Yahoo! Inc.'s China Web site warns users they're not allowed to post content that "divulges state secrets, subverts the government or undermines national unity." Yahoo's India site has no such prohibition.
Undeterred by China's restrictions, Yahoo, owner of the world's most-visited Web portal, last week paid $1 billion for a 40 percent stake in China's biggest online commerce firm, Alibaba.com.
Yahoo invested $120 million in a Chinese search engine in 2003. In 2004, it started an auction site in China, where total online revenue hit $1.1 billion.
India, an English-speaking democracy that allows freer flow of information, had online revenue of just $93 million.
"It does seem ironic that India, with its democratic government and free press, is so far behind China in developing its Internet market," says David Wolf, managing director of Wolf Group Asia, a Beijing-based regional consulting firm.
"The simple reason is that China has the infrastructure and India doesn't," he said.
The number of Web users in China has expanded sevenfold in eight years to 94 million. India has about 24 million Internet users, even though its population of 1.1 billion is close to China's 1.3 billion. Yahoo employs 600 people in China, 10 times as many as in India.
The Chinese government has paved the way for Internet growth by investing $138 billion in telecommunications networks in the past five years, even as it bans online content on topics from democracy to the Falun Gong spiritual movement.
'Giant market'
China's online revenue - which includes sales from advertising and from Internet gaming and wireless services - grew 35 percent last year to $1.1 billion and will rise 30 percent in 2005, according to MindShare, the media-buying unit of London-based WPP Group PLC.
"Content restrictions haven't stopped us from investing in technology and adding resources," says John Marcom, 47, senior vice president of the international unit of Sunnyvale, Calif.-based Yahoo. "China is a giant market that's growing quickly. There's a lot more demand that can be satisfied."
By contrast, India - home to international software companies such as Wipro Ltd. and Infosys Technologies Ltd. - generated about $93 million in online revenue last year, MindShare estimates.
India's Internet users number about 24 million - about a quarter of the 94 million Web surfers in China, according to the Mumbai-based Internet and Online Association and figures from the China Internet Network Information Center, a Chinese government agency.
India's lower incomes and a shortage of phone lines explain the gap.
China had 667 million active fixed- and mobile-phone lines at the end of 2004, according to China's Ministry of Information Industry - about one for every 1.9 people. India has about one for every 11 people, Telecom Regulatory Authority of India figures show.
China's per-capita gross national income was $1,290 last year, according to statistics from the World Bank in Washington. In India, it was $620.
To tap China's market, online companies such as Microsoft Corp.'s Microsoft Networks say they're willing to abide by censorship laws.
"In any country, we have to work with and be bound by the rules and regulations that the government determines," says Sharon Baylay, general manager for Asia outside Japan at MSN, the Internet unit of the world's biggest software maker. "Our expectation is business is going to be profitable."
MSN formed a venture with government-owned Shanghai Alliance Investment Ltd. in May to start MSN China, its first portal in the nation.
Baylay, who works at Microsoft's Redmond, Wash., headquarters, declined to say how much MSN invested.
'Prohibited language'
The company's MSN Spaces Web log service - which lets users post online diaries and articles known as blogs - sends the following Chinese-language error message when users type Chinese words such as freedom or democracy in entry titles: "You must enter a title for your space. The title must not contain prohibited language, such as profanity. Please type a different title."
Censorship isn't stopping venture-capital investors from favoring China's online market over India's.
SAIF Partners Ltd., a Hong Kong-based private equity firm, has about 70 percent of its Softbank Asia Infrastructure Fund invested in China and 15 percent in India, says Andrew Yan, managing partner at SAIF Partners. Tokyo-based Softbank Corp. and Cisco Systems Inc. invested in the $404 million fund.
Venture-capital firms made $177 million in Internet-related investments in China in 2003 and 2004, four times more than the $44 million India attracted, according to Asian Venture Capital Journal, a Hong Kong-based trade publication.
"China has a critical mass that is driving Internet interest," says Duane Kuang, Hong Kong-based director of strategic investments for Intel Capital China, an Intel Corp. venture-capital unit.
BlogChina.com, the operator of a Beijing-based blog service, has increased its number of registered users to 2 million from 300,000 in the past two years, says Chairman Fang Xingdong. The company, which says it is China's biggest Web log service, received startup capital from Softbank Asia Infrastructure Fund.
"Internet regulations aren't hurting our business," says Fang, 36. Of BlogChina's 210 employees, about 10 work full time monitoring postings for compliance with censorship laws, he says.
'Discount factor'
China's Internet regulations are designed to restrict "unhealthy" and "illegal" Web content, said an official at the State Council, the nation's Cabinet, declining to be identified.
Wang Lijian, a spokesman for the Ministry of Information Industry, declined to comment on enforcement of Internet rules.
Internet censorship in China does have a commercial cost, says Anne Stevenson-Yang, Beijing-based managing director of the U.S. Information Technology Office, which represents five American technology trade associations.
"Censorship puts all information businesses at risk," says Stevenson-Yang, 46. "That risk, translated into commercial terms, represents a discount factor."
Sina Corp., the Nasdaq-listed operator of China's most popular Internet search engine, paid a price for falling afoul of regulators earlier this year. Sina's share price slid 11 percent on Feb. 8 after the company said a Chinese government ban on horoscope and fortune-telling advertising would cut sales.
The State Administration of Radio, Film and Television said in a Jan. 24 notice that advertisements for services, including fortune-telling and numerology, were prohibited. Government Internet regulations published in 1997 ban "feudalistic" and "superstitious" content, according to a copy of the rules posted on the Ministry of Public Security's Web site.
The world's biggest Internet companies are enduring censorship to expand in China.
Yahoo entered the market in November 2003 when it bought Hong Kong-based 3721 Network Software Co. for $120 million. The company controls China's No. 3 Internet search engine, behind Beijing-based Baidu.com Inc. and Google Inc., according to Analysys International Ltd., a Beijing-based market researcher.
'Lay the cable'
Last year, Yahoo invested an undisclosed amount in a controlling stake in 1pai.com.cn, an online auctioneer that competes with market leader Taobao.com and EBay Inc.'s China site, EachNet.
Yahoo said in December it would offer subscribers in China its first-ever service combining mail and instant messaging.
India, where Yahoo operates India's No. 1 Web portal with 60 employees, lacks the basic building blocks needed to match China's online market, says Neville Taraporewala, Yahoo's country manager for India.
"India still needs to put in the telephone wires and lay the cable," says Taraporewala, 41. "At the end of the day, it's an infrastructure business."
Google, owner of the world's most-used Internet search engine, is stepping up its presence in China.
Google has operated a Chinese-language search engine from overseas since 2000, spokeswoman Debbie Frost says. In India, the company runs a search engine in English and five local languages.
China's 'Net police'
"We are clearly at an early stage," Frost says, adding that Google hasn't yet hired full-time employees for its China unit. "We're still learning how to operate in such a complex market."
China regulates Internet traffic through at least 12 government and Communist Party agencies.
Regulating agencies include the Ministry of Information Industry, the Central Propaganda Department and the State Secrets Bureau, according to a study published in April by OpenNet Initiative, a group of Harvard University, University of Toronto and University of Cambridge academics who track Internet censorship.
"Censorship comprises multiple levels of legal regulation and technical control," says Jonathan Zittrain, a Harvard University law professor and co-author of the study. "It starts at the cybercafe and proceeds up the backbone."
Government Internet regulations prohibit users from "inciting to overthrow the government or the socialist system," "harming national unification," "destroying the order of society," "promoting feudal superstitions" and "injuring the reputation of state organs," among other offenses, according to the Ministry of Public Security's Web site.
Chinese police have Internet enforcement departments in more than 700 cities and provinces to help enforce censorship laws, says Xiao Qiang, director of the China Internet Project at the University of California, Berkeley.
"China's Net police not only monitor Web sites, they also have software to detect subversive key words in e-mails and downloads, and they can trace messages back to computers from which they were sent," Xiao says.
Local governments also send undercover propaganda squads into Internet chat rooms to guide discussions, according to an April 28 article in Southern Weekend, a state-run newspaper in the southern city of Guangzhou.
The municipal government of Suqian City in eastern China's Jiangsu province employs 26 Internet commentators, and similar teams operate in Beijing and other cities, the paper said.
Companies such as Microsoft are undeterred.
"China is a very sophisticated online market, considering it's a quite a young business," says MSN's Baylay. "We have huge expectations of what China is going to deliver."
