China Internet Firms Seek New Sources of Revenue

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., Sohu.com , NetEase.com 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 double-billing.


INCONSISTENT BILLS


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.


FROM DARLINGS TO DOGS


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 2005.





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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