The headquarters of Tencent Holdings Ltd in Shenzhen, Guangdong province. Tencent, which began as a small startup between university classmates, made about 6 billion yuan ($924 million) in the third quarter this year. [Photo / Agencies]

Membership, rising Internet population stimulated sector's rapid development

BEIJING - When Pony Ma, who runs one of the largest Internet companies in the world, speaks of his early days as an entrepreneur, he is very candid.

"People around me, including my parents, never imagined that I would start and manage a company, because I did not look like an entrepreneur," he said.

"The only advantage I had was tens of thousands of lines of C language (computer) codes I had written, a few projects I had done, and my familiarity with software," he said.

Even so, the programmer has managed to elevate Tencent Holdings Ltd, a company he co-founded with his university classmate Zhang Zhidong in 1998, to a position alongside the likes of the Internet giants Google Inc and Amazon.com Inc.

Ma is a part of the increasing number of Chinese Internet entrepreneurs who, though they started from scratch and had no clear notion of which direction they would eventually go in, have tasted success beyond their expectations.

If there is one guiding idea that has helped Chinese Internet companies rise from obscurity to international fame, it is "micro innovation", or the pursuit of small and continuous improvements in the midst of doing business.

Take QQ, Tencent's most popular instant-messaging service. It started as a copy of ICQ, a similar service that was developed by the company Mirabilis and later bought by America Online.

After a legal dispute over the similarities between the products, Tencent decided to change QQ by adding a different interface, functions and other features tailored to Chinese Internet users.

What makes Tencent the most different, though, is its business model: It makes money by selling virtual goods. It collects small payments from users who agree to buy certain value-added services.

They, for instance, can dress up avatars - virtual representations of themselves - or decorate their personal Web pages. Tencent borrowed the idea behind those changes from a South Korean social-networking site, Cyworld.

In the third quarter, Tencent made about 6 billion yuan ($942 million) from such sales. That constituted about 80 percent of the company's total revenue for the period.

The reason why many domestic Internet companies have managed to overshadow their international counterparts in China lies in "their innovative approach based on local characteristics (of the Internet market)", Ma said during an industry forum in October.

The leading websites for online searching, e-commerce, social networking services and other lines of business on the Internet usually resemble their foreign counterparts in one way or another. At the same time, they have distinct characteristics aimed at attracting a large number of users from a particular place.

"Ten years ago, Chinese Internet companies copied what their US counterparts did," said Kai-Fu Lee, the former head of Google China. "But they tailored it subsequently to the tastes of Chinese users. If a country is five years ahead of another, the newcomer should of course learn from the forerunner."

Micro innovation does at times lead to controversy and is often criticized as being plagiarism.

Ma, whose company has been harmed by the charges that it was a copycat, said copying from others is a "necessary stage" in the Internet business, as it is in many other industries in China. The Internet, he explained, has not been around for long in the country.

Lee, though, says the situation is changing; more innovative ideas and companies are now coming from China.

In products that require advanced technology, such as cloud computing, the US will continue to be a leader for a long time. But in others, such as social networking applications, games and mobile Internet services, many promising companies are expected to emerge from China in the coming years, Lee said.

China's Internet experience began in 1995, when the first public Internet connection was made. From October 1997 to the end of June, the number of Chinese on the Internet has gone from 620,000 to 485 million, according to the China Internet Network Information Center. Starting in 2008, the country could claim to have more Internet users than the United States.

With more and more Chinese online, about 40 Internet companies have cashed in on their popularity and listed their shares on world stock exchanges. Baidu Inc, the largest search engine in the country, had a market value of $36.5 billion on Monday, and ranked fourth among all the publicly traded Internet companies in the world, after Apple Inc, Google, and Amazon.

In 2000, the Internet industry underwent the trial of the dotcom bust, which only the best competitors managed to emerge from.

After China joined the World Trade Organization in 2001, new ideas, advanced technology, products and foreign investment started coming to the Chinese Internet market faster than in previous years, said Hu Yanping, general manager of the Beijing-based research company Data Center of China Internet.

That has helped foreign Internet companies get a slice of the country's rising Internet pie, he said. The resulting competition has also helped Chinese companies become bigger and stronger, he said.

Charles Zhang, chairman and chief executive officer of Sohu.com Inc, which offers a search engine and other services, has also seen a change for the better.

"In the past, people did only what the government permitted them to do," he said. "But later they tried whatever was not prohibited, which is very important."