Ministry Reacts to Success of Internet
BEIJING --- As predicted by CMM-I, the rapid growth in the number of Internet start-ups utilizing foreign management, content and investment has forced the Chinese government to react by clarifying that the market is out of bounds to foreign players. Shortly afterwards the statement was played down by officials, saying that the ministry will publish new regulations on the operations of the Internet that will liberalize the market.
In an industry that has this far attracted and depended heavily on foreign investment the listing of china.com, part-owned by America Online, and it's market capitalization of US$ 1.4billion in New York in July provided further hype to the perceived value of China internet start-ups. That hype may have fuelled further interest from outside investors, but it also alerted the government to the effective ending of its monopoly on information delivery.
In a statement carried widely in the international press, Wu Jichuan said that foreign investment in the Internet was not allowed under Chinese law and the government planned to clean up the "irregularities".
In answer to journalists' questions on suitable levels of foreign investment in Internet businesses, Mr Wu replied that the current policy does not allow foreign investment and that the Chinese government still needs to strengthen its management over the information content business.
He also said that whether talking about ICPs (Internet content providers) or ISPs (Internet service providers), the issue is still about value added services which are not open to foreign players in China.
As with all initial gains made by foreign companies in new industries, the success has largely been based on the absence of adequate regulations rather than because of them. Like other industries, the first signs of success are being followed by a clampdown designed to dampen activity and allow the government time to react.
In a move aimed at defusing the tension created by the statement an official of the MII news department announced shortly after Wu's comments that new regulations would come out by the end of this year and make the market "more open and more standardised", thus leaving the future of the industry open to speculation.
However, the news of Wu's words has excited mixed responses from the Internet industry with a number of Chinese sites reporting foreign courters calling off all negotiations only to return days later with improved offers.
The likelihood of a full crackdown also looks less likely than usual given the fact that many of the Internet services aimed at Chinese speaking users are registered and operated outside China and therefore difficult to stop.
For this reason, "crackdown" is likely to mean little more than extended lists of banned sites being provided to ISPs which are responsible for controlling the access of their customers.
The situation may be less sure for companies with fixed resources on the mainland in easy reach of regulators. Within this group, the most vulnerable companies are those which have developed their Internet services through existing company structures. Since "operating Internet services" is not included in their business remit, these companies could be in the firing line as scapegoats are sought.
Whatever happens, news of government crackdowns always causes hearts to miss beats in a number of boardrooms around the world, indeed china.com is one of the few operations that has already crossed their short term finish line.
Also sitting the right side of the fence is News Corporation which has its lead investment, PDN Technology, based in the calmest place during a media crackdown, the People's Daily. Other companies, however, have stakes in Internet operations in China which do not necessarily enjoy the same protection.
These may include Dow Jones and Intel which have stakes in sohu.com, the pairing of MUI Media of Malaysia and Pat Robertson which have backed the Zhaodaole gateway and a number of foreign venture capitalists which have recently invested in domestic start-ups.
In the light of the recent controversy a forum organized by Fortune magazine including leaders of the industry such as the chief executives of Yahoo! and America Online will be of particular interest when it takes place in Shanghai next week.