In the midst of a global economic slowdown, China’s Internet market has been experiencing a remarkable boom: a vast and rapidly expanding user base that attracts online merchants and service providers worldwide, accompanied by rising consumer spending.
According to the China Internet Network Information Center (CNNIC), China had 513 million Internet users by the end of 2011, an increase of 12% compared with the previous year. Of those users, 350 million accessed the Internet via mobile phones, up 17% year-on-year.
While the agency notes that growth is decelerating relative to historical Chinese standards, the enormous scale of online shopping, payment transactions, banking and digital entertainment should sustain momentum in the coming years.
Here’s a look at what rose and what faltered in 2011.
Tuan Gou (Group-Buying)
The group-discount shopping phenomenon known in China as tuan gou exploded in 2011. The number of group-buying sites surged to more than 5,000, then contracted by nearly 2,000 within a year. Market research firm Analysys predicted many more would disappear in 2012 after exhausting their cash reserves.
Despite producing RMB 21 billion (about $3.4 billion) in sales that year, 80% of tuan gou revenue went to the top three sites, and intense price competition wiped out much of the industry’s profit margin.
Groupon’s entry into China as Gaopeng.com became a notable cautionary tale. After expanding rapidly into about 50 cities, Gaopeng faced reputational damage when it was sued in May for selling counterfeit watches, triggering national outrage. By November, heavy losses had forced the company to close 80% of its sales offices and cut roughly one-third of its staff. Gaopeng’s collapse damaged consumer confidence and cast a shadow over the entire group-buying sector.
Although the future of tuan gou remained uncertain, online shopping overall continued to thrive. Nearly 200 million people shopped online in 2011, a 20% increase from the year before. They spent RMB 774 billion (approximately $123 billion), up a striking 67% year-on-year. About 77% of purchases occurred in C2C marketplaces, while 23% were B2C, reflecting a landscape dominated by numerous small sellers and niche boutiques.
Within B2C, platforms that rent marketplace space—such as Taobao—proved more popular with shoppers than individual merchants’ own storefronts. Although online retail accounted for only about 4% of China’s total retail value at the time, its advantages in variety and price helped drive continued growth.
Mobile shopping showed strong potential. Of the roughly 200 million online shoppers in 2011, only 23 million purchased goods via mobile phones. Still, analysts expected explosive mobile Internet growth in the coming years as smartphone penetration, mobile browsers and social networks expanded.
As more companies moved services to the cloud, mobile shopping became increasingly viable and secure. Relatedly, mobile payment began to take off: about 30 million users were registered in 2011, roughly 8% of total mobile users. The opportunity for mobile commerce is significant once operators, banks and other stakeholders align on standards, security and collaboration. Venture capital and entrepreneurs were already drawn to the mobile sector by its growth prospects.
Search
The online search market rose sharply in 2011, growing around 70% to about RMB 18.8 billion (approximately $3 billion). iResearch forecasted a 40% compound annual growth rate over the next five years, driven by expanding e-commerce and rising demand for information. Advertisers were shifting budgets from traditional media to online search for broader reach and better targeting. Baidu dominated the market with about 76% share, while Google held roughly 20%.
Online advertising surpassed newspaper advertising for the first time in 2011, reaching nearly RMB 52 billion (about $8 billion). Much of this increase came from online retail, whose share of advertising spend climbed to 17% from 10% the previous year. Approximately 80% of online advertising revenue concentrated with the top 15 companies and sites; the largest gains were recorded by Baidu (RMB 14.3 billion), followed by Taobao and Google.
Travel
Online travel reservations and package bookings gained momentum as more consumers embraced travel and shopping as leisure. In 2011 the online travel segment remained relatively small—about 5% of the wider travel industry—but it posted rapid expansion. More than 42 million people spent RMB 167 billion (about $26.5 billion) on online reservations in 2011, a 61% increase year-on-year. Of that total, 45% went to hotel bookings, 41% to airfare, and 14% to vacation packages.
CNNIC anticipated double-digit growth for the online travel sector over the next two to three years, especially for leisure travel, while online airfare revenue was expected to stabilize.
Consumer behavior showed clear demographic patterns: female users spent about 30% more time browsing travel websites than male users. Young adults aged 20–29 formed the largest online travel audience, investing more time to hunt deals, followed by the 30–39 age group; these two cohorts were also the most likely to spend on upgrades like premium accommodations and luxury options.
Entertainment
Growth in online music (including sharing and downloads), digital publishing and some gaming categories slowed significantly in 2011 amid a shortage of new content and fresh attractions. Video stood out as the exception: more than 320 million people watched online video in 2011, and projections expected that figure to top 440 million in 2012.
The popularity of online video partly reflected strong consumer demand for diverse content within a tightly regulated media environment. However, video platforms were still working to convert high viewership into sustainable revenue. iResearch estimated video industry revenue at about RMB 6.3 billion (roughly $995 million) in 2011, with potential to double in 2012 as advertising, content sales and IPTV adoption increased.
China’s Internet remained a social hub for youth, many of whom were avid gamers. The online gaming market reached RMB 41 billion (about $6.6 billion) in 2011, up 17%, with nearly 70% of revenue captured by the three largest developers—Tencent, Netease and Shanda.
After a decade of rapid expansion, however, interest in traditional online gaming began to plateau as users shifted attention to social networking, mobile games and microblogs (weibo). Over time, conventional PC-based gaming was expected to cede ground to a new generation of social and mobile entertainment services.