China.com

Like everyone, Victor Koo, COO of leading Chinese portal Sohu.com, remembers where he was on September 11, 2001. Koo, MBA ’94, was staying at the Conrad in Pacific Place, a hotel and office tower complex on the edge of Hong Kong’s Central district—and he spent the next several hours channel hopping. “Every channel was 9/11,” he recalls.

But back in Beijing later that day, where Sohu is headquartered, he encountered a near-total news blackout. Except for Phoenix TV, a Hong Kong-based station that came through his broadband connection, there was no Chinese coverage of 9/11. “TV nothing, print nothing.”

Although Chinese were accustomed to getting their news filtered and often late through China’s state-controlled media, a complete TV and newspaper blackout on an event of this magnitude surprised even Koo.

But the Internet, it turned out, was jammed with news of the terrorist attacks on New York and Washington—and it was to the Internet that Koo and other members of China’s small but fast-growing “wired” elite went that day to follow events.

Something similar had happened two years earlier when, during the Balkans war, a United States Air Force plane inadvertently bombed the Chinese embassy in Belgrade, killing four. Within hours of that aerial blunder, page views at Sina.com—China’s other leading Internet portal, headed today by Hurst Lin, MBA ’93—climbed to 7 million. It was a historic moment, as Sina’s then chief engineer Yan Yuan-chao would later tell Wired. “People in China were reading real-time news from Belgrade—talking to one another and to others, whether they were in Beijing or Paris or New York.”

But the fact that the incident got immediate media play, and set off daily demonstrations outside the U.S. mission in Beijing’s very secure Sanlitun embassy district, also made it plain that this informational free-for-all had the blessing of the Chinese leadership.

The two events illustrate how the Internet can, by turns, be in step and out-of-step with officialdom in this vast, swirling country. Beijing wants what it sees as the good parts of the Internet—the features that offer enormous economic potential—but it would just as soon do without its awkward parts.

And there to plow this difficult but abundant terrain are Sina and Sohu, today the most popular Internet portals in what will soon be the biggest Internet nation on the planet. Sina, which was founded and nurtured on campus by three Stanford graduate students, and Sohu are China’s largest “horizontals,” supersites that, like Yahoo!, offer search functions, news, e-mail and a wide menu of other services like auctions and online shopping.

Sina’s full- and part-time employee headcount stands at around 1,400, the majority deployed in Beijing and Shanghai. Sohu, which focuses exclusively on Mainland China, has 1,350 staff spread across key locations around the country.

Comparing audience size gets tricky. Lin says Sina has the biggest. Koo is content to allow that Sohu and Sina are running neck and neck, but if you get pushy, he’ll tell you Sohu is in the lead and throw up a bunch of iResearch/ Alexa slides to make his point. (The Alexa chart for June shows Sohu reaching 135,000 people per 1 million surfers compared to Sina with 120,000 per million.) Koo concedes there are different ways of counting—indeed, China’s Academy of Social Sciences uses a formula that puts Sina on top—but it’s enough to know that each portal has millions of active users and that China’s current Internet population will look infinitesimal a few years from now.

The rise of the two Internet enterprises in China is a story with obvious business, cultural and political dimensions. But it is also a story of discovery for two Stanford-educated Chinese entrepreneurs sinking fresh roots in their ancestral homeland. Taiwan-born Jerry Yang, ’90, MS ’90, adds another element to the story, for Yahoo!’s co-founder sees no reason why his company shouldn’t eventually join China’s winning circle, too.

Hurst Lin describes himself as “a typical Ellis Island type of immigrant.” Born in Taiwan, he came to America with his family seeking better lives, settling in Brooklyn. Lacking the money for return visits to Taiwan, “I grew up assimilating into America in the public school system,” he says.

His dad worked in a neighborhood grocery while his mom commuted across the river to Manhattan, where she worked in a Lower East Side garment factory. Encouraged by his parents to excel at school, Lin won a scholarship to Dartmouth, where he earned his bachelor’s in electrical engineering before heading off to Stanford.

Words like “portal” were just coming into the language when he arrived in Palo Alto. “I hardly even used e-mail then,” Lin says. But he was good with numbers, so engineering grad students Jack Hong, MS ’91, PhD ’96, and Ben Tsiang, MS ’95—today Sina’s senior vice president of product development—asked if he would help them with a website venture they called Sinanet. “I was the spreadsheet guy,” Lin recalls, as if still protesting his ignorance.

Early on, Stanford administrators happened upon the Sinanet founders’ illicit operation in the mechanical engineering design loft behind Tresidder and summarily booted the trio out. “Kids were setting up businesses left and right all over campus,” Lin recalls. “We just happened to get caught.”

They decamped to the spare bedroom in Hong’s Palo Alto apartment, operating there until they gathered the courage to rent commercial premises. Ultimately they landed in Sunnyvale—home of another one-time campus bootleg web operation, Yahoo!

Despite the hassling, Lin remembers the profs were pretty good about it. “We were using Stanford equipment and bandwidth—and if they hadn’t cracked the whip, nobody would have gone to class.”

Sinanet proved wobbly. Lin and his partners tried to develop a market for distance learning and couldn’t. They ventured into e-commerce and flailed there, too. “We just didn’t have the formula,” says Lin.

Yet, “with China the farthest thing from our minds,” according to Lin, something oddly Chinese was jelling in the background. Lin and his cohorts had been helping Stanford’s Chinese students’ association organize and disseminate scraps of news the students were getting from home—mostly Taiwan, Hong Kong and Mainland China. “[Sinanet] became a kind of news feed,” Lin says. And as that feed grew and developed a wider following on and off campus, Chinese media companies (Hong Kong’s Sing Tao Group and Taipei-based United Media) approached Sinanet, wanting to become the company’s first outside investors. Lin laughs. “They didn’t know what they were doing, either.”

Maybe they didn’t, maybe they did. But as luck would have it, venture capitalists at Walden International, a firm with one foot in Mainland China and the other in the United States, were pursuing a bold Internet investment strategy that would pair Silicon Valley web expertise with Chinese savvy in local markets. They decided Sinanet was the ideal fit. It soon was merged with Beijing Stone Rich Sight Technology Co. Ltd., a Chinese software company with Internet ambitions, to become Sina.com. Goldman Sachs came in, then withdrew over boardroom disagreements. Morgan Stanley eventually replaced Goldman, but the momentary lack of an investment bank delayed Sina’s initial public offering on the NASDAQ until 2000. There were also Chinese regulatory hurdles to overcome, and other issues. But Sina survived these travails and today boasts a market cap of $1.4 billion.

Victor Koo’s path didn’t intersect with Lin’s until both men had left Stanford. Born in Hong Kong, he spent his high school and first two university years in Australia, before leaving Sydney University to go to UC-Berkeley as a Regent’s Scholar. He entered Stanford’s MBA program while working for Bain and Co., the management consultants.

Sohu started out as Internet Technologies China, at MIT, where founding chairman and CEO Charles Zhang was working on his doctorate. Zhang’s breakthrough was creating the first popular Chinese search engine, an accomplishment that drew the attention of Intel, Dow Jones, IDG and others that soon signed up as investors. Koo came along in 1999 as senior vice president, business development—from the Beijing-based venture capital firm Richina Capital—just as plans were being laid for Sohu’s NASDAQ listing. Richina had investments in industrial companies (see Teaching 'Start-Up' sidebar) and was hugely instrumental in the Ziff Davis media organization’s expansion in China. But Ziff, now famous for its Z-net TV and a slew of web businesses, was then focused on traditional media in China. Koo hungered for a shot at the Internet.

When Sina entered the Chinese market in 1999, the Mainland was still largely an information vacuum. As China took one step, then another in its transition from central planning to a market economy, the government still owned the bulk of information: it controlled education and publishing and pervaded the industrial, services and social infrastructure. But the government was splitting into what Lin calls conservative and progressive camps. From some departments, information flowed relatively freely, from others hardly at all—and that led Sina to a fundamental decision.

“Our editor decided, since there wasn’t much information to search, we should become the provider of information,” Lin recalls. “And we were lucky—this was during the Internet fervor in ’99-2000 and part of the government said, ‘you guys should be doing that.’”

And so Sina went forth. Sohu, which began in 1997, already had borrowed a page from Yahoo! and focused on search capabilities. That is by Lin’s account, and he says his competitor’s strategy was good for getting information out of Hong Kong and Taiwan—but pretty useless at getting solid information on Mainland China since little of it was accessible.

China, it’s important to point out, still requires foreign publishers like Ziff to operate through government joint ventures and limits websites to aggregating news content from sanctioned sources, rather than generating their own.

Between China’s fast-growing private sector and the sea change in Beijing’s attitude toward information dissemination—there are now thousands of institutional and government websites—search capability has become a preoccupation for Sina as much as Sohu.

Where business focus is concerned, Koo thinks Sohu has the competition beat hands down. For one thing, focusing exclusively on Mainland China avoids all the political, social and linguistic complexities Sina faces foraging for business in Hong Kong, Taiwan and other overseas Chinese markets. Koo thinks they are too small for the trouble anyway. “It’s also an easier story to tell investors,” he says.

Lin concedes that Sina regulars outside Mainland China amount to only around 5 percent of the portal’s user base. But flying the flag overseas, he argues, means that when potential international partners think of China, they think of Sina first—giving it first look at new technologies, like Yahoo!’s auction platform, which they now use after recently forming an alliance.

It wasn’t all smooth sailing. “Given the Internet revolution started out in Silicon Valley, there was plainly arrogance,” Lin remembers. “The U.S. staff tended to dictate to the China staff what was right for the China market, even though we didn’t live in China.”

Luckily, a light went on “when at last the entire company reached a consensus that, in order to succeed in China, we had to abandon the U.S. thinking. That was when we started to overtake Yahoo!, Sohu and a number of earlier entrants in the China marketplace.”

Running an Internet portal in China has its risks. Liu Shui, a journalist who was jailed years earlier for supporting China’s democracy movement, was arrested in May and sentenced to two years’ “custody and education” after commemorating the June 4, 1989, Tiananmen Square tragedy in a series of web postings ahead of its 15th anniversary.

According to Hong Kong’s South China Morning Post, 61 mainlanders were in detention for Internet offenses as of early May. The story did not identify which website Liu had used, but it is unlikely it belonged to either Sohu or Sina. Both Koo and Lin freely acknowledge that everything on their sites is vetted by teams of monitors backed by search engines on the lookout for antigovernment references.

A world-weary look creases Lin’s face as he proceeds to run through the basics of how cyberspace works in China. “The [censorship] issue gets overblown,” he begins. “Yes, if you push it to the extreme, there are taboo subjects that don’t get talked about—Tibet independence or Taiwan independence, for example.”

Koo ran down the same list a few days earlier, remembering to add the Falun Gong, a banned religious sect that rubs nerves in the Chinese leadership. Without elaborating, both he and Lin say their companies keep in regular communication with the government’s “news bureau,” known in English as the Internet Information Management Bureau.

The prohibitions unsettle civil libertarians, but for some China watchers who have witnessed this country’s warp-speed transformation in just 10 years, they look like issues that could pass in time. Some optimists find encouragement in recent precedent—like the storm of text messaging that broke out when the government initially covered up this year’s SARS II outbreak. Millions of messages flashed through Internet portals, and popular conjecture suggests that static spurred the year-old administration of President Hu Jintao and Premier Wen Jiabao to fire the country’s health minister and Beijing’s mayor, the officials at the center of the furor.

As media and information sources have multiplied and diffused to the grass roots, China’s information management apparatus has sprung leaks. Hong Kong hasn’t helped, having morphed from a well-behaved British-run money machine into a rambunctious, unpredictable force for openness. So when local newspapers got wind of the central government spiriting a new season of SARS victims to secret locations to keep one step ahead of World Health Organization investigators, they played the story above the fold, sparking SARS-related text messaging across China.

Sina, which prides itself as China’s premier online news source, was in an odd position: while subscribers of its messaging service were busy passing around updates, the portal itself was holding back the news: “The reporting on SARS was particularly sensitive,” Lin told Business Week in February. Where sensitive subjects are concerned, “We won’t report it till we get the green light from the government.”

If Sina and Sohu don’t take the lead in testing the limits of censorship, their shareholders would hardly fault them. The COOs of these NASDAQ-listed companies focus unapologetically on business—skirting what Lin calls “fringe [users] who don’t pay any more than the other 99 percent of our addressable population” and delivering services “the average Joe wants.”

The central government wants the web to work in the economic sphere because it encourages efficiency. That has wider implications than commonly thought. As Koo points out, issues such as local corruption now are widely discussed in Internet postings. But opening up broadband services for anyone to challenge official views on national sovereignty is something else again. As is widely known—officials hardly make a secret of it—the central government blocks access to many sites.

Antigovernment views are invariably seen as unpatriotic—in the same way ardent George W. Bush supporters interpret criticism of today’s “wartime” White House as unpatriotic. The difference is that government wariness in China reaches into every sphere more systematically. Type in a URL in Hong Kong, say www.singtao.com, a middle-of-the-road Chinese-language Hong Kong daily, and you get to where you want to go. Type in the same address on the Chinese mainland and servers keep swirling until the request times out and a “page unavailable” message pops up or you’re sent to another site altogether.

In a viewpoint prepared for Computerworld Hong Kong in July 2003, Peter Bullock, a Hong Kong partner of Masons, a UK-based law firm, observed that, before 1999, few Internet laws existed in China. And while a plethora of broad-brush rules subsequently raised uncertainties for Internet companies and customers alike, “[t]he only certainty, it seems, is that the Central Government will eventually lose its battle to control the Internet.” Why? “While the instruments of control continue to be firmly in place, the practical ability to monitor and block content and communications regarded as undesirable, whether generated within China or outside, is now stretched to breaking point.”

When Koo looks back on the Internet’s beginnings in China, one feature stands out. “The Internet was perceived as niche because it had a small audience compared to TV and because it was in a niche, it was less regulated,” he says. TV (and print) reached into every corner of the country, while the Internet, even growing as fast as it was, still reached only a tiny fraction of China’s 1.3 billion people. By the end of this year, there will be 84.2 million web-enabled PCs in China, according to International Data Corporation (IDC) estimates, and a small but fast-growing percentage of users among the country’s 300 million cell phone subscribers.

“The Internet’s impact on society and people is much bigger than its business implications so far, even though the companies that went public have a collective market cap in the billions of U.S. dollars,” Koo says. For one thing, he explains, portals began charging for services only two years ago, having started—as portals elsewhere did—following the free, ad-based revenue model. “And so what’s happened is, all these people have been using this as a way to reach out to the world to get information,” Koo says. “The portion of ‘thought leaders’ and affluent people [using the Internet] is very high and increasing very rapidly.”

But China’s Internet penetration is tiny. At slightly more than 6 percent, it is half the world average and only a tenth that of the United States. As a growth story for investors, though, China has “forever” magic to it. Surprising no one, PricewaterhouseCoopers in July projected China’s media sector would enjoy 25 percent revenue growth through 2008 largely on the back of steadily rising online advertising. The number of Internet users in China increases by 800,000 a week.

Sina’s Lin argues that once penetration approaches 25 percent of the population—300 to 350 million people—the industry achieves critical mass and revenue begins to add up torrentially based on sales from as few as 2 or 3 percent of all users.

And as the Internet’s social impact deepens, business will follow. “There is no longer any doubt that by 2008 Asia’s Internet market will have arrived,” says Nathan Midler, Beijing-based manager of Internet research at IDC Asia/Pacific. “Whether measuring Internet users, buyers, or e-commerce, Asia’s growth rates are phenomenal.” (E-commerce is growing by 80 percent annually across Asia and by more than 116 percent in China, according to IDC.)

“The fact that China has had only three portals that were able to go public before the [dot-com] bust—and there are not 20 now vying for the market—has helped them stay strong,” Midler says, including third-place Netease.com in his count.

The big story at the moment seems to be Yahoo!, according to Midler. “Yahoo in the [last] year or so has finally made some significant steps in growing itself on the Mainland.”

One smart move was acquiring 3721, a keyword search company. “It gets them into the search business and there’s a lot of cash in that,” Midler says. “I see Yahoo! growing into a contender—I wouldn’t say the market’s locked up by Sohu and Sina.”

That assertion gets no argument from Jerry Yang. Yahoo! Inc.’s chief yahoo says the 3721 acquisition enables the portal to be a strong player in search, with a large base of small business subscribers already in place. “We also launched our paid auction service—a joint venture with Sina—to address the rapidly emerging e-commerce market,” he says.

Although Yahoo! officially started in 1999, the perception among analysts and competitors alike is that it stumbled along the way. But from Yang’s perspective, these are still very early days in the Great China Race. “We believe that we are in the earliest stages of Internet development [and] have sharpened our business strategy in China in two areas: search and e-commerce.”

Yang says that by leveraging the strength of Yahoo!’s technology and expertise in Japan, Hong Kong and Taiwan auctions—and Sina’s relationship with merchants and individual buyers and sellers—the two companies have forged a winning combination to compete in China’s market.

Because China still awaits implementation of online credit card payment—and must wait longer still before consumers become comfortable giving away their financial information online—goods and services like airline tickets are delivered within cities on a C.O.D. basis. In some ways, then, China resembles pre-plastic, pre-Internet 1960s America. But in other ways, the People’s Republic is very 21st century in its technical sophistication. Why? Because China can deploy many times more talent than any other country can on any given project.

China is a country of tremendous contrasts, where Iron Rooster steam-powered trains still ply the rails at horseback speed while Maglev trains levitate toward Shanghai at 260 mph. Where just behind Beijing’s SoHo complex—home of global tech companies like Sina—peasants earning a dollar or two a day doze on flatbed bicycle “trucks” waiting for the next moving job, while, on the ground floor, a Japanese coffee shop dispenses tiny cups of Blue Mountain for $10 a pop.

Year in and year out, graduates bursting with talent pour out of universities by the hundreds of thousands, at once the government’s greatest hope and its greatest fear—for Beijing is obsessed with controlling the pace of change and is wary of a new generation’s impatience.

The fear always is social instability and the possibility that it can break out suddenly and massively, inflaming cities of 10 million or 15 million within hours. And yet, no country could claim to change at anything remotely close to China’s pace. Leave aside China’s almost complete shift from central planning to market economics in just 25 years and consider this: China’s urban population, now “only” 400 million, is projected to double in just 17 years.

Open markets and big cities, of course, are just what Internet portals thrive on. As China races toward becoming the world’s largest economy, it is easy to see how Koo and Lin, now worlds away from Stanford lecture rooms noisy with debate, might take comfort in knowing they both landed in the entrepreneurial center of the universe.

“When I first came to China in 1997, I was no different from a classic U.S. tourist, bewildered and lost,” Lin says. “However, as time went on, I adapted and came to realize that this is the new ‘America’ in terms of economic opportunities and social change. I guess life is strange—I had to do a 360-degree turn to discover my ‘America.’”

Read a May 2010 update on this story.

JOEL McCORMICK is editor of China Economic Review, headquartered in Hong Kong.