Draq, via Flickr (Creative Commons license) A Chinese Internet cafe: Who's really making money here?

With 136 million users, China is the second largest Internet nation after the U.S. But as the figures for 2006 come in, it is obvious that the problem of the first Internet bubble has not changed: online, China is attracting more eyeballs than hard currency.

Yesterday I attended the New Year's Party of Tudou in Shanghai, China's largest video-sharing site. They were celebrating passing the threshold of 10 million downloads per day. To increase its market share, Tudou loses money. In fact, they pass most of the few bucks they earn from ads on to their users. Although Tudou is the market leader in China, it only has a meager ten percent of the market -- a frighteningly low figure.

More "successful" is the Chinese auction site Taobao, which is effectively pushing Ebay out of the Chinese market by offering its services for free. But in the process they're bleeding huge amounts of capital.

According to the Internet Society of China, in 2006 Chinese Internet users spent about 275 billion RMB ($35 billion USD) -- up almost 50 percent compared to 2005. That's a very rosy view.

On average those Internet users spend 170 RMB per month -- but my cheapest ADSL connection costs already 120 RMB per month. So most of that money goes to telecom operators. That leaves 50 RMB -- just six U.S. dollars -- to spend on online shopping, gaming and other expenditures. That might be not enough to pay back all the capital currently being sacrificed to gain market share.