The dispute with US Internet giant AOL three years ago seemed to be an overwhelming blow to Tencent Technology (Shenzhen) Ltd.

The Chinese company had to change the name of its instant messaging (IM) service tool OICQ to QQ due to accusations of intellectual property rights infringement on AOL's famous software ICQ.

However, this move turned out to be a blessing in disguise for the Chinese firm.

The new name, which sounds like the English word cute, is much easier for Chinese youth to pronounce and has gotten rid of the association with ICQ. The number of its users rose from 50 million in January 2001 to 280 million by the end of March.

QQ's success also got the attention of other Internet companies, which began to enter the online chat market from the second half of last year.

The strong attraction of IM tools will add more users to Internet companies and lead to increases in their revenues.

The Shenzhen-based Tencent made US$36 million in revenues from April to September last year on profits of US$21 million.

It was the biggest service provider for China Mobile, the leading Chinese wireless operator, and the third-largest earner in terms of online advertising revenues, only after Sina and Sohu.com Inc.

The reason is simple: Tencent's QQ has more than 280 million registered users.

Pleased with their 10-fold increase in stock prices on the NASDAQ in 2002 and 2003, Netease.com Inc, Sina Corp and Sohu.com Inc, the three major Chinese Internet portals needed a new boost to their business and Tencent's success gave them the imperative to explore a new area.

The three companies all launched trials of their instant messaging tools. Netease has already started to charge users 6 yuan (72 US cents) per month.

While the Internet consumer services sector already has a mature business model, short message service (SMS) and online advertising for corporate use have also become red hot.

Alibaba.com, which claims to be the largest business-to-business e-commerce company in China, also released its instant messaging tool AliTalk with the aim of getting customers to transact on its website.

Tencent, which released Tencent RTX (real time exchange), a corporate product, is determined to make it another of its core businesses after SMS and online advertising.

Bill Zhan, general manager of Tencent's corporate business department, said his company will spend 100 million yuan (US$12 million) in the next three years to tap the market potential.

"It is predicted that the corporate IM market will overtake the consumer market in 2007 in the United States and we believe the situation will be similar here," said Zhan.

He said his company already has about 90,000 registered enterprises in China, including the Chinese operations of Coca-Cola and Japanese conglomerate Omron, Chinese electronics company TCL and carmaker Chery.

A copy of the standard version of Tencent RTX targeting mainly small- and medium-sized enterprises costs between 490 yuan (US$59) and 1,925 yuan (US$232), while a collaborative copy for large companies costs between 1,620 yuan (US$195) and 66,420 yuan (US$8,000).

Zhan added that although most Tencent RTX users are currently using free trial copies, he is confident that Tencent will surely recover the 100 million yuan (US$12 million) investment into the product sooner or later.

The company also formed an alliance with Beijing-based enterprise software firm UFSoft to bundle Tencent RTX with UFSoft's software.

At the same time, Tencent will release classical Chinese and English versions of the software soon, in an attempt to win over the subsidiaries of companies from Taiwan and foreign countries on the mainland, as well as in overseas markets.

According to Zhan, Tencent now has about 60 people developing enterprise solutions.

The report from market research companies also supports the Internet companies' enthusiasm.

"IM has become a new territory with endless attractions after online advertising, SMS, and online games and is a new battlefield for Internet companies and telecom operators," said Afa Zeng, an analyst with Shanghai-based Internet market consulting company iResearch Co Ltd.

According to iResearch's report on the Chinese IM market based on a survey of more than 10,000 Chinese Internet users, the peak number of simultaneous IM users in China reached 5.5 million last year, compared with 590 million worldwide.

It will grow by 35 percent this year to 7.4 million and exceed 12 million in 2006.

Despite this feverish expansion from Internet companies, the IM business faces many challenges.

The low income level caused by frequent users who pay a set fee has prevented the business from growing into something as successful as other Internet businesses such as online advertising or online games.

According to a report on China's IM market conducted by Shanghai iResearch Ltd, students and ordinary employees account for one-third of the total IM population.

At the same time, more than 60 percent of IM users make less than 1,500 yuan (US$181) a month.

"Plenty of leisure time and price-sensitivity are two major characteristics of frequent IM users, so it is easy to see why students and ordinary employees are more interested in IM communication than other people, but it is also an obstacle for the IM business to grow into an industry like online games," said Afa Zeng with iResearch.

While it is hard to say how big the market is, the IM software market worldwide will grow from US$6.8 million in 2003 to US$25.7 million in 2007, although the number of IM accounts will more than double from 590 million to 1.44 billion, according to US research firm Radicati.

Another challenge for Chinese IM operators is the attitude of telecom carriers and international giants like Microsoft and Yahoo!.

China Online, a broadband Internet portal invested in by the country's second-largest fixed line telecom operator China Netcom and US-based International Data Group (IDG), launched its own IM service IMU in cooperation with Beijing-based Zhongsou Online Software Co Ltd in February.

IMU will be compatible with other IM tools in the market and aims to become the second QQ in China, according to Chen Pei, chief executive officer of Zhongsou Online.

China Telecom, the biggest fixed line operator, was also said to be testing its own IM software and planning a debut later this year.

Since telecom operators have bandwidth and network advantages and Internet companies sometimes rely on telecom operators to charge their users through phone bills, the entry of companies like China Telecom and China Netcom will place pressure on Internet companies.

On the other hand, moves made by Microsoft's MSN Messenger and Yahoo! Messenger may also have a significant impact on domestic IM operators.

The US giant Yahoo! also beefed up efforts in the business, which was marginalized in the past years due to advances from competitor Microsoft's MSN Messenger and Tencent.

Yahoo! China, which is managed by a native of China Zhou Hongyi, adopted a Chinese-style marketing campaign from April to July and offered its users to send free messages to mobile phone users, which usually cost 0.10 yuan (1 US cent) per message, a popular way of communicating among Chinese youth.

Microsoft's MSN Messenger in China already has the second-largest user population with an 11 percent penetration rate, between Tencent's 74 percent and Netease's 4 percent. MSN Messenger users are mostly white-collar workers, which may provide a more valuable customer base from a business perspective than Tencent's student-dominated user population.

Considering Microsoft's dominance with Internet Explorer and its huge capital, any real move by the US giant may bring overwhelming pressure to its Chinese competitors when the market will be large enough to attract the company.

(China Daily April 7, 2004)