2008 11 China Internet Market Overview

China Market Overview: One Billion Customers in 20 minutes Andy Tian A d Ti XPD Media Inc. andy@xpdmedia.com 2008.11 2008 11

Agenda: State of economy The Internet market Opportunities for entrepreneurs and investors 2

China economy to grow 8‐9% in 2009 Global GDP Forecast Gl b l GDP F t Adj Adjustedd to ~8% late Oct 3 Source: Mary Meeker’s Tech Trends Presentation, Nov 5th, Web 2.0 Conference

Key factors driving and protecting China’s growth China US >30% consumer saving rate1 Close to zero saving rate Liquid: China has $1.9 trillion Highly leveraged: over cash reserves $10 trillion national debt Fixed RMB protects China from global currency fluctuation Robust domestic demand, Declining consumer spending replacing export as growth engine i $568 Bln in infrastructure spending allocated for 2009 p g $700 Bln just to bail out banks (1) National saving rate is even higher at close to 50%, mostly by the government 4

China is saved by an “unsophisticated” mortgage market Chinese banks only started lending mortgages in the last 6 years By US standards, the lending practices are very unsophisticated By US standards the lending practices are very unsophisticated – 30% down payment required for first mortgage, 40% for second mortgage – Lack of centralized credit bureau places burden of proof on the applicant: among other documents, applicant needs a signed and stamped letter from among other documents applicant needs a signed and stamped letter from employer stating their salary can cover mortgage payments with significant margin By 2008, more than 50% of properties are still purchased with cash Derivatives are new to China, heavily regulated and monitored; mortgage‐backed instruments are almost non‐existent To encourage spending, banks have only recently lowered down payment requirement to 20% 5

Not all is rosy, China actually has already gone through a similar financial crisis triggered by bad corporate loans Traditionally Chinese banks have lent vast sums to state‐owned‐enterprises based on policy, rather than evaluation based on performance Result: bad loans accounted for as much as 23% of large banks To date, China has already spent several hundred billion dollarss bailing out it s top To date China has already spent several hundred billion dollarss bailing out it’s top banks Selected Bank Bail‐outs (incomplete) Date Bank Amount (USD) 2004 Bank of China $22.5 Bln 2004 China Construction Bank $22.5 Bln 2004‐2005 Industrial and Commerce Bank of China $162 Bln 2006 China Everbright Bank $2.6 Bln 2008 Agricultural Bank of China $19 Bln 2008 China Development Bank $20 Bln 6 Source: public news articles via Google

China has the most Internet users, at 263M in Jun 2008 Mln China Internet Population 500 400 382 20% 294 ~19% 19% 300 penetration in US: 223M 210 2008 200 137 111 94 100 80 59 23 34 0 2000 2001 2002 2003 2004 2005 2006 2007 2008E2009E 7 Source: 2008 CNNIC China Internet Report

Chinese Internet users: young and entertainment driven Age spread of Chinese Internet users 2008 Jul User Activities Online 100 Average 2.7 hours online d per day 31.4% >30 80 Online music 85% Online news 82% 18.7% IM 77% 60 25‐30 Online video 71% Search 69% 40 30.3% Email 63% 18 24 18‐24 Online games 58% E-commerce 58% 20 Blog/space 19.6% < 18 updates 42% 0 8 Source: 2008 CNNIC China Internet Report, 2008 KPMG Destination Digital

Internet will play an increasingly important role in China Lack of consolidated retail infrastructure Ecommerce E Lack of domestic mass entertainment Internet as the most influential medium Online advertising Increased competition and spending in telecom industry with 3 fully licensed operators g g Online gaming Chinese consumers are always looking for a bargain 9

Ecommerce: fastest growing sector, the engine of Chinese Internet China Ecommerce Volume User behavior In 2007: a snapshot Bln USD 60.0 46 Mln 46 Ml users shopped online h d li 139% 54.0 125% 120% 117% 107% 48.9% ‐ clothing, home decorations 79% 77% 32.4% ‐ books, music and videos 32 4% b k i d id 40.0 69% 28.9% ‐ cosmetics 31.9 71.3% used online payment % d li 20.0 18.0 8.0 4.5 2.8 0.6 1.1 0.0 YoY growth % 10 Source: iResearch Ecommerce Report

Online advertising: ad pricing and delivery still immature, rapid growth driven by ecommerce China Online Ad Market 2007 Online Ad Market breakdown Bln USD Bln USD 4.0 1.5 YoY growth 3.2 74% % 78% 65% Brand 65% 49% 40% 0.7 1 2.3 2.0 20 Search 108% 1.4 0.5 0.4 0.8 0.5 Other 0.3 0.3 0.0 0 2004 2005 2006 2007 2008E 2009E YoY growth % 11 Source: iResearch, 2008 KPMG Destination Digital

Online gaming: biggest Internet sector in China at $2.5 Bln China online gaming market $2 Bln, 80% of total market in 2008 is Bln USD free-to-play games driven by virtual 5 goods, goods making China the largest virtual 59% 65% 52% 4.3 goods market in the world 35% 25% 4 3.44 These free-to-play, massive online games feature 3 • Very large user base: peak 2.55 concurrent users reaching > 2M 2 1.68 • Long lifespan: leading games are over 3 years old 1.02 1 0.64 • Focus on social interactions: #1 reason for users to play games is 0 to socialize with friends 2005 2006 2007 2008E 2009E 2010E YoY growth % 12 Source: iResearch 2008 China Gaming Industry survey

This means opportunities for entrepreneurs and investors Key trends going forward Focus on verticals Focus on local Ecommerce Meta-search and recommendations SME tools and platforms Better targeting Online Focus on local Advertising More efficient ad marketplaces Ad tools and platforms g j More casual games than just MMORPG’s Lighter weight, more accessible games Gaming Integration of gaming with communities and SNS Addressing international market from China 13

Though lots of challenges abound Fierce competition: lots of copycats for any given business model Early user population: herd mentality and rampant disregard for IP Major differences in user behavior and expectations Major differences in user behavior and expectations Exits are hard: “if you don’t make money, we don’t want you; if you make money, we might buy you; then again we might just copy and crush you” i h b h i i h j d h ” Language and local relationships 14

Last words from the wise… Companies with cogent business models that provide consumer value should survive / thrive – consumers need value more than they have needed it in a long time… and the Internet should be the best place to find it… p …especially for China… 15 Source: Mary Meeker’s Tech Trends Presentation, Nov 5th, Web 2.0 Conference

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2008 11 China Internet Market Overview

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2008 11 China Internet Market Overview — Presentation Transcript