online user
experience will increase traffic and ad revenue. But in China, there is a spirited
difference of opinion as to whether “cleaner” sites will eventually prevail. Google
China, for example, believes its look will win in the end. Not surprisingly, the
dominant leader, Baidu, believes its look is ideal.
Tao Li from HDT helped provide perspective on this approach: Building the systems
and processes that identify and address what the Chinese respond to today is a much
more valuable skill than predicting what they might prefer in the future. For example,
if the Chinese Internet population responds to flashy pages heavy with links and
videos, then online advertising should be flashier and less text oriented than what is
provided in the U.S. Marc van der Chijs, a key player through both his founding role
at Tudou and current leadership of Spil Games, has pointed out that advertisers must
recognize this trend.
• Users Are More Focused on Entertainment / Gaming – Multi-player online games,
music, and video thrive more than serious, information- and transaction- oriented
activities do on the Chinese Internet. While all activities are sure to grow in China,
the former, escape-oriented ones are likely to remain in the lead. In addition, these
areas often still run afoul of copyrights; unless a business model addresses the limited
financial resources of the average Chinese consumer, it is unlikely that copyrights
will be more respected.45
• Youth Will Remain Dominant -- There has yet to be and may never be meaningful
adoption of the Internet among older generations in China. The value of online
activity may be dependent on the career progression in terms of salary and power
acquired by the current young lead generation of Internet users. More on this in
section 4.6.2 below
• Communities Can Be Rabid - BBS, UGC and to some extent social networking
actually represent a plurality if not a majority of the ways that Chinese can strongly
(and to some extent, freely) express themselves in any medium, not just online. Few
major sites are without a BBS, and few major brands are not the subject of BBS
discussion – discussions that can be extremely influential.46 More on BBS in section
4.6.1 directly below.
• Provinces Are Paramount -- China does not represent one homogenous market
space, but rather many unique niche markets. Thorough independent research of
target markets is highly recommended prior to any large-scale investment.
44
Jenny Hoe, independent consultant, Web Analytics Roundtable
45
Interview with Marc van der Chijs and Direct Marketing Roundtable
46
Interview with Marc van der Chijs and Direct Marketing Roundtable
Page 22 of 82

23. • Mobile Is Ubiquitous -- While there exists a general expectation that mobile usage
will have a huge impact on the Chinese Internet, it is not as clear how soon that will
happen or how companies will take advantage of the opportunity47. Similarly, it is
not clear how the use of mobile may impact other trends in usage from cafés or with
broadband.
• Cybercafes Are Part of the Culture – While cybercafés have proliferated
worldwide, in China a very large number of consumers rely on them for their primary
Internet access. This makes things like targeted advertising very difficult to deploy, as
the computers are essentially public. Cafes are not looked upon favorably by the
government, and increasing broadband to the home (and higher-speed mobile, as just
mentioned) might move cybercafes to a role closer to that of its role in the U.S., but
this is not a given.
• Ad standards? What Are Those? – This paper has touched on ad standards but just
to be clear, here is a brief roundup of the situation: A campaign that includes the top
100 sites in China requires up to 7,000 different ad sizes to be cut.48 For all parties –
advertisers, publishers and third parties such as agencies – this is far from ideal. But
given the proliferation of cheap labor – including graphic designers – the pain is
apparently not high enough for action. During our research, we found evidence of
groups trying to propagate standards, but nothing has been successful to date.
4.6.1. BBS
The most influential technology in China in terms of free expression of ideas is not a
common Web technology. It is Discuz!, the software platform that powers 70% of all
Chinese BBS49. When a U.S. user sees a Chinese BBS with the ability to accommodate
flashy images, they may not recognize it based on the text heavy interface more
commonly known to U.S. Internet users.
As summarized by Gang Lu in the blog www.mobinode.com and documented by
iResearch Consulting Group, “in 2007, In China around 36.3% users spend 1-3 hours on
BBS, about 44.7% users spend 3-8 hours and even 15.1% users are on BBS for more than
8 hours a day. Over 60% of users will login at least 3 BBS more than 3 times each every
week.” 80% of Chinese Websites operate their own BBS. However, based on
examinations of Chinese BBS, the gap in design is not as far from the U.S. as is the case
with gaming or portals.
George Godula, founder of Web2Asia, pointed out the more aggressive companies seek
to influence BBS listings to put their company in the best light; companies, aware of the
influence of the BBS, can find ways to influence how comments are placed. It is also an
acknowledged practice of the Chinese government to influence editing of the BBS.
During the Olympics, the government communicated to site owners that negative BBS
comments could prompt a shutdown of the site50. Many believe that the government and
47
Interview with Marc van der Chijs
48
Web Analytics Dinner, See Appendix
49
http://www.mobinode.com/2008/01/17/chinese-bbs-the-undiscovered-phenomenon-in-chinese-Internet/
50
Interview with Marc van der Chijs
Page 23 of 82

24. Carrefour worked together to quell protests outside Carrefour stores in China and that one
main way it was done was to shut down BBS threads on the protests.51
These efforts are less an indication of the issues with BBS and more of an indication of
the power and influence of the BBS. For a Chinese user, the opportunity to post an
(anonymous) comment to BBS and influence a large audience can possess greater value
than to send a comment back to an advertiser or portal owner directly. This incentive
also exists for businesses. For example, Spil Games shut down their BBS to prevent
competitors from logging Olympic related comments52.
Because of the power of BBS, the opportunity to use them to shape opinions, and the
relatively smaller gap in knowledge of BBS technology and design, U.S. MNCs would
benefit from investment in a BBS strategy.
4.6.2. A Young at Heart Internet Nation
To date, it has not appeared that older generations in China have adopted the Internet.
Figure 5 - Historical Trends in Age Demographics for Chinese Internet Users
While there are some changes in percentage shares in the age brackets younger than 30,
those above have remained relatively static. A strategy based on expecting Internet users
to “grow up” would appear risky given the demographic trends from CNNIC.
Given these trends and the likelihood they will not change, U.S. Web firms may benefit
by focusing on those that favor their strengths. For example, it may be difficult to create
the type of dense sites or unique games the Chinese prefer, but BBS and youth marketing
are well within the American wheelhouse.
51
Web Analytics Dinner, Appendix
52
Interview with Marc van der Chijs
Page 24 of 82

25. 5. Final Thoughts
The team’s recommendations are embedded in the six challenges that precede this
section. The six challenges represent the key issues to consider before setting foot on the
mainland.
However, they do beg the unanswered question: Should American Web firms even enter
China?
We see two contrasting ways of looking at this question:
5.1. Get Going Now
From major infrastructure to vast complexes, the Chinese are building at a pace
unmatched in the world. A visit to any major city in China – for example, Shenzhen,
which was a fishing village 25 years ago and is now bigger than any metro area in the
U.S. except for New York – is proof enough of this. The West talks about how fast things
change in our society, but in many ways we don’t hold a candle to China; for example, it
took London as much time to just hold the public hearings about its vast new
international terminal at Heathrow as it took Beijing to fully complete its even larger
one.53 This pace of change can be seen online as well. It is often just a matter of weeks
before a hot new startup spawns multiple copycat sites, for example.
When we first began looking at the Chinese online ad market, we thought it was on a path
similar to the U.S., and simply behind the U.S. by a number of years. American firms
could wait until the market in China matured and then expect to do well. Indeed, some
major American Web firms in China still believe precisely this.
We no longer believe this, however.54 China will take its own path, and firms who want
to succeed there will simply fall behind if they do not get involved now. Be smart how
you enter, be willing to sacrifice, and be patient for profit – but if you are to enter, don’t
let those things delay your entry. This is what we heard not only from Internet industry
leaders, but also leaders in other industries we met with, from financial services to
telecom to software.55 The message is clear: Go!
5.2. Ask Even Deeper Questions First
Many in the West are of course dismayed by China’s approach to human rights, including
freedom of speech. It may be inevitable for media firms in particular to feel compelled to
grapple with this issue as they enter China.
Everywhere in China you will find the word Harmonious and synonyms thereof, on
buildings, businesses, even municipalities. Asian culture and religious history stress
balance in mind, body, and spirit and Confucian ideals of harmony among people. Yet we
witnessed explosive growth that often lacked these ideals. Other times, the growth
seemed more like the opening ceremony of the Beijing Olympics: Executed by vast
53
Paul Goldberger, “Situation Terminal,” The New Yorker, April 21, 2008
54
Section 4.6 details many examples that support this view.
55
IEMBA-wide meetings in Hong Kong with Excel Technology and Citi; in Shenzhen with ZTE
Page 25 of 82

26. numbers of people, yet tightly controlled by a few. But whether chaotic or controlled,
individual rights in China are quickly given lower priority in the name of progress –
whether it is a roadside neighborhood being walled off so that Olympic visitors won’t see
it, or a BBS shut down to help a MNC withstand a corporate crisis.
For online advertising, the real issue may be whether the professional class that upholds
standards of business and codes of conduct will be empowered. From ad metrics, to
intellectual property, to credit, to issues of censorship, online advertising requires not so
much strong government policy as it does the power to police itself. Some would argue
that the central government should be less wary of the professional class and embrace the
ideal of harmony and balance so ingrained in its culture.
So considering this reality, American Web firms need to confront themselves with the
contrast between a native cultural value system which governs commerce and legal
norms and frameworks, and those at play in China. It is one thing for a Western product
brand to do well in China; for a service brand, dependent on something like advertising,
is a whole other question. Will the physics at play in China ever allow success without
causing PR problems back home? Is it your job to help change China? What output
from a Chinese presence can be leveraged back to the global business? These are tough
questions that pose perhaps a seventh and most difficult challenge to overcome.
Page 26 of 82

27. APPENDICES
Page 27 of 82

28. MEETING REPORTS
Page 28 of 82

29. 1. OgilvyOne Worldwide
23rd Floor, The Center
99 Queens Road
Central, Hong Kong
www.ogilvy.com
July 31, 2008
Participants: Sean Rach, Managing Director (sean.rach@ogilvy.com), Pavitar Juneja,
Matt Luxton
1.1. Summary
Sean Rach is the Managing Director for OgilvyOne Worldwide’s Hong Kong office. He
provided interesting insights into the Hong Kong advertising market in general, and the
online advertising environment specifically.
1.2. Specifics
1.2.1. The Online Advertising Space (Hong Kong)
• Ogilvy’s preferred method for placing online ads is through Third Party Ad Servicers,
such as Double Click. Double Click gives ad agencies access to a ton of data through
“click tags” attached to each online ad, including which Websites are generating the
most actions (clicks).
o Ogilvy is then able to optimize the ad campaign based on the real time data. It is
this powerful tool that makes online ads, in Sean’s mind, so powerful.
• Advertisers, however, only spend 3% of their ad budget on digital media. This
compares to 35% of digital consumption, illustrating a huge “confidence gap” among
advertisers.
• The dominant online ad model in HK is, as with PRC, a daily rate model (CPT).
o Rach believes this is cultural – the boss wants to see the ad on the best Website on
the specified day – not the lack of metrics on ad impressions.
Page 29 of 82

30. o This is driven by historical ads in HK as well – television and print media have
been dominant for so long, and this is the manner in which they are bought.
o He also thinks ad agencies are partly to blame for CPT model dominance in that
they tend to overwhelm their clients with information and statistics about the
online ad space. He believes they need to make it simple to get their clients to
understand the online space.
• Rach thinks that PRC may be better off than HK in this regard since they don’t have
the “bad habits” of HK. Advertising is a new thing there, and consumers are willing
to accept ads in multiple forms.
• Another problem in the HK online ad space is lack of standards across Websites.
Each site has different requirements for the size of ads, which makes it very
expensive for advertisers as well.
• As for advice to U.S. content providers, his most important point is that cookie cutter
models do not work. Just because it has worked in the U.S. doesn’t mean it will work
in Asia. You have to be “locally relevant.”
Page 30 of 82

31. 2. Procter & Gamble (China) Ltd.
27-33/F., Center Plaza
161 Linhexi Road, Tianhe District
Guangzhou, Guangdong, P.R. China
Post Code: 510620
August 1, 2008
Participants: J. Alfonso (Pon) de Dios, Associate Director, Greater China Media
Department (dedios.JA@pg.com), Pavitar Juneja, Matt Luxton
2.1. Summary
Procter & Gamble (PG) is a sophisticated advertiser, and is keenly focused on its
consumers. It relies primarily on TV ads currently, but has created online trial campaigns
that try to tap into China’s penchant for online communities and blogging. The two most
striking points from our interview were (1) Pon’s surprise that CPT is used by others in
the digital advertising space, and (2) his perspective that the success (or failure) of any
Website is driven by locally relevant content. Without content that attracts appropriate
consumers, FMCG (Fast Moving Consumer Goods) producers will not advertise.
2.2. Specifics
• TV ads have made PG successful, and this is why PG spends most of its advertising
budget on TV rather than digital.
• Digital ad budgets are, however, escalating – Pon did not have the numbers with him
– and he believes that they probably are not where they need to be.
• PG focuses on creative digital ads and trial campaigns, and sees User Generated
Content and Social Networking Sites as the battlefront in the online space.
o PG is acutely aware of the Chinese trend toward online communities (UGC) and
is focusing its online ad campaigns here.
o One example was a PG Pampers Website where PG created a community for
mothers to discuss baby care. This was hugely important to mothers, particularly
Page 31 of 82

32. given China’s one child policy (i.e. no learning from past mistakes), and led to a
big increase in Pampers sales.
• PG does not have a good way to measure the ROI on its online ad campaigns. It is
focused on engagement time, and so does NOT buy ads on a CPT basis. It is all CPC
or CPA. Pon was surprised when we told him that others have said CPT is the
dominant online ad model.
• PG sees video as important, but more as a way for PG to advertise rather than as a
medium on which to advertise (i.e. they are not advertising pre-roll or post-roll on
tudo.com or 58.com or other Websites).
• Bottom line for PG: they key for any Website is to create content that reaches PG’s
consumers. Given China’s obsession with blogs / UGC / BBS, a simple portal
doesn’t do it. You have to create features / communities that attract consumers.
Page 32 of 82

33. 3. Jun He Law Firm
Suite 2208, 22/F, Jardine House
1 Connaught Place
Central, Hong Kong
www.junhe.com
July 30, 2008
Participants: Theresa De, Partner, Dennis S K Hu, Solicitor, Pauline N. Y. Chan,
Solicitor, Pavitar Juneja, Matt Luxton
3.1. Summary
• General restrictions on ad content that seem consistent with “common sense”
approach
• No laws exist that are specific to the online ad environment – PRC and courts are
trying to adapt existing laws (IP and health) to online environment
• U.S. companies that try to enter PRC market directly may face legal difficulties that
domestic firms do not experience.
3.2. Specifics
3.2.1. Chinese Legislation Process
• Laws that apply across the PRC (and, in theory, in Hong Kong and Macau) are passed
by the National People’s Congress (the NPC), the equivalent of the United States
Congress.
• There are a number of Ministries, however, which are empowered to pass regulations
and rules that have the binding effect of law. Examples of PRC Ministries include the
Page 33 of 82

34. Ministry of Information, the Ministry of Foreign Exchange, and the Ministry of the
Petroleum Industry. Multiple Ministries may pass regulations pertaining to a single
law.
• Provinces also often pass laws that apply within their boundaries. In theory, these
laws are consistent with laws passed by the NPC, although this is not always so.
3.2.2. Advertising Laws
• The NPC passed an Advertising Law in 1994, effective 1995, that applies to
advertisements generally, regardless of the media for the ads. The text of the law is
attached in the Appendices.
o There is no national law directed specifically to online ads, although local Beijing
authorities passed an online ad law in 2001. We were not able to get much
information on the specifics of this law.
• There are many requirements on what ads can and cannot contain, although there is
not a lot of guidance (e.g. laws must be for the general good of society, cannot
promote violence, cannot jeopardize social order, cannot include or reference national
symbols (flag, song, etc.), cannot be injurious, must be truthful, etc.)
• There are a number of other laws that may also apply to advertisements and
advertisers, such as intellectual property laws, or Ministry of Health regulations on
tobacco, drugs, etc., for example.
• The Law provides for joint and severable liability among the parties (advertiser,
agent, publisher) for compliance with the Law. This means that publishers, under the
law, are required to ensure that advertisements are truthful, not injurious, etc. (see
above on law requirements) even though they didn’t create the ads.
o Firms try to shift this risk via contract where publishers require advertisers to rep
and warrant that ads comply with the law and that advertisers / agents have proper
permits to do business.
• Penalties for non-compliance can includes fines, confiscation of ads, and possible
criminal / civil liability
3.2.3. Doing Business in China
• You must have a local legal entity in PRC to do business in China – a Wholly Owned
Foreign Entity (WOFE), a JV, or a partnership of some sort.
• You must apply for, at a minimum, a permit / license to do business in China. The
entity that must provide the permit / license depends on the nature of the business and
where it will be conducted.
o A business that operates only in a single location must apply for permission from
local regulating body. A company doing business throughout China likely has to
apply to an NPC Ministry for a license / permit.
Page 34 of 82

35. o Online Advertisement Publishers (Baidu, Tencent, etc.) must apply for permission
to operate from the NPC (Ministry of Information?). Theresa and Dennis referred
to these entities as “ISP”s.
• Licenses reflect the scope of business that a firm conducts – you cannot conduct
business that exceeds the scope of the applied for and approved license.
• Licenses for ISPs are greatly scrutinized (and WOFEs have a hard time getting these)
because the Internet is a “dangerous toy”
o PRC government is concerned about scope and effect of Internet traffic
Page 35 of 82

36. 4. Dr. Hong Xue
The University of Hong Kong
Faculty of Law
August 1, 2008 (Teleconference)
Participants: Dr. Hong Xue, Matt Luxton
4.1. Summary
Dr. Xue is a law professor at the University of Hong Kong, and holds LLB, LLM and
PhD degrees. She currently teaches a class on Information Technology Law in the
People’s Republic of China, which has 4 primary areas of focus: Access, Privacy
Protection, Online torts, and E-Commerce.
Dr. Xue emphasized the importance of receiving government approval before you do
business in China, and content driven Websites have additional burdens placed upon
them due to the number of different agencies and ministries whose approval are required.
The bottom line for her is that online entities face a complex legal system in PRC, and
companies should hire competent local counsel to help them navigate this landscape.
4.2. Specifics
• PRC laws related to Information Technology, in general, are very complicated. In
2000, the National People’s Congress issued regulations on Internet Services, which
led to a host of rules promulgated by various Chinese Ministries, including the
Ministry of Information and Industry (MII), the Ministry of Commerce, and the
Ministry of Education.
• Internet Service Providers, or ISPs (effectively content based Websites) may require
up to 10 different approvals before they can start operating.
o At the bottom of sina.com.cn, for example, you can find a link that shows the
various department approvals Sina needs to operate and that demonstrates its
compliance
• The most important approval for ISPs is the one from the MII. Other agency
permissions are determined based upon the content of the ISP.
• Sites that contain pharmaceutical information, for example, need permission from the
Ministry of Health
• An additional permission from MII, the Information Content Provider (ICP) license,
is required to publish news. An ICP is the most difficult permission to get, and
currently only 3 Websites have permission to re-publish news that the state controlled
news agency generates. These sites are sina.com.cn, sohu.com.cn, and
netease.com.cn.
• Regarding U.S. companies entering China, Dr. Xue feels that they have been
unsuccessful for two reasons:
Page 36 of 82

37. o Culture – U.S. based operations don’t appreciate Chinese demands for content
o Government pressure – Google is a good example. When Google failed to
receive its ICP, it “rented” one from a small site. The Government shut the site
down, and also launched a media campaign against Google, actively encourage
the population not to use Google. She feels this has had a huge effect on the
success of Google’s china site.
Page 37 of 82

38. 5. Tencent Technology Company Limited
8/F, Suite A
TCL Tower
Shenzhen Nanshan Hi-tech Park
www.tencent.com
July 31, 2008
Time: 2:00 PM
Participants: Jiang, Michael, General Manager – Advertising Platform & Products,
Matt Luxton, Pavitar Juneja (PJ)
5.1. Summary
Matt and PJ met with Michael Jiang (center person in the picture) from Tencent
Technology Company Limited to discuss advertisement models currently prevailing in
the Peoples Republic of China (PRC) and its future trends. Michael was very helpful and
informative about the PRC advertisement market both from the Advertiser and online
Publisher standpoint. Overall the meeting was fruitful and provided good insight on the
advertisement market trends and ad revenue models prevailing in the Peoples Republic of
China (PRC).
5.2. Specifics
5.2.1. About the company:
Tencent provide one-stop solution for the following capabilities:
• Search Engine capability, Competitors – Baidu, Google
• Portals, Competitors – CINA, SOHU
• Gaming
Page 38 of 82

39. • e-Commerce, Competitors – Dang Dang, Alibaba, eBay
5.2.2. Advertisement Industry in the Peoples Republic of China (PRC):
• Following industries (in the order) are major online advertisers in the PRC
o Automotive
o IT Hardware
o Real Estate
o Fast Moving Consumer Goods (FMCG)
o Apparel
o Banking & Finance
o Internet Service Providers
o Gaming sites
• Tencent provide online advertisement for low end brands like Gaming, Apparel and
FMCG
• Small to medium brand advertisements are on CPC model for revenue generation
• High end brands like Automotive advertisements, big banners are on CPT, CPM
model for revenue generation
• For all major brands, number of clicks are monitored by the 3rd party like double
click, Allyes
• Number of page viewed is monitored by the Publishers
• Post Click statistics has no standards and typically monitored by the Advertisers
5.2.3. Advertisement Future Trends in PRC
• PRC advertisement industry is resistant to accept CPC, CPA models due to
uncertainty in the revenue generation
• Industry is embracing CPT, CPM models
• CPC and CPA models will be used in the 2nd and 3rd tier advertisements
• Video advertisements accompanied with the brand name will become more prevalent
as Chinese market is less technology savvy.
• Bandwidth is no issue and mobile users are increasing every day. Advertisement
through mobile devices (like in Japan) will become popular
• No future for just video sites like 58.com, tudo.com
• Privacy will still remain a big issue in the near future
• Social Networking Sites (SNS), YouTube and other sites which follow Facebook
business model will have hard time in PRC
Page 39 of 82

40. • Major change in the Social Network Sites (SNS) needed. Recommendation is to
integrate online network with offline network
• PRC government is flexible and industry will decide regulations and compliance with
the law
• Tencent expects its users to rise from 273 M to 300M by the end of this year
5.3. Conclusion
• To be successful in PRC, Foreign Company must alliance with the local company.
• Foreign company must provide power and authority to local people
• CPM revenue model for online advertisement will remain most popular among high
end brands
• Low end brands are moving towards performance based models like CPT
• Mobile and Online video for brand recognition will become popular
Page 40 of 82

41. 6. AOL China
TUSPark Headquarters
Beijing
July 31, 2008
Participants L to R: Lu Lu, Vice President, Technology, AOL; Dr. Norman Koo, VP &
GM AOL China; Patrick Sheridan and Jamie Hammond. Not shown: Luke Shi, Assistant
GM, AOL China.
6.1. Summary:
Norm Koo runs AOL China, and Lu Lu runs the development team in China but is based
in the U.S. where he also runs a major development team for some of AOL’s top
Websites. Luke Shi is their right-hand man. We met with the three of them on a Thursday
afternoon at AOL China’s offices, located in Tsinghua University Scientific Park
(TUSPark), a building complex that houses many of the top American Web firms’
Chinese offices.
The office and the entire TUSPark campus is dominated by early-twenties aged Chinese
employees, many of whom graduated from Tsinghua or other nearby universities, and
some of whom still live in dorms. This area, in the Northwest corner of greater Beijing, is
the heart of China’s Silicon Valley.
6.2. Specifics
Page 41 of 82

42. • In Spring 2008 AOL Taiwan and AOL Hong Kong launched. There is also a Chinese-
language AOL portal targeting North American Chinese-speaking audience. There is
as of yet no AOL.CN
• They are curious to learn from our report the following:
o Why have other American Web firms in China failed to meet expectations?
o Should AOL consider doing something very different to succeed?
o Is it necessary to have a joint venture to succeed here? Seems like every WOFE
(wholly owned foreign entity) has failed…this is not to say that every JV has
succeeded, because some have not.
o In any case, what level of control does the local office need to have to succeed?
• Here once again we heard anecdotes about the virtue of manual labor in China’s Web
world:
o When AOL called a local content partner asking for a content feed, the partner
said “What feed? Just hire people to copy and paste our content like everyone else
does.”
o …Automation is everything in the U.S. online business…here it is seen as putting
people out of work.
o Dang Dang is another example – POD delivery service
• Supergirl (Chinese Idol, basically) finale: 1.2 billion votes cast
• One reason e-commerce hasn’t fully taken off yet is that refunds aren’t big in China –
so you have to see what you are buying (hence Dang Dang service above).
• It takes time for a foreign firm to win in China. Motorola has been here 20 years.
Nokia a long time as well.
• Most people we met with referred to the power and potential of mobile, as was the
case in this meeting. Examples: SMS = IM here; your phone number being your
identity…the aftermarket for premium numbers; phone bling.
• As online grew in the U.S., older people did go online. Here that is not happening.
Online is for the young.
Page 42 of 82

43. 7. Google China
Participants: Ann Wang, Online Sales and Operations Director, Adsense, Google
Greater China, Dong P, Google Online Sales and Operations Director, Adwords, Google
Greater China, James Hammond, Patrick Sheridan
7.1. Summary
The Google Building might as well be located in Mountain View. Hip young staff meet
visitors in the lobby front of the flat screen LCD projecting a 3d version of the Google
Zeitgeist. Spacious cubes, a yoga room, and of course catered lunches all complete the
Google aesthetic. We received a full tour of the Beijing facility, a dedicated meeting
with senior managers, and lunch at the company cafeteria.
Google feels well positioned for long term growth in China. They are currently focused
on small to medium size enterprises (SME). They feel their product offerings are
perceived as more complex by customers than those of major competitor Baidu, however,
over time with increased competition the market will move in their direction as it has in
the U.S.
Global HR policies defined in Mountain View have a limiting effect in China ramping
sales staff to compete with Baidu. A major challenge remains originating traffic to the
Website and keeping traffic. Most Google China searches result in content hosted on
Baidu. Google is partnering to embed its search bar in local portals as well as acquiring
highly trafficked portals. In terms of content networks, Baidu was described as the
‘Head’ and Alimama as the ‘Tail’, meaning that Baidu takes the most high end premium
content advertising and Alimama looks to extend its ad network reach into the smaller
content players.
Google maintains five offices in China: Hong Kong (sales), Taiwan [sales], Guanzhou
[sales], Shanghai [engineering services], and Beijing [HQ, a bit of everything].
Page 43 of 82

44. 8. Web Analytics Dinner
Lan Club
Beijing
July 30, 2008
Participants included: Benjamin Joffe, Managing Director, Plus Eight Star Ltd. (first on
left); Nguyen Le, Vice President Product Strategy, Wanmo.com (to Ben’s left); Lin Juan,
Senior Analyst, Wedge MKI (to Nguyen’s left); Florian Pihs, Data & Analytics Program
Director, MRM Worldwide (first on right); Jennifer Hoe (to Patrick’s right); Darryl Su of
Omniture China (two down from Jennifer); Yong Wu, GM, Webtrends; Apple Xu &
Yimeng Ding, OgilvyOne Worldwide; Patrick Sheridan, Jamie Hammond.
8.1. Summary
We arrived in Beijing from Hong Kong earlier in the day and headed downtown for
dinner at this amazing Phillippe Starck-designed club, where one dish was more exotic
than the next.
Florian Pihs, who blogs at http://longmarch.chinalytics.com, set up this dinner and it was
a great way to get started meeting Beijing online-professional community. Patrick and
Jamie had several fruitful exchanges during an evening of wide-ranging conversation.
8.2. Specifics
• Anecdote on the importance of BBS: After the Olympic torch relay problems in
France, there were protests at Chinese Carrefours. The Chinese government “helped”
Page 44 of 82

45. the company delete BBS conversations about Carrefour, and that helped squelch the
protests as it cut off a key way of organizing them.
• No reason why Google China couldn’t close the ‘language gap’ it suffers from with
Baidu – but that doesn’t mean they can overcome Baidu.
• Nielsen could use a better reputation in China -- and Comscore could use more of a
reputation.
• Most big advertisers are not spending enough in China to care about precise metrics
(and the metrics is not driving more spending either)…but that is just a matter of
time.
• Omniture: Set to announce some major China deals. One of the challenges is hiring –
takes too long to clear home office -- and with the pace of change in China combined
with the lack of qualified people, that is even more of a problem. They do see the
opportunity to take a more public metrics role in China, but not in their plans at this
point.
• Ad standards: IAB weak here at this point. T advertise on the top 100 sites, you have
to cut six or seven thousand banners. Fortunately, graphic designers come cheap in
China. (What we heard later in the trip is that the need for lots of manual work can
actually serve as a virtue – automation is not the goal in many cases…the more
people you hire, the more favorably you are looked upon by the government etc.)
• Advertisers who buy three screens down on major portal home page do not get or do
not care that their visibility is low.
• Simplicity is not as valued in Chinese Web design…the dense pages of Sohu/Sina are
much favored over the simplicity of a Google.
• Several people during conversation quoted Alexa figures…a sign of weak metrics!
• An innovative startup featured on TechCrunch will find in no time 3-4 copycats in
China.
• The aggregate of the CPT ads are $8 eCPM
Page 45 of 82

46. 9. CNNIC (China Internet Network Information Center)
Headquarters
Northwest Beijing
July 31, 2008
Participants L to R: Patrick Sheridan; Tan Yaling, International Business Development,
CNNIC; Jamie Hammond; Li “Howard” Guanghao, Deputy Director International
Business Development, CNNIC.
9.1. Summary
CNNIC oversees China’s domain name registry and other fundamental aspects of the
Chinese Internet on behalf of the Chinese government. The organization also publishes
regular reports on the size, scope and key characteristics of the Chinese Internet.
Page 46 of 82

47. Their offices are located near a building that houses the .CN servers, where the first email
sent out of China was mailed 21 years ago saying, “across the Great Wall, we can reach
every corner of the world.” (see picture at right). For us to start our first morning of
meetings in Beijing getting a government outlook seemed like good timing.
9.2. Specifics
• Online was up and running in China for a while before it was fully open to the
Internet, in 1994 – albeit on very small pipe.
• When dotcom bubble burst, Chinese Internet growth flagged for 4-5 years, just like in
U.S.….2.0 helped bring it back, just like U.S.
• Tencent QQ cards (Taobao aftermarket), game points at Internet cafes…big numbers.
Alipay very strong, as is mobile payment.
• June 2008 report shows Internet usership in China at 253mm -- biggest in the world.
Up 43mm in 6 months and 91mm in a year - more than 50pct.
• Critical mass was reached in the second half of 2006 when it hit the 10pct (of total
Chinese population) point at 137m.
• Registrations of .cn domains spiked around same time. 12mm now. was less than
2mm two years ago. Only 1 yuan to buy.
• 80% of usership is broadband.
• Telcos and cable compete for access, just like in U.S.
• 28.9pct have accessed via mobile first half of year. 73mm mobile users. Speed seems
to be picking up. but that includes notebook terminals.
• Penetration of population stands at 19.1pct. 19 hrs /week online (goes up and down
and then up). top apps: music, news, IM, video, search
Page 47 of 82

48. • “Online advertising is in all of these applications, it is everywhere actually. online
music, online news, even instant messaging. Popup windows also get advertising..it is
almost everywhere. Sometimes this online advertising is regarded as malicious
software because it pops up.”
• Online video: 160mm viewers, better off than rest of Internet users. Movies/TV
constitutes 86.3 pct of online video content...Olympics will boost this
• Video sharing prevalent, mostly via IM
• BBS not as strong as before, thanks to IM (which is also less monitored).
• Generally: BBS college (and local) communities. IM personal. Email work
• After top five apps, you then have: 6 email; 7 gaming (monetized, but not through
ads); 8 blogs (have some ads); 9 BBS (some monetized with ads).
• As alluded to above, BBS will decline as alternatives become more popular…that
said it can be “hard to tell the difference between a blog and a BBS.” “One is person
centralized and one is [geo or topic based] community centralized."
• Online shopping 16.2 rmb 1h 08. Taobao (like eBay) dominant C2C commerce,
81.5pct market share. They don’t charge. Dang Dang (like Amazon) top B2C, then
Joyo, totaling 60pct. These sites do advertise.
• Baidu 74.5pct of search market share. Google "only" 14.3pct
• Rural going up fast in growth pace. And only 7% penetration there.
• They agreed with notion that one reason for delta in online ad market size between
U.S. and China is that in China, advertisers cant reach older people online, unlike in
U.S. where older have money...but eventually the under 30s will get older. and
advertisers will go online more to reach them
• Government can’t focus on everything at once. Focus is on connectivity and
growth…things like ad standards might come later.
Page 48 of 82

49. 10. UPS, Official Olympics Sponsor
News Plaza Hotel
Beijing
July 31, 2008
Participants clockwise from left: Patrick Sheridan; Jamie Hammond; Joseph A Guerrisi,
VP, Marketing, Asia Pacific Region, UPS; Sok , Communications Manager, U
Page 49 of 82

50. 10.1. Summary
We met with UPS on the night of their arrival in Beijing for Olympics month. We met at
the News Plaza hotel, which they were to “own” for said month, hosting clients and
executives during the games. This was part of their sponsorship of BOCOG, the Beijing
organization hosting the Olympics.
UPS as an official sponsor was “delivering the Olympics” -- handling transportation and
logistics for the games, which allowed it to display – and advertise – its prowess in such
areas to China.
Above are images from an ad doing just this, taking up an entire wall at the Tiananmen
Square subway station.
10.2. Specifics
• In 2005, UPS was “really getting going” in China, having gotten out of its JV there
post-WTO, to operate as a wholly owned entity. The Olympics pitch came at that
time, and it was “perfect timing” in terms of their need to basically re-launch in the
country in a big way.
• UPS primarily interested in B2B and image marketing.
• Asia Pacific region they run has three zones:
o English speaking (NZ, AU, India)
o China
Page 50 of 82