Why China's Rapid Online Growth Won't Help U.S. Firms

Chinese internet users
Chinese internet users

China now has 485 million Internet users, which is 52% more than the entire population of the U.S. The China Internet Network Information Center reported the figure based on numbers as of the end of June. Extraordinarily enough, only 36% of China's population uses the Internet now. Internet penetration in the U.S. is more than 76%.

Those numbers helps justify the extremely high valuations of many China-based Internet companies, and show why U.S. firms like Google (GOOG), Microsoft (MSFT), Facebook, and Twitter are so anxious to gain market share in the People's Republic. China's No. 1 search engine, Baidu (BIDU), has a market cap of nearly $52 billion, more than twice that of Yahoo. (YHOO). Yahoo's revenue last quarter was $1.2 billion, while Baidu's was $372 million. But, while Yahoo's ad sales are barely growing, Baidu's were up 88% in the first quarter. Baidu's share of the search business in its home market is 75.9%, according to research operation Analysys International. Baidu's rapid expansion in the world's most populous nation helped drive its brand value up 141% to $22.6 billion in the latest BrandZ report.

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The size of China's online population has driven shares of Sina (SINA), Sohu (SOHU), and Tencent higher as well. The presence of these portals and microblogging operations are likely make it harder for U.S. companies to successfully compete in the market. Another hurdle is the Chinese government. Google found this out the hard way when it battled the central government in Beijing over hacking and censorship issues. The People's Republic also blocks access to Facebook and Twitter.

Given the relatively low penetration of the Internet in China, it's population of users is bound to grow rapidly, especially as people relocate from rural areas to cities to find work. That will help local Internet companies, while U.S. firms, impeded by an authoritarian regime on one hand and rapidly expanding local competition on the other, will look on helplessly as a great opportunity passes them by.