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Feature: Web mergers show trends in market

Chen Jen-ran, right, Yam Digital Technology Co chief executive officer, speaks at a press conference questioning whether Yahoo-Kimo Inc's acquisition of Wretch Co is moving the Internet advertising industry toward monopoly. Jan Hung-tze, center, chairman of PC Home Online, and Morse Chen, chairman of Webs-tv.net, look on. PHOTO: WANG PEI-HUA, TAIPEI TIMES

In recent years, mergers and acquisitions (M&As) in the Internet industry have become frequent and high-profile affairs, with "Web 2.0" service providers being the most-watched targets of the trend. Yahoo's purchase of photo-sharing site Flickr in March 2005 and Google's buyout of the popular video sharing site YouTube in October last year have created a huge media buzz.

The M&A binge has finally reached Taiwan, as last month's heavily-covered acquisition of the nation's largest photo-sharing and blog service portal Wretch Co (無名小站) by Yahoo-Kimo Inc (雅虎奇摩), the nation's largest Internet portal illustrates.

According to a survey conducted in November of last year by the online market research firm InsightXplorer Ltd (創市際), Yahoo-Kimo leads the market with the number of web pages viewed at 63 percent, followed by Wretch, which provided 17 percent. PC Home ranked third by providing 8.1 percent of pages, while Webs-tv.net and Yam offered a combined 3.2 percent of pages, according to the poll.

According to Chou Wen-ching (周文卿), an analyst at the Market Intelligence Center (MIC, 市場情報中心), the combined successes of Yahoo-Kimo and Wretch are actually beneficial to each other from a business point of view.

Internet traffic is the most important indicator of success for commercial Web sites, which is why Yahoo-Kimo is expanding its variety of services with features such as auctions, shopping, community, stock quotes and news -- all of which increase traffic.

Chou points out that while Wretch can bring more users and advertisements to Yahoo-Kimo, Yahoo-Kimo's strong research and marketing teams are able to create a business model for Wretch to remain competitive in the swiftly changing business.

With online users providing content, Web 2.0 sites are now being considered the saviors of the Internet industry, which had a serious meltdown in the fall of 2001.

But the problem, according to Chou, is that many of these Web 2.0-concept sites have relied largely on advertisement revenues or subscription fees as their major income instead of creating profits that are consistent with their high traffic.

Moreover, since many founders of Web 2.0 sites are mostly young creative types instead of astute business people, many of these sites as businesses may be short-lived without sufficient funding and a meticulous operation model.

As a result, many young Web entrepreneurs chose to sell their companies to industry giants for a quick buck before they are dethroned by the large number of startups that spring to life everyday. Chou points out that Wretch is a good example of how to further explore the business potential of a site by managing human resources, maneuvering finance and advancing technology, while waiting to decide on whether or not to create an independent operation.

A potential traffic boom for Yahoo-Kimo has local competitors worried, prompting three Internet heavyweights to hold a press gathering on Jan. 23 with a joint statement that voiced their concerns over possible industry monopoly by Yahoo-Kimo.

In the statement, the three Taiwanese giants Webs-tv.net (網絡數碼) chairman Morse Chen (陳銘堯), Yam Digital Technology Co (蕃薯藤數位科技) chief executive officer Chen Jen-ran (陳正然) and PC Home Online (網路家庭) chairman Jan Hung-tze (詹宏志) questioned if the deal would render Yahoo-Kimo a more dominant power in online advertising and thus hamper diversification in the market.

They called on the government's market watchdog to evaluate whether the combination of Yahoo-Kimo and Wretch -- expected to secure 80 percent market share of Internet traffic in Taiwan -- would violate fair competition principles.

Yahoo-Kimo applied to the Fair Trade Commission for the acquisition at the end of last year, but the commission found more information was needed to carry out the review, commission spokeswoman Chou Ya-shu (周雅淑) said on Feb. 16. The commission has not yet received the information required.

The commission has consulted online operators, the Ministry of Economic Affairs and the government-funded Institute for Information Industry (資策會) about the planned deal, she said.

Chou added that despite Yahoo-Kimo and Wretch providing different types of services, the commission needs to determine the effect of the marriage from the perspective of both horizontal and vertical competition in the industry.

Chou said if the combination leads to restriction in competition or impedes new operators from entering the market, it would violate the Fair Trade Act (公平交易法) and the commission would have to veto it.

In another press conference on Jan. 23, Rose Tsou (鄒開蓮), managing director of Yahoo-Kimo, responded to lawmaker's concerns over rival Internet portals by saying that Internet users tend to have more influence than Internet portal operators when it comes to possible market shakeup.

Besides, she said, "The Internet is not a zero-sum market."

Commenting on her rival's concerns about the online advertising market, Tsou said that instead of opposing the planned buy, portals should jointly expand the whole market with creative advertising that will help advertisers market on the Internet more effectively.

Ironically, while pointing the finger at Yahoo-Kimo's aggressive expansion, both Webs-tv.net and PC Home themselves have been trying to expand their territories by forming strategic alliances with other firms or acquiring companies.

For example, Webs-tv.net, Taiwan's largest online multimedia service provider in the past year, has become an aggressive buyer acquiring Yam and another online portal Sina.com's (新浪網) Taiwan unit, as well as Blockbuster Inc's Taiwan subsidiary.

And PC Home, in addition to boasting the largest online shopping site in Taiwan, now provides Internet telephone services through a partnership with Skype Technologies SA. To challenge Yahoo-Kimo's dominance in the online auction market, PC Home formed a joint-venture auction site with US auction giant eBay last September.

But their worry is not groundless. Yahoo-Kimo, which also runs the largest auction site in Taiwan, enraged users in September of last year when it began to charge sellers a transaction handling fee -- 3 percent of the closing price -- on top of a listing fee of NT$3 per item.

Even though the Fair Trade Commission later ruled that no laws were violated, the new pricing scheme was damaging to Yahoo-Kimo's corporate image.

After taking over Wretch, Yahoo-Kimo will probably have more chips to bargain with while negotiating with advertisers, not the ability to damage the diversity of the industry.

The main force that pushes the fast popularity of Web 2.0 companies is user-determined content, which fully demonstrates market mechanisms. In other words, companies that run Web 2.0 businesses who intend to control content or go against what users want will soon say farewell to their Internet investments.

After all, as Time Magazine's choice for person of the year shows -- "you" are in control of the technological age.
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