Whitepaper ups China | Internet | E Bay

Don't forget China

The Chinese internet market is the next big chance for your internet start-up, but take care: your copycat will kick you out of the market?

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Student: Kontakt:

Juergen Hoebarth MVA in Art Administration juergen.hoebarth@gmail.com

Public Published via http//:www.austrianstartups.com 1 Don't forget China 08415579 Page 1 of 20

Abstract

The Chinese internet market is one of the fastest growing markets in the world. Around 300 million citizens of China are using the internet and there is still an expected growth in the coming years. All global internet giants and as well start-ups seek new potential users for there services all the time. China has become the largest internet region at the beginning of 2009 companies peer more and more towards getting into this market, beside the European market. But China has its own rules and is a region where a lot of copycats of western successful internet stories are existing and dominating the market in their sector. This paper should give an overview of the development of the Chinese internet giants and the copy culture of China. We try to find out how existing western internet giants are doing with there China strategy and find out how successful they are in getting a kind of plan for start-ups to be ready from the beginning on for the Chinese internet market. Furthermore we would like to give some advice and examples for a strategy for a start-up which plans to enter the Chinese market form the beginning and find out if this market is the next big chance for them and their investors.

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Introduction

From 8.9 Million Users to 300 Million users in less than a half decade, figures like this represent the Chinese internet market. For a long time people only focused on web development for English speaking countries. China grew into the biggest internet market unnoticed and developed its own services based on copycats from the west. Nowadays start-ups are thinking about going to other markets beside the English speaking ones and seek success for their products there, but as China has its own rules and culture when it comes to business and has all kinds of censorship restrictions, companies have had problems, more or less, to enter the market and be successful. One of the questions is what should emerging online services take care of and be familiar with, when it comes to their launch entering the biggest market in Asia. I choose this topic because I am fascinated by the possibilities the internet offers to people and entrepreneurship in this era as well the fact that more than less the whole world is your market.

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What makes the Chinese internet market interesting for western online companies ?

Around 2000 the internet became very popular in the western hemisphere and a lot of companies , like Google, Ebay and Amazon, were founded. Development stagnated after the dotcom crash,but in the last 2 years, since the rise of the idea of web2.0, internet companies are sprouting worldwide with different online services for customers. Services like Flickr, Digg or Youtube are children of the second global movement in the internet world. One big area where these trends come from is Silicon Valley, a region that a lot of internet and technology companies call home. For a long time the US was the largest online market, but since China supports internet access for its citizens, the growth rates have been tremendous. Between somewhere in late 2008, early 2009 China became the largest internet market worldwide and it is still growing. There is a huge potential for further growth. Companies from the 1.0 and the 2.0 era are mostly focused on the western world and mostly offer there services in English, because the domestic internet market used to speak English. Right now there are around 300 million persons in China using the internet and there was an growth rate of 40-50% in the last 16 month. . Further the Chinese mobile internet market was growing to a market of 117 million mobile internet user and there will be more as China Mobile continues to develop its3G Network. This trend is more or less recognised by western internet developers, netcompanies, entrepreneurs and investors. Some of them intend to enter this market as well, to further growth and world wide leadership in there sector. Western companies are looking at deals where millions of monetary units are involved, like with Facebook and Youtube. In the western part of the world the golden era of economic growth is more or less over. This century Asia is going to dominate the economy in the long run. If companies look at socio demographic factors, they will see that in China around 68% of the population are 30 years old, or younger; around 40% are high school graduates and 30% are students. This is an enormous potential market of people who will have money to spend online in the future. At the moment 30% of the Chinese netizens earn below

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500 Yuan, but they are young and their income will grow in the coming years. Companies are trying to be prepared for the future. Companies like Google are present but aren't really dominating the market like they do the European market, as well as the US American market. Since a lot of the WEB 2.0 concepts are based on users, it is interesting for internet companies to get a piece of the Chinese internet cake so they can present future growth potential to there investors, as most of these companies are venture capital funded. The Chinese internet user is very social, in china BBS is very popular and people spend hours on such sites. These concepts are not so popular in the western world, at the moment, but interesting for the whole social media trend which is happening at the moment.

As we can see the market in China is huge and it is really seductive to enter this market as there is still growth in the user base, because the whole Chinese population is around 1.2 billion. But why don't people look to the, similarly huge, Indian market in the same way? In India internet usage is not as widespread and India is more an “underdeveloped” and low income country than China. English is more common as well. In China the internet use is by around 22% of the population, whereas in India it is only 8% which is equal to around 80 million Internet users. Looking at countries like Korea2 , with internet use by around 76% of the population, there is still a large potential for growth in China. With projects like, the Chinese government wanting to have broadband access in every village by 2010, the rate of internet use will definitely grow.3 At around 300 US dollars, things like the MiniPCS are affordable for persons in China and with these tools they will access the global net.

2 http://www.internetworldstats.com/asia.htm 3 http://www.cnn.com/2009/TECH/01/14/china.internet/index.html

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Copy 2 China: the reality of how the Chinese internet market has rules and kicks out the west.

When people from the west think about China they associate copy culture as well. Specifically things like the Shanzhai trend are recognised all over the world. But how is it when it comes to Internet? First lets have a look at one of the big players in the search engine market. Google is more or less the world's leading search engine and also has a Chinese version. But if you look at the market shares of search engines in China, Baidu has the leading position with around 55%, whereas Google has around 21% and Yahoo around 7,2%4. When you compare Google with Baidu it is very interesting that Baidu looks nearly the same as Google.

You see that there is much similarity in their style and in their business model, which is based on the “Adsense” technology. Baidu did not really hide from the public that they are copying the model of Google in China. Google is present on the market as well and started a run to get a piece of the growing cake in 2009. For example, they introduced the free music download search engine,
4 http://www.searchengineoptimizationcompany.ca/seoblog/World%20Wide%20Web/search-engines/worldwidesearch-engine-market-share-part-1/05012009

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which is popular and only reachable if you are in China. With localisations like this, Google is trying to win market shares in China. 5 Further there is a kind of re branding campaign to www.g.cn to become well know in China and gain more on the growing market and to kick the copycat Baidu in the long term.6 Google has had problems with authorities in China as well and funny things happen when people try to reach Google Blogsearch in China. They where redirected to Baidu. This means that Baidu more or less hijacked Googles traffic in China.7 Google confirmed that there have been such issues, the Chinese government, which controls the internet and Baidu itself, never acknowledged this.

There are a lot of other copycats as well, like QQ which is more or less a copycat of ICQ, and Alipay, a copycat of Paypal. All these Chinese internet companies have copied the concepts of successful western stories and turned into market leaders in china. One reason is that sometimes the names of the originals are too difficult to remember for the chines users. Another reason is that western companies forgot to translate to Chinese, a big mistake, or that they had problems with getting business licenses from the Chinese government.

As we can see the most successful online companies have their copycats in China and these copycats are doing very well as market leaders there. It is interesting to see this culture and trend from a European point of view, because these things haven't happened in Europe. There most of the well known online brands from the US are market leaders in the European market as well. One special case is Youtube and China. There are copycats of Youtube like, Youku and Tudou in China. The interesting thing is that the Chinese government totally bans Youtube from time to time and doesn't allow people form china to visit this site. 8 China has a rule where only state run companies

5 6 7 8

http://www.china.org.cn/culture/2008-08/01/content_16113289.htm http://www.searchenginejournal.com/google-china-buys-gcn-domain/5943/ http://www.techcrunch.com/2007/10/18/baidu-hijacking-google-traffic-in-china/ http://news.cnet.com/8301-1023_3-10203146-93.html

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can post videos on the net. It looks like the Great Chinese Firewall is working well for the copycats in the long run, because this gives them the chance to grow under the protection of the Chinese government. 9 A battle between the two Chinese copycats has started over who will get the largest video portal on earth, because they are both growing and fighting for the Chinese market,as well as, in the long run, trying to get shares in other countries. 10 Both are also getting into the mobile streaming video market and recently, on on 17th of May 2009, Youku launched its 3G Portal gaining for a large market share in this sector as well, as China Mobile goes 3G these days.11

As we can see in China there is definitely a copycat of every success story form the west and they are doing very well. This last case concerning the video portal sector in the Chinese market is really interesting, because it is a battle where an international site like Youtube has more or less no chance to win. Bureaucratic restrictions by the Chinese government just kick them out of the market. Once there is a copycat brand for a service that is better known, it is hard for the original to get into the market again, even when the restrictions are removed and an agreement is reached between Google, who owns Youtube and the Chinese government. The reason, for censorship at the moment, is that there have been regime critical videos between the millions that are offered on Youtube .

9 http://news.cnet.com/8301-10784_3-9895796-7.html?tag=mncol;txt 10 http://www.examiner.com/p-12846~Youku_com_Ranks_No_1_in_Chinese_Video_Sharing_Sector.html 11 http://www.xprn.com/pr/09/05/09300211-1.html

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So as we saw before, it is not easy for international founders to get into the Chinese market and win Chinese customers, but what about if you are the market leader and a Chinese copycat is coming up against you?

Ebay the largest online auction house in the world, was doing very well on the Chinese market, in the beginning and had around 80% of the online auction market share in china. Then Jack Ma comes and kicks you out of the market, being the biggest player on the Chinese internet market, with its Alibaba Group. Ebay was doing quit well on the Chinese internet market, but in2003 Jack Ma decided to make its own C2C auction platform under the label Taobao. With a funding of around 45 million US dollars, it won the race in more or less 3 years and finally, in 2006, kicked Ebay totally out of China so that they had to close their office there. 12 We have to ask why this happened and look at the details behind this story, because it shows a lot of things we can learn from the mistakes Ebay made in the past and which are important if you are planing to deal on the Chinese internet market with your internet business.

It looks like Ebay more or less had an image problem to get there concept properly positioned in the Asian market. In Japan Ebay started in early 1999, but it was 5 month later than the market leader Yahoo in cooperation with Softank. Ebay never had the chance to catch up with them and finally quit the market in 2002.

As China has a lot of economic grow it was interesting for Ebay to get into the market in China, after they failed in Japan. In 2003 Ebay entered the market with a takeover of the local online auction brand EachNet for 150 million US dollars and put another 100 Million US dollars into their China business. Ebay was doing well in the beginning, but a few month later Jack Ma opened its
12 http://www.chinaeconomicreview.com/industry-focus/latest-news/article/2006-1219/Ebay_to_close_China_site_and_partner_with_Tom.html

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copycat Taobao and in less than 18 month Taobao became the No1 auction site in mainland China in 2005.

So what happened and when Ebay failed there. When we look at the background, the Ebay model fits very well for the US where everyone has a credit card and where payments could have been made online as well, which is not so common in China. Taobao did not charge anything for the listing of products and lets the buyer and seller get in contact before the contract is closed via their own instant messaging. Another thing was how the site was built, the Ebay site strictly followed there usability model from the west where Taobao used their advantage, as they are familiar with the local market and culture and made a design and usability structure that better fits the Chinese way. Another factor for success was that they have had experience with the Chinese E/Business market through their global success with Alibaba and also that they offered a trusted payment method via Alipay for their customers. In China a lot of things in business and buying and selling are based on trust. Taobao lets people post personal contact possibilities and personal details, which is strictly forbidden under the Ebay online auction rules, but shows openness in the Chinese way, you are standing behind this offer with your name. Further the clientèle at this time was 17% of people under the age of 30 which liked Taobaos style and so it was easy to attract them permanently to this platform. Furthermore some of the shops were buying wholesale at Alibaba's B2B platform and reselling it on Taobao's B2C market. Ebay users have to be verified by their credit card and often there were problems where users can not get the verification via Chinese Ebay.13 That the customer service was totally crap and that people didn't have a chance to get into contact with the sellers to bargain, something deeply ingrained in Chinese culture, also added to the problems for Ebay. Ebay tried to solve these problems by not charging sellers for listing their products when they started recognizing their tremendous user base loss. This made customers in other countries
13 http://www.chinatechnews.com/2007/03/13/5092-credit-card-verification-causes-problems-for-ebay-eachnet-userin-china/

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angry though and finally, as Taobao was gaining leadership and around 80% market share in 18 month of the online auction sector in China, Ebay decide to close down there china business ,as they did a few years before in Japan.

Localisation is important to claim your land from the beginning.

As we have seen most of the big players and inventors where recently coming from the USA and exported their business concept, or services, all over the world. We are in another cycle of funding and growth of internet companies, these should learn a lesson from examples like Ebay, ICQ, or Paypal, which were copied quickly, and be careful taking their steps onto the market. A new trend these days are social networking like Facebook. Facebook itself is the worlds largest social network and its growth rate from 2007 to 2008 was around 100 to 120%. 14 It is still growing dramatically in Europe in 200915 and expanding into the Asian market as well. At the moment it is very interesting to see that Facebook is well developed in Hong Kong and people are using it there as well. Hong Kong tycoon Li Ka-shin invested around 60Million US dollars. In China there are a lot of very successful copycats and Facebook once commented that they will not go into this market,. Instead they may consider buying some of the local copycats later one. 16 One problem was that Facebook did not offer a Chinese version so, for the same reasons, people preferred copycats like Xiaonei. It has also been reported by Facebook users in China that the site is not always available, similarly to Google, or Youtube. Likely the Chinese government cracks down on this site as well. 17 So lets have a look at the Chinese copycat Xianonei, founded in China in 2005 and in 2007 became the largest social network in China . What's very interesting is that Xiaonei is really a more or less a 100% copycat of the design and the layout of Facebook. On the other hand it developed its own features

14 15 16 17

http://www.techcrunch.com/2008/06/12/facebook-no-longer-the-second-largest-social-network/ http://techcrunchies.com/growth-rate-of-facebook-in-europe/ http://www.webwednesday.hk/2007/10/facebookcn.html http://blogs.wsj.com/chinajournal/2008/07/01/facebook-gets-poked-in-china/

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from the start, things like mini games and that the profiles are more or less open and others see who was visiting their profile, something that is not possible on Facebook. Xiaonei did it very well, because they take the international concept and adapt it for the Chinese market. One indicator that it still acts like a copycat is that after Facebook launched its idea of an open application Xiaonei launched this feature as well for their customers a few month later.

I am not totally familiar with law but if something like this would happen in the US or Europe I believe Facebook would sue them in court. The copycat gets 430 million US dollars funding from financial backers, like the Softbank Corporation. This investor also put money into several other Chinese internet copycats, with great success..18 Facts like these make it even harder for the original giant to survive and get a sustainable growth in this market. Looking at actual figures makes it totally clear who is wining the social network race in china at the moment. Xiaonei had around 40 million user at the beginning of May, in China. Facebook just below 500.000 users. So what are the reasons why Facebook is not getting the attention in China that it gets in most other countries. One reason may be the bad translation. Some people complain about the Facebook's “crowed sourced” Chinese translation. Xiaonei itself may look like Facebook, its original source of inspiration, but inside some things are more localised and makes it more suitable for the Chinese market. Similar to some of the other social tools, like the popular BBS forums, in China, Xiaonei is all about you and your gossip, like a local personalised newspaper about you and your friends. Xiaonei was beginning to sell virtual gifts and offer its own virtual currency which can be loaded up by Alipay the most widespread online paying solution in China. Currently Xiaonei also has a competitor, kaixin001.com a social network more focused on online gaming. You see there is also a battle going on in the country itself, like in the video portal sector, which makes it more or lass harder for the international giants to get a step into the market, as well.

18 http://venturebeat.com/2008/04/30/xiaonei-the-facebook-of-china-raises-430m-better-funded-than-facebook/

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We can see that localisation is a big deal when it comes to the Chinese market. The story is repeating again and again; first it happened to Ebay and now it looks like it repeats with Facebook as well, it seems that American companies don't really pay too much attention to local culture,local ways of doing thing and acting in a different culture. This can gives the copycats the advantage and should not be forgotten if you are planing to enter this market with your internet company. Translating the website into another language is not enough to copy a successful strategy from your domestic market.

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Reasons for failures which can be seen based on the cases described

One big mistake western internet giants make is that they localise too little and don't remember the word of mouth effect that spreads services like very quickly. Terms like Facebook aren't easily spoken by people in China, even if they are familiar with English. They prefer Chinese versions. A Chinese study, for example, shows that 9 of 10 people recommend Baidu to other new internet users in China. Another big issue is with the Chinese government; they like to block overseas giants with the Chinese firewall and this gives copycats more chances to grow in the critical phases of emerging technologies. Since all the Chinese copycats need a licence form the government and are more or less censor users from time to time. Even if international sites could be reached, the Chinese government more or less slows down the bandwidth for these sites so that users get frustrated and go back to their local copycats like Youku or Tudou, because they get full support concerning the bandwidth there. All these factors give Chinese copycats the advantage in comparison to the big internet giants from the west.

‘In other words, the Chinese government treats Chinese information and communication technology companies as more ‘politically trustworthy’, which not only forces international companies to adopt local censorship policies, but also fundamentally handicaps them in competition with Chinese homegrown clones in terms of domestic marketing,’ he added.19

19 http://chinadigitaltimes.net/china/facebook/

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Ideas for a strategy to enter the Chinese market. (based on a current project I am working on)

I am around a lot of local start-ups in Austria, because I am the founder of austrianstartups.com, a blogging and consulting company that gives support and reports about start-ups in Austria. I am very interested in the topic of chances on the international market and not only the US market. One of the companies I am consulting is an online music storage company in Austria that still has a Chinese English-speaking user base and has plans to launch a Chinese version as well. One of the first steps in this process was letting the site be translated by Chinese native speakers and letting them be reviewed very often by Chinese local people from my personal community and also talking about things they like and they use and what they don't find so amusing.

We spent a lot of time speaking with Chinese internet users about what they do, how they do it, to understand the internet user base in China better. For example tunesbag.com is using videos form Youtube,which is more or less not available in china, so we have to adapt the integration of Youku there. We have to look for ready viral effects like using QQ as a multiplicator, instead of ICQ, Further we don't include our social feed in Facebook, because in China it is Xiaonei being used. As Tunesbag also has a premium service where payment is offered via Paypal and credit card at the moment, the company has to adapt to offer Alipay payment solution. It looks like the core concept of the service does not need to be changed, but all the interactive element have to be adapted to the local Chinese services to be successful there. It is planed to open a small office from the beginning, with a freelancer, or with a partner that operates in the Chinese market and is a Chinese native speaker and also perfectly speaks English, because we have to offer answers for customer services and also need people who do online marketing in blogs and BBS forums to spread the message about the service. The name of the company might have to be adapted to the Chinese Version as well. We have not defined these points in all details at the moment but as it can be seen there are a

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lot of things you have to think about and in the end it might be more or less a a new product transformed and adapted for the Chinese market and only the heart will be the same as the original version. Tunesbag taked care form the beginning on to have the system more or less open for different languages and different interfaces, so a market entry can be done in less than 6 month. At the moment it is planed to do a closed beta in summer 2009 on the Chinese market, like the company has done before on there domestic markets. This will give a good chance to improve and learn form the local users in china to avoid mistakes.

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Conclusion

As we have seen the Chinese internet market has its own rules and restrictions as a way to deal with international giants who want to enter this market. The internet is more or less controlled by the government and it looks like the Chinese government prefers to support their own IT-companies over foreign ones. It is very important when you are planing to enter the market to be familiar with local ways and Asian culture, because there are other rules when it comes to usability and the way that people do things. I think nowadays as a start-up you should think about your product as also on the Chinese market from the beginning and not, like a few years ago, just think about the English speaking part of the world. It will be interesting to see how in the next two years the development of the Chinese internet is going forward as the Chinese government plans to have broadband access in every village by 2010.and who will actually lead the mobile market that is starting to develop. It will be interesting to see because it could be that the Chinese copycats have more success than the originals on the global market as well. There is a trend of entrepreneurship coming up in China when it comes to WEB2.0. As we live in a global world we are in a global competition as well, and so I would say the fast, smart and clever one will win the race and those who are thinking from the beginning on about a global strategy when they found a company will survive and if they are well prepared and know the rules of the Chinese internet market and adapt some issues, they definitely will have a chance to survive in this country as well and will not get kicked out as easily as the big global net giants have been before by their Chinese copycats.

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Reference List:

! Miniwatts Marketing Group 2009, “Asia Marketing Research, Internet Usage, Population Statistics and Information” viewed 20 May 2009,[online] available at: http://www.internetworldstats.com/asia.htm ! Cable News Network 2009, “ China tops world in Internet users” viewed 19 May 2009, [online] available at: http://www.cnn.com/2009/TECH/01/14/china.internet/index.html ! SEO Internet Marketing Inc 2009, “World Wide search engine marketshare”, viewed 20 May 2009, [online] available at: http://www.searchengineoptimizationcompany.ca/seoblog/World%20Wide%20Web/sear ch-engines/worldwide-search-engine-market-share-part-1/05012009 ! CRI 2008 “Google to compete with Baidu in MP3 search” viewed 19 May 2009, [online] available at: http://www.china.org.cn/culture/2008-08/01/content_16113289.htm ! Loran Baker 2007, “Google China Buys G.cn Domain” viewed 20 May 2009,[online] available at: http://www.searchenginejournal.com/google-china-buys-gcn-domain/5943/ ! Duncan Riley 2007, “Baidu Hijacking Google Traffic In China” viewed 20 May 2009,[online] available at: http://www.techcrunch.com/2007/10/18/baidu-hijackinggoogle-traffic-in-china/ ! Greg Sandoval 2009, “ China bans YouTube” viewed 20 May 2009,[online] available at: http://news.cnet.com/8301-1023_3-10203146-93.html ! Greg Sandoval 2008, “YouTube ban only erodes China's image” viewed 20 May 2009,[online] available at: http://news.cnet.com/8301-10784_3-98957967.html?tag=mncol;txt ! Chu Meng 2007, “Youku.com Ranks No.1 in Chinese Video Sharing Sector” viewed 20 May 2009,[online] available at: http://www.examiner.com/p-

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12846~Youku_com_Ranks_No_1_in_Chinese_Video_Sharing_Sector.html ! PR Newswire Asia 2009, “Youku Anticipates Big Appetite in China for 3G Mobile Video” viewed 21 May 2009,[online] available at: http://www.xprn.com/pr/09/05/093002111.html ! China Economic Review 2006, “Ebay to close China site and partner with Tom” viewed 21 May 2009,[online] available at: http://www.chinaeconomicreview.com/industryfocus/latest-news/article/2006-1219/Ebay_to_close_China_site_and_partner_with_Tom.html ! ChinaTechNews.com 2007, “Credit Card Verification Causes Problems For eBay Eachnet User In China” viewed 21 May 2009,[online] available at: http://www.chinatechnews.com/2007/03/13/5092-credit-card-verification-causesproblems-for-ebay-eachnet-user-in-china/ ! Michael Arrington 2008, “Facebook No Longer The Second Largest Social Network” viewed 21 May 2009,[online] available at: http://www.techcrunch.com/2008/06/12/facebook-no-longer-the-second-largest-socialnetwork/ ! TechCrunchies 2009, “Growth Rate of Facebook in Europe” viewed 23 May 2009,[online] available at: http://techcrunchies.com/growth-rate-of-facebook-in-europe/ ! Palava Digital Limited 2007, “Facebook.cn” viewed 23 May 2009,[online] available at: http://www.webwednesday.hk/2007/10/facebookcn.html ! Loretta Chao 2008, “Facebook Gets Poked in China” viewed 23 May 2009,[online] available at: http://blogs.wsj.com/chinajournal/2008/07/01/facebook-gets-poked-inchina/ ! Matt Marshall 2008, “Xiaonei, the Facebook of China, raises $430M — better funded than Facebook” viewed 23 May 2009,[online] available at:

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http://venturebeat.com/2008/04/30/xiaonei-the-facebook-of-china-raises-430m-betterfunded-than-facebook/ ! China Digital Times 2009, “Welcome to China’s Parallel Cyber Universe” viewed 23 May 2009,[online] available at: http://chinadigitaltimes.net/2009/04/welcome-to-chinas-parallelcyber-universe/

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