TELECOM Digest OnLine - Sorted: China Internet Firms Seek New Sources of Revenue

China Internet Firms Seek New Sources of Revenue

Lisa Minter (
Mon, 29 Nov 2004 10:39:12 EST

HONG KONG (Reuters) - China Internet media firms, which struck gold
with mobile phone messaging services last year, are scrambling to
diversify after a government clampdown on sex-related material and a
billing overhaul.

Some have found new lucrative veins in online games, advertising and
search services as the companies seek to protect their revenues
against clampdowns and reforms by Beijing.

Although the shift is being greeted with guarded enthusiasm by
investors, analysts warn that the government could also interfere with
their new ventures.

"If you want high growth, you go for wireless," said UBS analyst Eric
Wen, referring to more advanced phone features including multi-media
messages. "But then you have some big brothers watching you, and they
can hit you very fast. If you want to go elsewhere, maybe you can have
more stable growth, but your growth rate will not be all that high."

The industry's major players, including Sina Corp., , Inc., Tom Online and Linktone Ltd., have all suffered as a
result of the clampdown on messaging -- a business iResearch estimates
will top $480 million in revenues this year.

Beijing initiated its campaign late last year against billing abuses
by companies, including signing up customers who hadn't requested the
service, imposing charges for phantom messages and overcharging or


In China, phone companies keep a commission for each text message sent
over a mobile phone, relaying most of the revenue back to the Internet
providers. The billing records of the phone companies were not always
consistent with those of the Internet companies, according to the
government, and it stepped in to impose a standardized billing system.

The government also stepped up the campaign over the summer by
sanctioning some companies for pornographic and junk mail messages.

Sohu, which earned 45 percent of total first quarter revenues from
short messaging services (SMS), saw that contract to 18 percent of
third-quarter revenues, said Senior Director Caroline Straathof.

The company, which was sanctioned in August for sending spam over its
multimedia messaging services (MMS), has shifted its strategy to focus
not only on mobile services, but also online games, search services
and advertising.

"We are right in the middle of being sanctioned in one business line,
and though there are many challenges we need to deal with there, the
other business lines are doing just great," Straathof said.


Messaging services for mobile phones had helped Sohu and its peers
become Wall Street darlings in 2003 as they cashed in on China's SMS
boom to turn in their first annual profits.

After languishing for the two previous years, Sohu's shares shot up
over 360 percent in 2003, only to drop over 40 percent this year. They
have come back a bit since August as investors get more visibility on
the situation and diversification efforts.

At the beginning of 2004, about 60 percent of revenue for China media
companies came from SMS-related services, including news, jokes and
games, according to a UBS report.

The investment house welcomed the recent diversification drive, saying
many of the newer services should see 50 percent growth or better in

Companies said diversifying their revenue streams is an effective
hedge against future clampdowns but added they can never factor out
the risk of government action against their newer business lines.

Online games have already attracted regulators' attention, with
authorities closing thousands of Internet cafes and state-run media
making frequent criticism of some game content.

"There's always the risk factor because investors are worried about
how the Chinese will regulate," said Elaine Feng, executive vice
president at Tom Online, whose SMS revenues held steady at $14.7
million from the first to the third quarters but accounted for
shrinking percentage of total revenues.

"For a listed company, what you have to do is make sure your
operations and content are in line with the regulators, and that's all
I think you can do."

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