Culturecom: China’s Answer To Microsoft?

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Culturecom: China’s Answer To Microsoft?

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Microsoft says it is prospering in China. It recently announced that in the second half of 1999 sales increased by

Michael Rawding, regional director for the greater China region, said that sales of Windows 2000 are going particularly well. That
may change in October, however, with the release of Chinese 2000.

Chinese 2000 – being developed by Culturecom Holdings Ltd in conjunction with China’s Academy of Sciences (CAS) – is an
operating system designed specifically for the China market.

According to Sassoon Securities of Hong Kong, Chinese 2000 draws from a database of over 80,000 Chinese characters and
enables users to select a character in 2.5 keystrokes, on average.

The mainland China version of Microsoft Windows, in contrast, has a database of only 13,000 characters to draw from. It is
slower to work with because users have to select characters using pinyin, effectively typing out the sound of the character using
the romanized alphabet – taking approximately 4-6 keystrokes per character, on average.

Whether this is enough of a competitive advantage for Chinese 2000 to eat into the Windows market share in China is an open
question. But China’s Academy of Sciences seems to feel it merits serious attention.

It entered into a 65:35 joint venture (Culturecom:CAS) in August of 1999 to develop the Chinese 2000 operating system. While
Culturecom has provided US$27 mln in funding and around ten software engineers for the project, CAS has supplied facilities in
Beijing and more than 100 software engineers of their own, according to Gary Liu of Sassoon Securities, in a report obtained by

CAS has been trying to develop a Chinese operating system for the past fifteen years. Worried that Microsoft and/or the U.S.
government may have built secret "backdoors" into the Windows OS, Beijing has been vigorously supporting efforts to come up
with a homegrown platform.

Chinese 2000 is not the only OS under development, however. CAS is also behind Red Flag Linux, a Chinese version of Linux,
the open source code OS. (Other participants in this project include the Peking University Founder Group and Compaq Computer

But if CAS bets on Chinese 2000, this could result in immense profits for Culturecom. Making the OS China’s national standard
should, at the very least, result in millions of RMB worth of sales to official government bodies.

This is hardly a fait accompli. CAS won’t even consider giving the software "national standard" status until final testing is
complete – sometime in the third quarter of this year.

Gary Liu is bullish, however. "Buy Culturecom, mainly for its Chinese 2000 OS ambitions," he says in his report.

If you’re up to it, Culturecom’s Hong Kong ticker number is 0343. According to the Sassoon report, "it hopes to float Chinese
2000 [separately] either on Hong Kong’s Growth Enterprise Market or Nasdaq by 1Q2002."

Culturecom, The Company

Culturecom Holdings Ltd was not always a software development firm. In fact, until recently it was primarily involved in print
media, particularly newspapers and comic books. The company also made safes and furniture.

In the late 1990s, as a result of prodding from new shareholders, Culturecom started to change its focus. It began selling off its
money-losing publications: Huanan Jingji Journal and Fresh Weekly Magazine in 1996, TV Weekly in 1997 and Young
Generation Magazine and S Magazine in 1998.

The company disposed of Ying Kee Safes and Furniture Ltd in August of that year and sold off the publishing operations of Tin
Tin Daily News in 1999.

Although it has gotten out of newspaper publishing in a big way, Culturecom has held on to its comic book publishing arm, and
for good reason: it makes a healthy profit. The firm sells 2.5 mln copies a month in Hong Kong.

At HK$3 (US 39¢) in profit per copy, that translates into almost a million US Dollars a month from comic books alone. And that’s
just in Hong Kong.

The company is, of course, looking to market its wares in China. In September of last year Culturecom hooked up with China’s
Ministry of Culture to publish, print and sell comics in 8 cities.

According to the Sassoon report, "sales from comics [in China] can be expected to increase from HK$6 mln (US$772,000) a
month to HK$10 mln (US$1.29 mln) a month in 12 months."

Ecommerce: CultureKid i-shops

Comics are, of course, primarily sold to children. Taking advantage of its presence in this market sector, Culturecom is launching
a series of ecommerce stores that wed the Internet to brick-and-mortar retail outlets.

In December of last year the company launched its first CultureKid i-shop, a store that sells goods advertised and marketed over
the Internet. While the kids will see and find out about the products from the website, they have to physically go to the store to
buy the goods. (No transactions are completed online.)

The company plans to open 200 shops in Hong Kong and, eventually, 1,000 in China. To keep costs low, Culturecom plans to
set up 95% of these outlets as franchises.

Qcode and Q9

To round out its new focus, the firm is also involved in the development of a Chinese character input system. It has a 30% stake
in Qcode Technology, the developer of the Q9 software.

According to Sassoon Securities, the software is a simplified Chinese character input system based on the use of 9 numeric

"The system is being developed for application in set-top boxes, cash register hardware and portable electronic devices like
mobile phones and the PalmPilot." In fact, 3Com’s Palm Pilot unit has reportedly signed a deal to use the Q9 software.

Qcode "will receive a HK$50 (US$6.50) royalty fee for every Chinese version Palm Pilot to be manufactured," the report says.
Culturecom plans to float Qcode Technology in 2001.

Potential competitors include Zi Corp and Microsoft Windows CE.

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