IT Services Vendor Takes China Internet Quirks in Stride

A fledgling Shanghai company aims to tap rising demand for back-end IT services in China, where red tape and other woes can make it complex to operate in the country's booming Internet industry.

China claims more Internet users than the U.S. has people, but its Internet companies face a host of challenges unique to the country. Parts of China's Web infrastructure remain poorly connected, and regulators can punish companies if users upload pornography or other sensitive content to their Web sites.

But another key challenge is that the Internet's fast growth has boosted the need for workers with experience managing back-end servers, while those skills remain scarce, said Steve Mushero, cofounder of ChinaNetCloud. Mushero used to work as CTO for Tudou, a Chinese YouTube rival.

"There are a lot of complications that you just don't see in the rest of the world," Mushero said. "There's a huge shortage of trained and experienced professionals, and things are fast."

ChinaNetCloud manages back-end servers and cloud infrastructure for customers. The company will operate a customer's private servers or provide it with servers running virtualization software, like Amazon.com does with its cloud service, that ChinaNetCloud then manages for the customer. The company, which was founded in 2008, has grown to nearly 40 employees and could reach 100 by the end of the year, Mushero said.

China says 384 million people in the country used the Internet in the second half of last year. Broadband penetration is high and many Internet users are young, so industries like social networking and online gaming have soared in the country. Examples of big Chinese Internet companies include search engine Baidu.com and portal Tencent, which rakes in revenue from selling virtual goods like clothing and pets to players of its online games.

Many of ChinaNetCloud's customers are online gaming companies, partly because they often need to find more servers quickly if a popular new game starts reeling in many users, Mushero said. A company in such a situation can scale up quickly by starting to use servers from a cloud, which ChinaNetCloud can provide, he said. The company also serves enterprise customers.

The growth of Internet companies is helping fuel China's IT services market. That market is set to grow by at least 20 percent each year for the next few years, said Jens Butler, a principal analyst at Ovum. Incentives from the Chinese government such as tax breaks and investment in technology parks are also boosting the sector, Butler said.

Internet companies face more practical challenges in China than they might in a developed market like the U.S. One challenge is that China's major communication networks are not well connected, including the two networks that separately cover the northern and southern parts of the country, Mushero said.

China also keeps a separate student network that covers university campuses. An Internet company needs servers on each network to offer services to its users, Mushero said. It also needs specially placed servers to offer services via the country's mobile networks, he said. China's three big mobile carriers are all state-owned and have autonomous branches in each province, further complicating business with them.

Links can be purchased between China's separate networks. But companies that, for instance, want to reach both northern and southern China must have separate IP (Internet Protocol) addresses on the two regional networks, which also raises new needs in the domain name system (DNS), Mushero said. The DNS is what directs Internet users to a Web site's correct IP address when they type in a domain name like idg.com.

Networks are much more strongly linked in the U.S., Mushero said.

"Here it's more fragmented, so it's more difficult," he said. "You can't just serve the whole country from one place."

For Web sites that offer user-generated sections, government regulation is another challenge in China. Chinese authorities expect companies to keep their Web sites free of certain sensitive content. The owner of a blog site, for instance, could be punished for failing to erase pornographic pictures posted by a user or comments on sensitive political issues like the 1989 pro-democracy protests in Beijing's Tiananmen Square.

Global IT service providers like IBM and Hewlett-Packard compete in China alongside smaller local vendors. ChinaNetCloud partly competes with those vendors, but its virtualization services are somewhat unique in China, said Tina Tang, a principal analyst at Gartner. Virtualization is not yet common there, despite being widely discussed, she said.

One of the biggest hurdles for China's IT services industry "is the level of red tape that still exists and is unlikely to disappear in the near future," according to an Ovum report.

ChinaNetCloud has received several hundred thousand dollars in funding, Mushero said. It could become profitable anytime but is currently investing in growth instead, he said.

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