America Online on Monday announced a joint venture with Legend Holdings, China's dominant PC maker, to develop interactive Internet services for the Chinese market.
The venture brings AOL into an Internet access and content market that has not escaped the global slump but could grow into a Internet powerhouse over the next several years. An official estimate in January placed the number of Internet users in China at 22.5 million, out of a population of more than 1.25 billion.
The joint venture will be owned 51 percent by Legend and 49 percent by AOL, and each will invest around US$100 million over the next few years, according to a joint statement made Monday. AOL initially will provide consultation and technical support for interactive services.
After China's expected accession to the World Trade Organization (WTO), the venture gradually will expand the scope of its activities, the companies said. Foreign companies are now restricted from China's Internet content and services market, but the terms of China's WTO entry call for a step-by-step opening of the market over the next few years.
Legend is China's biggest maker of PCs and bundles its PCs with an Internet access service under an agreement with China Telecommunications (Group) Corp., the country's incumbent carrier and largest ISP (Internet service provider). Buyers can easily hook their computers up to the service as soon as they start them up, according to Legend. Legend also operates a Chinese Web portal, FM365.com.
That clear path to consumers may make Legend an ideal partner for AOL in China, said Matt McGarvey, a Beijing-based Internet analyst for International Data Corp. (IDC).
Yet the U.S. giant is heading in to an Internet content market as grim as that anywhere in the world, with consolidation looming for the major portals. Hong Kong cable broadband provider I-Cable last week confirmed it is in discussions with one of China's biggest portals, Netease.com Inc., for a possible acquisition. Wang Zhidong, the chief executive officer, president and director of Sina.com, another major portal, last week resigned amid another round of layoffs and speculation that the company may be going on the block.
"The next six to eight months are going to be extremely brutal," said McGarvey.
The deal could shake up China's Internet content market, where other big U.S. brand names have been successful. In March, The Chinese version of Yahoo.com ranked sixth among Web sites visited by home users in China, according to Hong Kong-based Internet Audience Measurement Asia Ltd. (Iamasia). MSN.com ranked No. 11. The top five sites were all local, said Stephen Yap, director of marketing and communications at Iamasia.
China's Internet advertising market is still immature, with most investment going into advertising on the top-ranked portals that can deliver a large number of viewers, rather than to focused Web sites, he said. It will take at least 18 months for a market to develop for more targeted Web advertising.
The key to the success of AOL's offering is likely to be what price premium it can charge for its members-only content on top of the going price of plain Internet access, McGarvey said.