China´s digital champions

Perspective Andrew Cainey Adam Xu Matthias Hendrichs Timothy WongChina’s DigitalChampions

Contact InformationBeijingTimothy WongSenior Associate+86-10-6563-8300timothy.wong@booz.comHong KongMatthias HendrichsSenior Associate+852-3650-6100matthias.hendrichs@booz.comShanghaiAndrew CaineyPartner+86-21-2327-9800andrew.cainey@booz.comAdam XuPrincipal+86-21-2327-9800adam.xu@booz.com Booz & Company

EXECUTIVE China is now by far the largest online market in the world, with an estimated total of 510 million users as at the endSUMMARY of 2011, and projections that this figure could reach 750 million by the end of 2015. Some of the more developed cities along the east coast are starting to approach market maturity with Internet penetration of up to 70%. Massive infrastructure investments are shifting the focus of expansion to the less developed interior, to 2nd and 3rd tier cities, and even to the countryside. The continuing robust growth of the Chinese economy, predicted to remain close to double digits throughout the period of the new Five-Year Plan being implemented, is quickly creating a substantial urban middle class with significant disposable income. The advent of 3G mobile services at the end of 2009 has led to brisk adoption of smartphones and tablet PCs: mobile Internet users numbered over 360 million by the end of 2011, and further extremely rapid growth in the mobile sector is expected over the next few years. The Chinese Internet is essentially with innovative payment and delivery a youth phenomenon, with users solutions. Numerous other successful predominantly under 35 years of e-tailers like 360buy and VANCL age and the majority of mobile soon began to emerge. The number of users currently under 25 years old. Internet users in China is expected to Blogging and microblogging have reach 750-800 million by the end of been especially popular activities 2015, almost all of them being able to with this demographic: microblog enjoy mobile as well as conventional leader Sina Weibo attracted more access. This growth is driving the than 250 million users within three development of new services such as years of launching. E-commerce has digital entertainment, cloud computing, enjoyed extremely rapid growth, with e-banking and location-based social Alibaba trailblazing in the B2B arena, networking, and will continue to then launching the hugely successful boost advertising revenues by 50% or B2C/C2C platform Taobao. Initial more per year. The development of the consumer concerns were overcome Internet, and especially of social media,Booz & Company 1

The state of the Chinese Internet in 2012 China surpassed the US in its number of Internet users at the beginning of 2009 (if not earlier, by some estimates), and now far outstrips it, with an estimated total of 513 million users at the end of 2011, compared to 273 million in the US. China now accounts for more thanis creating new forms of advertisement may be too wedded to the global half of all Internet users in Asiaand advertising strategy, such as viral concept of their brands and thus have Pacific. Moreover, while the marketsvideos and word-of-mouth microblog problems of flexibility in adapting of Europe and North Americacampaigns. The most successful home- to the tastes of Chinese consumers are approaching saturation, withgrown Internet companies— regardless of the regulatory context. penetration rate reaching arounde-commerce giant Alibaba, online In 2010, overseas companies such as 80% and further growth slowingentertainment group Shanda, and Japanese e-mall Rakuten attempted to a trickle, growth opportunitiesTencent, which has attained a near- to get a foothold in the market by in China are still massive; as yet,monopoly in the instant messaging leveraging established positions of Internet users account for over a thirdmarket—have all enjoyed successful Chinese joint venture partners. This of the population, and are mainly inIPOs and are becoming increasingly may be a better strategy, although the large urban centres. The marketdiversified in their portfolios. Foreign the success still needs to be proven. is still immensely growing rapidlyplayers have thus far struggled to Meanwhile, leading Chinese Internet in some of the wealthier provincesestablish themselves in this valuable players are starting to penetrate new on the east coast: in Shanghai,market. SNS leaders like Facebook, overseas markets: gaming companies penetration is close to 70% andTwitter, and Foursquare have found like Shanda are expanding their annual growth rate is around 23%;their sites being blocked due to international sales efforts, and in populous Guangdong, adjacent togovernment concerns. However, the microblog platform Sina Weibo and Hong Kong, penetration has edgedlimited success of MSN, Expedia, and new Alibaba smartphone OS Aliyun above 60% and annual growthAmazon, and the failure of Ebay and are soon to launch English-language is 18%. However, the focus ofAOL suggest that foreign companies versions. expansion is now shifting to many less-developed inland provinces such as Henan, Yunnan, Gansu and Inner Mongolia where annual growth rates exceed 50%. Heavy investment in telecommunications infrastructure is rapidly improving the capacity and reach of the country’s Internet architecture, and new users are reportedly being added at a rate of more than 6 million per month—leading to projections of a total of 750-800 million users by the end of 2015, more than half of the population. The Chinese government has in general been very supportive of the growth of the Internet sector and has encouraged massive investment2 Booz & Company

in expansion and improvement Smartphones and tablet PCs have to 50 million units. The number ofof the infrastructure. Continued swiftly gained in popularity in just mobile Internet users had reachedinvestment is an important feature two years, since the government 360 million at the end of 2011, andof the 12th Five Year Plan. Stimulus issued 3G licenses to the three main is forecasted to surge to 800 millioncomes from the demand side as telecoms providers in 2009. Mobile by 2015.well, with the continuing robust Internet use is now set to drive aoverall performance of the Chinese new phase of accelerated expansion. Unlike the mature Internet markets ofeconomy—almost undented by the Although the rate of increase in the the West, which are now experiencingglobal financial crisis, and predicted number of mobile Internet users tailed strong uptake even among the olderto sustain close to double-digit year- off somewhat in 2010, it had still segments of society, the Interneton-year growth during the coming maintained a 5-year compounded in China is predominantly a youthfive years—creating a substantial annual growth rate of above 100%, phenomenon. Even users in theirmiddle class with a lot of spending and smartphone sales in 2010 more forties tend to be hesitant adopterspower (see Exhibit 1). than doubled over the previous year and to use only a limited rangeExhibit 1Growth of the Middle Class and of Disposable Income SHARE OF CHINESE URBAN HOUSEHOLDS 66 109 191 280 373 64 204 643 1,574 3,267 1.3% 0.5% 1.4% 0.5% 0.3% 1.2% 2.0% 3.3% 5.7% 9.4% 5.6% 1.8% 5.1% 0.8% 7.4% 6.9% 7.7% 2.4% 19.4% 12.6% 21.2% 13.6% 16.7% 24.2% 17.0% 27.6% 59.4% 15.4% Global Affluent 99.3% (>USD 25,000) 92.9% 49.7% 95.2% Mass Affluent 77.3% (USD 12,500-25,000) 78.4% 51.1% Upper Middle Class 38.6% (USD 5,100-12,500) 50.5% 19.8% Lower Middle Class (USD 3,200-5,100) 23.2% Poor (≤USD 3,200) 9.9% 9.7% 10.2% 2.6% 1985 1995 2005 2015 2025 1985 1995 2005 2015 2025 Urban Households ( Mn ) Urban Disposable Income (USD)Note: Base forecast. Certain figures do not amount to 100% due to the effects of roundingSource: National Bureau of Statistics of China, Booz & CompanyBooz & Company 3

of simple services, while users Chinese Netizens have at some time problems have been successfullyin their fifties or sixties are very kept a blog. Microblogging has addressed through the provision offew. However, the ‘80s and ‘90s quickly become massively popular COD (cash on delivery) or escrowgenerations are fanatical devotees of as well, with leading platform Sina payment facilities and inexpensivethe Internet. The cinema, music, and Weibo attracting over 250 million courier delivery, there has been aprint media industries in China are users in just three years. rapid takeoff in online consumerstill relatively immature, hampered by purchasing—chiefly through thegovernment control of content, and The B2B sector pioneered the massively successful shopping forumare restrictively expensive for many development of e-commerce in Taobao—with compounded annualpeople. The Internet has thus filled China, and still holds the dominant growth rate around 90% from 2007a gap for affordable entertainment, position, with a projected total to 2011, and expected to sustain a leveland has become a central component transaction value in 2011 of around of around 29% through 2012 to 2015.of popular culture for young city US$930 billion, nearly 90% of total A survey in 2009 found that 85% ofdwellers. Even while ownership of online purchasing. Growth continues Chinese consumers had searched forhome PCs and mobile devices remains to be strong, as the potential of product information online, and morerelatively low, huge numbers of young the platform is increasingly being than 50% had visited at least onepeople are able to enjoy Internet recognized by SMEs as well as larger online retail site, with around half ofaccess at their colleges or workplaces, producers. The B2C and C2C sectors those making at least one purchase;or at one of the increasingly common were initially inhibited by concerns 30% of online purchasers had alreadylarge-scale Internet cafés. The Internet about security and payment, and developed a regular buying habit,has been particularly welcomed by by the fact that credit cards were at making at least 5-10 online purchasesthese younger users as an outlet for that time still fairly uncommon in in a 6-month period. The value of B2C/personal expression, with surveys China—and remain so among many C2C transactions is expected to exceedsuggesting that more than 50% of younger internet users. As these US$150 billion in 2012 (see Exhibit 2). Exhibit 2 Development of Online Shopping in China CHINA E-COMMERCE TRANSACTION VALUE (US$ BILLION AND YOY CHANGE, 2011 -2015F) 392 400 70% Growth rate 68% Amount 350 60% 310 300 53% 50% 250 241 40% 200 182 33% 30% 150 28% 27% 119 20% 100 10% 50 0 0 2011 2012F 2013F 2014F 2015F Source: iResearch, Booz & Company4 Booz & Company

China’s Alibaba, founded in December 1998 in Hangzhou by Jack Ma, was China’s become the dominant player serving the steel industry, and Dunhuang isInternet outstanding early success in opening establishing itself as a specialist inchampions up B2B e-commerce, and continues to dominate the sector, with a market smaller scale international trade. The sector continues to grow, as the clienthumble foreign share in 2011 of around 50%. In base expands from SMEs to largerentrants recent years, however, there has been a proliferation of smaller competitors, corporations, and leading players no longer seek to attract only import- many of whom are carving out export trading companies but reach substantial niches for themselves out directly to manufacturers (see through differentiation in industry Exhibit 3). focus: MySteel, for example, has Exhibit 3 Leaders in B2B E-commerce MARKET SHARE OF CHINA’S B2B E-COMMERCE (BY COMPANIES’ REVENUE FROM BUSINESS, 2011) Alibaba Global Sources 25% HC International Dunhuang Made-in-China Global Market Mysteel Netsun Others 1% 49% 2% 2% 3% 3% 4% 11% Source: iResearch; B2B Toogle; Booz & CompanyBooz & Company 5

360buy is the leader in the B2C unafraid to take risks. Ma Huateng, itself by its commitment to investfield, with a market share of around founder of Tencent, the country’s early in the best IT systems and a35%. In an increasingly crowded IM leader, Chen Nian, founder of large-scale logistics infrastructure.and competitive sector, local online retailers Joyo and VANCL, Li While their initial business modele-commerce specialists have to vie Yanhong, the father of search engine was often copied from successfulwith international giants like Amazon giant Baidu, and Jack Ma, the creator international enterprises, the leadingand Newegg, and with traditional of Alibaba and Taobao, are acclaimed Chinese players have been adept atretailers starting to move online. as being amongst the world’s most localizing the design of their sites andIt is becoming increasingly vital innovative businessmen, and serve the content of their offerings to meetto clearly differentiate product or as an inspiration to rising young the tastes of local customers. Taobaoservice offerings. There is also a focus entrepreneurial talents in China. wrested the leading position in C2Con improving efficiency in delivery from Ebay by offering free listings.through strengthening logistics Many of these success stories It also introduced a completelypartnerships or developing a self- benefited from first mover advantage, new feature, an IM facility to allowowned logistics capability. having established an early foothold buyers and sellers to communicate in the emerging China market before with each other. And it addressed theTaobao, part of the Alibaba empire, leading foreign brands attempted problem of lack of consumer trust byhas been a spectacular success in the to enter. Leading e-tailer 360buy, developing its own escrow paymentC2C sector. It had achieved a 59% for example, was founded in 2004 system, Alipay.market share within two years of and was already well entrenchedits foundation in 2003, and forced in a leading market position before As in other sectors, the governmentEbay to withdraw from the Chinese Newegg launched in China in 2008. plays a strong role in the Internetmarket in 2006. EachNet, the early Some have also profited from China’s sector and this has proved anleader among Chinese online auction lax enforcement of IP laws: Baidu, obstacle to many foreign players.sites and acquired by Ebay in 2003, in particular, became well-known Ebay ran into difficulties when ithas withered to a 0.6% share of for its facilitation of online music- migrated its platform from Chinathe market, while Taobao today sharing without copyright. However, to the US; having to cross the Greatcommands a 90% share. The only more important reasons for their Firewall to access the site often ledother significant player, PaiPai (9% outstanding performance were to prohibitively slow page loadingshare), relies on cross selling to the their willingness to take risks, an times. Google withdrew its Chinaestablished customer base of its large aggressive drive for expansion, and a operation from the mainland toparent company: Tencent, owner of sensitivity to the demands of the local Hong Kong in March 2010, afterPaiPai, runs QQ, China’s dominant market. As start-ups, with the benefit repeated clashes with the governmentinstant messaging service. of venture capital backing, many of over requirements to censor search these Chinese Internet companies results. In the second half of 2009,China’s biggest Internet successes were able to pursue bold and it had begun to make rapid progresshave been created by a new breed ambitious growth strategies, while in its battle with local leader Baidu,of entrepreneur, charismatic and larger foreign players were often increasing its market share from 30%visionary leaders who are astute much more cautious in investing for to 43%, while slashing Baidu’s sharejudges of the Chinese market and are growth. Again, 360buy distinguished from 68% to 56%. Since its retreat6 Booz & Company

from the mainland, Google’s share Windows Messenger has failed to buying leading Chinese online auctionof the China search engine market make any significant inroads into site EachNet, but the company washas crumbled to less than 20%, the Chinese market in the face of eclipsed by the spectacular rise ofwhile Baidu’s has bounced back to the massively popular home-grown Taobao. Expedia purchased the76%. Facebook has been blocked in QQ system—which has developed a online travel agency eLong in 2004,China since 2009. Although there are wealth of locally tailored content and but attempts to introduce foreignrumours that it is seeking to re-enter a tiered membership pricing model senior managers to harmonize thethe market through partnership (free for basic users, graduated fees management style in China with itswith a local Internet company, for additional services). Windows global operation led to difficulties.home-grown social networking site Messenger claims barely 4% of Only with the appointment of CuiRenren has been able to consolidate the market, while QQ has more Guangfu as CEO at the end ofits market-leading position without than 70%. The MSN portal and 2007 did eLong’s performance startcompetition from the international search engine have not achieved to improve, but it has still failedgiant. Twitter and YouTube have any significant penetration either. to make a dent in the dominantlikewise been blocked, to the benefit Myspace is accessible, but it has position of market leader Ctrip,of leading Chinese video-sharing acquired only a meagre 6 million which commands a share of moresites like Tudou and Youku and the users in China. AOL has twice than 40%, compared to less thandominant microblogging platform, attempted to enter China, and has 7% for eLong. A key factor in theSina Weibo. Foursquare, the location- twice been obliged to make a swift disappointing performance of thesebased social media site was also retreat. These foreign companies have three acquisitions may have beenblocked in China in 2010. The field of often been too focused on relatively the loss of the creative talent behindLocation-Based Services (LBS) is now short-term profit rather than long- the companies: EachNet founder,left open for domestic copycats, of term expansion, or were hesitant Bo Shao, quit the company to workwhich there are at least a dozen. to fully empower their local teams. in venture capital, Joyo’s founder, Insisting on adherence to their global Chen Nian, left to start up anotherHowever, there may be cause to brand concept made them inflexible online business, the hugely successfuldoubt how well some of these foreign or at any rate slow to adapt, and clothing retailer VANCL, and eLong’splayers could perform against local reluctant to tailor their content and co-founder, Zhang Ligang, left tocompetitors anyway. Facebook and appearance for local needs and tastes. start the healthcare website iKang.Twitter can be readily accessed viaVirtual Private Networks (VPNs), Overseas companies that tried to The new trend for overseasbut, despite the glamour of these crack the China market by acquiring participation in China’s Internetinternationally famous brands, successful local players have fared market is collaboration rather thanmost Internet users in China prefer little better. Amazon bought the No.2 buyout. In 2010, Hong Kong Internetthe characteristically Chinese look local e-tailer Joyo in 2004, but failed company Tom.com joined with Chinaand feel of Renren and Sina Weibo. to achieve the market dominance Post to found a mainland e-tailing JVNeither Facebook nor Twitter had it enjoys in many other countries, called Ule. Tom’s technology know-managed to build a 5% market struggling to hold its own against how and established online customershare when they could be directly local rival Dangdang. Likewise, base can combine with China Post’saccessed. Similarly, Microsoft’s Ebay attempted to establish itself by obvious advantages in warehousing,Booz & Company 7

delivery, and payment facilities. Also whittled into Taobao’s dominant sites Qzone and Pengyou. Newin 2010, Japanese leading online position to establish a healthy 9% partnerships are also being forgedshopping mall, Rakuten, entered the share of the market), a third party with US social games developerChina market via a JV with the search payment platform, Tenpay (which Zynga and Hong Kong broadcasterengine company Baidu. is now China’s second largest such TVB. It has even developed its own service, thanks to its status as the Web browser, Tencent Traveler. InTencent is one of the most dazzling exclusive payment provider for all of 2010, Tencent’s revenues were 19.5successes of China’s Internet boom. Tencent’s sites), online gaming, and billion RMB, and its net profit justFrom its start as an instant messaging an online media division providing a over 8 billion RMB (see Exhibit 4).application in 1998, it has now host of other Web services, includingexpanded to six business divisions— its own search engine, SOSO, a Web Other industry leaders follow aadding to its QQ messenger a wireless portal, P2P media sharing, interactive similar policy of broad diversificationInternet service, the C2C e-commerce television, the microblogging platform while trying to maintain customerplatform PaiPai (which has already Tencent Weibo, the social networking stickiness through a unifying brand.Exhibit 4China’s Leading Internet Companies Now Publicly Listed Market Cap 2010 PE Ratio Listing IPO Year Feb 10 - 2012 Revenue Feb 10 - 2012 Major Offering Market (US$ Million) (US$ Million) (EPS in US$)Tencent 2004 HKSE 35459 3022 29 Instant message, internet value add servicesBaidu 2005 NASDAQ 45841 1218 52 Search engineShanda 2004 NASDAQ 2240 857 65 Multimedia internet entertainment platformNetease 2000 NASDAQ 6250 847 13 Internet application, service, and technologyAlibaba 2007 HKSE 4702 725 22 B2B, software, internet infrastructureSouhu 2000 NASDAQ 1938 613 13 Portal, online gamesCtrip 2003 NASDAQ 3441 443 21 Online travel agencySina 2000 NASDAQ 4310 402 (-6.42) Search engine, e-commerce, content providerPerfect World 2007 NASDAQ 568 392 5.0 Online gameDangdang 2010 NYSE 730 351 (-0.20) Online storeGiant 2007 NYSE 1010 205 7 Online gameKongzhong 2004 NASDAQ 162 146 (-0.1) Mobile internet applicationsKingsoft 2007 HKSE 2669 127 8 Software development and applicationRenren 2011 NYSE 2050 76.54 (-0.85) Social networkYouku 2011 NYSE 2620 61.5 (-0.27) Video SharingTudou 2011 NASDAQ 408 45 (-3.84) Video SharingSource: Booz & Company 8 Booz & Company

B2B forum Alibaba created its own Marketplace, primarily a C2C forum, sites. At the beginning of 2011,third party payment arm, Alipay, and the new Taobao Mall to provide Shanda CEO Tang Jun announcedand in 2009 founded Alibaba Cloud a dedicated B2C venue for leading the intention to “enhance theComputing (AliCloud) to develop retail brands. It has also launched its globalization” of the still dominante-commerce cloud computing data own search engine, eTao, an essential gaming division (responsible forservices. Recently, it announced it was resource for online shopping. Shanda, around two thirds of Shanda’s totalgoing to launch Aliyun, an Android- originally a pioneer of online gaming, revenue) by seeking more partnershipscompatible smartphone OS which has expanded into multiple areas of with overseas game developers andwill access cloud-computing functions online entertainment, with a Shanda launching four games on internationalvia the mobile Internet. It would seem Online e-publishing division and the markets in the second half of the year.that Alibaba has designs on the global Shanda Cloudary e-library (which Sina Weibo, the No. 1 microblogmarket with this latest product, since had been set for an IPO on the NYSE platform may also be planning anit is also developing an English- in the summer of 2011, though that attempted assault on internationallanguage version of Aliyun. Its sister plan is now on hold), and a new third markets, as it has recently announcedcompany, Taobao, in 2008 divided party payment system, Shanpay, as plans to launch an English-languageinto two wings: the original Taobao well video-sharing and digital music version of its service.Booz & Company 9

New trends in The Internet is an exciting new avenue for the advertising industry: it However, the rapid development of social media in the last few yearsadvertising increases the value of advertising by now allows for a wide range ofand the making it measurable and targetable as never before. Spending on online different types of advertisement, and hence for a diversification ofgrowth of advertising in China was a paltry 6 advertising strategies. Video-sharingthe mobile billion RMB in 2006, but had risen to 32 billion in 2010, a CAGR of sites offer the possibility of either inserting short paid ads into aInternet nearly 50%. That trend is expected popular video, or uploading a longer to continue, with forecasts putting advertisement as a stand-alone the total spend for 2011 at around video. Unlike more conventional 51 billion RMB, at RMB 80 billion cinema or TV commercials, online in 2012, and approaching RMB video ads can be quite substantial 100 billion in 2013. More effective narratives, and may only reference monetization of online searches has the product or company obliquely seen search engines almost double rather than advertising it directly; their share of the overall advertising audience reach is achieved through spend since 2006, at the expense of viral dissemination of the video and integrated portals: search engines word-of-mouth recommendations increased their share of advertising from users of the website. Social income from 23% in 2006 to 34% in networking sites, especially 2010, while portals’ share fell from microblogs, provide even more scope 39% to 20% in the same period. for viral marketing. The apparel Video-sharing sites have also seen e-tailer VANCL has been particularly particularly strong growth, trebling effective in using China’s leading their share of advertising money Twitter-clone, Sina Weibo, to promote between 2006 and 2010, although itself, and has amassed over 430,000 still accounting for only around 5% followers. Another attractive new of the total. Advertising expenditure option to emerge in recent years is on social networking sites has thus the embedding of an advertisement far been sluggish, still barely 3% of into an online application: for the total. However, industry analysts example, Yili, a large dairy company, predict that this will be the area of has started using advertisements most rapid growth over the next few embedded in a popular game on the years. networking site Renren. Traditional banner ads continue to The youth bias of China’s online be popular, and have been used very population is even more pronounced successfully by businesses such as with the new phenomenon—3G the online shopping mall Taobao. services are less than three years10 Booz & Company

old—of the mobile Internet: almost already reached 70% penetration, establishing itself as the strongest ofall users are under 35, and over use of search engines was nearly many such Chinese sites. It boastshalf are under 25. Although there 50%, and listening to online music exceptionally experienced productwill be opportunities to sell to the and e-reading were close behind. design and operations teams, and it‘3-low’ segment (blue collar workers, However, social networking was was able to establish a strong initialmigrants, and the military) and trailing some way farther back, with user base in the IT and fashionto high-end young professionals, only 36% penetration; and gaming, communities. Moreover, it hasthe mobile Internet market will be online TV, and e-mailing had even partnered with four of the leadingdominated by young users of limited lower uptake, only around 30% or social networking sites so that itsmeans, already established Internet less. Online payment is the weakest service can be synced with theirs:users aspiring to migrate to mobile area of all, with only 6% of people many users are now accessing theservices for greater convenience. using their mobile devices for this service via the Sina Weibo microblogVery few consumers are willing to purpose. Mobile use of social media rather than its own website. Jiepangpay more than 3,000 RMB for a is already developing quite rapidly. has also recently announced asmartphone, and the majority have It seems likely that online banking, partnership with Nokia, to producethus far been paying only 1,500- online payment, and e-commerce an NFC system for more convenient2,000 RMB. Domestic manufacturers will be the other key growth areas and verifiable ‘checking in’ toare rushing to bring more models for the mobile Internet over the locations. In effect, it has first moverto market at the 1,000 RMB price next three years. The Australian status in the LBS field, since thepoint. The number of mobile Internet telecommunications giant Telstra is similar US service Foursquare wasusers, already over 360 million at the becoming heavily involved in China’s blocked in 2010, after less than aend of 2011, is predicted to almost mobile Internet, with its main focus at year of operation in China. However,treble within the next four years (see present being on music, gaming, and there are numerous other domesticExhibit 5). advertising. competitors, including the Chinese Internet’s biggest players, Sina,A 2010 survey of the activity of Another emergent trend is Location- Baidu, Tencent, and China Mobile;China’s mobile Internet users Based Services. Jiepang, founded in competition to establish a leadingfound that short messaging had the summer of 2010, appears to be market position will be fierce.Exhibit 5Age Breakdown of China’s New Mobile Internet Users 81% OF MOBILE INTERNET USERS ARE UNDER 30 51% 24% 10% 6% 6% 4% <18 18-24 25-30 30-35 36-40 >40Source: Booz & CompanyBooz & Company 11

CONCLUSION China’s Internet has experienced exceptionally rapid growth since the has developed particularly quickly, with the pioneer online shopping late 1990s. At the end of 2011, it mall Taobao achieving extraordinary had well over 500 million users, 360 success over the last seven years. million of whom had begun to access The most successful home-grown it via mobile devices. In a country Internet companies—e-commerce with such a vast population and such giant Alibaba, online entertainment sustained rates of high economic group Shanda, and Tencent, which has growth, there is still enormous scope attained a near-monopoly in IM—have for further expansion of the online all enjoyed successful IPOs and are sector, and the advent of 3G mobile becoming increasingly diversified in services since 2009 is providing the their portfolios. Gaming companies stimulus for a new phase of rapid such as Shanda are already attempting development. With government to build a position in overseas support for aggressive infrastructure markets, and it appears that microblog investment, the Internet is reaching platform Sina Weibo and Alibaba’s beyond the maturing markets of the new smartphone OS, Aliyun, may have major east coast cities, into the less similar ambitions. Foreign players developed interior of the country, into have thus far struggled to establish the 2nd and 3rd tier cities, and even themselves in the valuable Chinese into the countryside. The number of market. SNS leaders like Facebook, users is expected to reach 750-800 Twitter, and Foursquare have been million by the end of 2015, almost all thwarted by government restrictions; of them being able to enjoy mobile but the limited success of MSN, as well as conventional access. This Expedia, and Amazon, and the failure growth is driving the development of of Ebay and AOL suggest that foreign new services in fields such as digital companies have problems of flexibility entertainment, cloud computing, in adapting to the expectations of e-banking, and location-based social Chinese consumers. More recent networking, and will continue to overseas forays into the Chinese boost advertising revenues by 50% Internet, such as the entry of Japanese or more per year. The development e-mall Rakuten, are attempting to of the Internet, and especially of utilize joint ventures with Chinese social media, is creating new kinds partners. This may be a more effective of advertisement and advertising strategy; however the success will strategy, such as viral videos and depend largely on the execution and word-of-mouth campaigns on the management of the JV. microblogging platforms. E-commerce12 Booz & Company

About the AuthorsAndrew Cainey is aBooz & Company partner andleads our Digital practice inChina. He has over 25 yearsof management consultingexperience and has been basedin Asia for 15 years. He adviseslocal and multinational clientsacross all major industrieswith particular expertise infinancial institutions, health andconsumer.Adam Xu is a Booz & Companyprincipal based in Shanghai,focusing on consumer, retailand digital. He has extensiveexperiences of helping theclient to achieve the growth inChina, from China entry, growthstrategy to such functionaltopics as the go-to-marketoperating model, trade spendand customer management. Hehas been extensively helpingthe “traditional” consumercompanies in China to developthe digital strategy and buildthe digital marketing and saleschannels operating models.Matthias Hendrichs is asenior associate withBooz & Company based inHong Kong. He has morethan 15 years of experiencein consulting and corporatemanagement in consumergoods, media, technologyand chemicals with extensiveexpertise in corporate strategy,M&A, sales and marketing, andsupply chain management.Timothy Wong is asenior associate withBooz & Company based inBeijing. He has extensiveexperience in deliveringstrategy, policy, feasibility studyand implementation support fortechnology, digital, automotive,and consumer goods clientsin China.Booz & Company 13

The most recent list of Worldwide Officesour office addresses andtelephone numbers can Asia Bangkok Helsinki Middle East Florham Parkbe found on our website, Beijing Brisbane Istanbul Abu Dhabi Houstonwww.booz.com Delhi Canberra London Beirut Los Angeles Hong Kong Jakarta Madrid Cairo Mexico City Mumbai Kuala Lumpur Milan Doha New York City Seoul Melbourne Moscow Dubai Parsippany Shanghai Sydney Munich Riyadh San Francisco Taipei Oslo Tokyo Europe Paris North America South America Amsterdam Rome Atlanta Buenos Aires Australia, Berlin Stockholm Chicago Rio de Janeiro New Zealand & Copenhagen Stuttgart Cleveland Santiago Southeast Asia Dublin Vienna Dallas São Paulo Adelaide Düsseldorf Warsaw DC Auckland Frankfurt Zurich DetroitBooz & Company is a leading global managementconsulting firm, helping the world’s top businesses,governments, and organizations. Our founder, EdwinBooz, defined the profession when he established thefirst management consulting firm in 1914.Today, with more than 3,300 people in 60 officesaround the world, we bring foresight and knowledge,deep functional expertise, and a practical approachto building capabilities and delivering real impact.We work closely with our clients to create and deliveressential advantage. The independent White Spacereport ranked Booz & Company #1 among consultingfirms for “the best thought leadership” in 2011.For our management magazine strategy+business,visit www.strategy-business.com.Visit www.booz.com to learn more aboutBooz & Company.Printed in Greater China©2012 Booz & Company Inc.

China´s digital champions

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