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While other industries struggled through the world's financial turmoil, China's Internet industry advanced at a strong pace in 2009, maintaining a years-long trend by posting as much as 40 percent revenue growth. Total direct income may have reached 70 billion yuan.

Reports from large, listed companies suggested Internet profit margins were as high as 40 percent. And if all goes well, total income should easily reach the 100 billion yuan mark in 2010 – even without preferential policies, state-owned asset transfers, bank loans or support from domestic capital markets.

This amazing prosperity, however, cannot conceal a mounting crisis for the Internet in China. It's a crisis that seemed to climax in 2009 but, in fact, will only deepen in 2010.

The industry's revenue structure is marked by strange distribution patterns. Online game industry revenues exceeded 30 billion yuan in 2009. But revenues from online advertising were only 20 billion yuan, and Internet commerce and services income totaled less than 20 billion yuan. So unlike the Internet industry in developed countries, or in any other Chinese business sector, China's Internet industry revenue structure is freakish, unstable and unsustainable.

The reason is simple: Areas into which the Internet industry can and should be moving are chock-full of longstanding vested interests, especially those of the state-owned monopoly variety. Internet entrepreneurs trying to gain a foothold in these areas are subject to overt or covert resistance, often under a banner of morality, social values, national stability or public safety. They may be attacked and punished. The heavy handedness, artless technique, shallow reasoning, disrespect of human rights, and brazen acts of interest groups are all reminiscent of another time: It's as if we've returned to the days of the Cultural Revolution.

But anti-competitive acts violate China's effort to build an information society and market mechanisms. Some 2009 events as well as ongoing activities have been unprecedented in the decade since China connected to the Internet. Worth noting are the Green Dam debacle, the World of Warcraft incident, Web site blocking, wireless WAP site cut-offs, and putting popular sites such as Facebook and Twitter behind a regulatory firewall.

Domestic and industrial environments encourage these trends. In recent years, the state has advanced at the expense of the private sphere in industries on high growth trajectories, such as minerals, real estate and new energy. Now, the Internet industry is in the bull's eye. Areas lauded as waves of the future, such as animation and logistics Web sites, are dominated by government-backed businesses. As a result, taxpayer money is being squandered and bookkeeping muddled while executives inflate their performances.

From its birth, the Internet industry has been a child of hard work, venture capital and overseas equity. Some local governments have decided to protect a few Internet companies that made names for themselves, and the central government's Ministry of Industry and Information Technology has largely adhered to fair management principles. But overall, the industry has been treated as an oddity that must be dealt with from outside the system. No matter how some Internet entrepreneurs promote their images, and no matter how they leverage their personal connections, eventually they find themselves swimming naked in the deep end.

But in addition to the domestic environment's impact, rottenness inside the industry deserves some blame for the crisis. Whirlwind development led to stories of overnight riches, which in turn attracted a significant number of unqualified entrepreneurs with questionable motives. The industry now looks at innovation as risky, while copycats seek instant success with online games, cheap content and plagiarism. They exploit regulatory loopholes or do business in the economy's gray zone.

What's needed is fair and impartial rule of law to promote healthy development for the industry. Regulation is also needed to protect the legitimate rights and interests of hundreds of millions of Internet users.

Overreacting to trouble spots and ignoring the forest for the trees eliminates some offenders but usually hurts legitimate operators. Criminals transfer illicit cash through banks and television advertisers promote fake products, but we don't close banks or shut down television to prevent criminal activity. Yet what would never happen in the real world is happening in the virtual world through forced closures and shutdowns, violating the legitimate rights and interests of Internet companies and users. If the bad guys are using a public platform, they should be punished and loopholes closed. But the good guys should not be hurt in the process.

Unless balance returns, the crisis will worsen. Two hard-hit disaster areas have been online games and videos. In 2010, the disaster could spread to online payment, interactive and information services.
 
For years, online games were spared the obstructions imposed by monopolies, vested interests and rent-seekers. As a result, the field was a gold mine. But the sector's enormous growth attracted all sorts of financial players, good and bad. It also triggered high-profile interference by rule makers, rule interpreters and various regulators. The powerful joined the gold rush, and the industry suffered.

Now, a worst-case scenario is that online game operating costs will skyrocket, profit growth will fall, the market will shrivel, and innovation will die. Remaining would be only major forces to run the industry, such as institutions. The whole scene could begin to mirror the limited entertainment landscape that saw the Eight Model Plays dominate during the Cultural Revolution.

But these dangers should not be difficult to correct. Worse would be silence in the face of danger. I would guess more than 90 percent of those working in the industry are unaware of the problems. Nor do they care. But they should. It's true that the industry is affected by an uncontrollable environment, but the industry must shoulder some responsibility as well.

Many Internet entrepreneurs think they're clever. At the same time, they bury their heads in the sand, thinking they can survive by focusing on piracy, crass content and good relations with government officials. But no matter how deeply they bury their heads or dip into bank accounts for "public relations" and kickbacks, they will be watched – and watched closely -- because there is money to be made.

E-commerce, wireless platforms and e-books should be bright spots in 2010 that help the Internet industry break the 100 billion yuan mark. A more pessimistic estimate, however, is that industry revenues will hover around 80 billion yuan as online gaming revenue slows and video services crash.

A key variable is the overall environment. Fortunately, China has been opening its economy for more than 30 years, and history is unlikely to reverse itself. I prefer to remain optimistic. The turmoil will continue, but that won't change the climate. The Internet industry is a bit chilly now and is shivering in crisis mode. But it will continue its tenacious, although painful, development.