The Chinese internet industry is going through an interesting phase of expansion circa US 1998 under the backdrop of new applications of web 2.0/3.0 and learnings of the dot-com bubble. With overall Internet penetration rate still low, none of the leading players in the industry have achieved the critical mass neccessary to fend off competitors encroaching into their own industry. Furthermore, with valuation sky high, and user numbers impressive many companies are desperate to find ways to

1. Justify their valuation
2. Expand into new segments
3. Find a viable business model

For sures, the recent success of Taobao against an once seemling entrenched player with critical mass, EachNet, has created the business environment (and maybe hubris?) that nothing sacred. (The economic impact of Taobao vs. Eachnet goes much much beyond their immediate auction industry.) Many of the leadings players in online portal, mobile portal, SMS, IM, MMOG, Auctions, and search have all announced initiatives and encroachment into each other’s application or end user segment. See :

Tencent GS Report
S&P on Shanda

both via billsdue

But really what makes this much more interesting than 1998 is the fact that all this is taking place under the adjacent & bleed-in innovations of Web 2.0 in the US (Search, Blog, RSS, Tag etc) and arguably Web 3.0 in Japan/Korea(Ultra Broadband, IP Ubiquity, Mobile, MMOG, Virtual Commodities,“1st Degree Blogging”). There are a lot more moving parts than there were in the US in 1998.

Given the increased complexity I’m not certain that all players will eventually find the business model or the growth they are looking for. With no players gaining critical mass given the hyper competition, very few players will be able to gain scale (critical in the tech world) to amortize their R&D investments to become highly profitable businesses. Furthermore, many unique structural innovations require some sort of platform gorilla company company with highly profitable businsses to jump start (Web 2.0 would not have happened without Google’s adsense/adword AND eBay’s distributed business model learnings: the long tail). I am certainly not convinced this landgrab in China is healthy and rational behavior but I have no way of knowing. Competition in most cases is good, but as I have learned in the dot-com days, many times, competition can be very destructive. Perhaps a similar crash will take place and clean out the “weeds” allowing surviving companies to scale and new innovations to take place. Like I have learned from the dot-bomb days, in the end, the crash wasnt such a bad thing after all.