E-BUSINESS SPECIAL REPORT
The Mushrooming Chinese Internet Market

When it comes to the Internet, China is no longer undiscovered country. Three Chinese portals are trouncing their U.S. rivals in the region, and investors are taking notice.

However, although Sina Corp., Sohu.com and NetEase.com are beating U.S. rivals Yahoo (Nasdaq: YHOO), AOL Time Warner and Microsoft (Nasdaq: MSFT) now, they were not always on top. Earlier this year, in fact, the portals were relatively unknown in the United States -- until their stocks began to climb.

Are the new Chinese portal kings likely to retain their position, or will a narrow revenue base hamstring them in the long run?

Rise of NetEase

Like many U.S. Internet companies, the Chinese portals did not spring fully formed into action to provide Internet technology in the country. Rather, each one has a history that is rife with mergers.

Olive Wang, a spokesperson for NetEase, told the E-Commerce Times that the company was incorporated in the Cayman Islands in 1999. "Before that, the company's predecessor was Guangzhou NetEase Computer Systems, which was incorporated in Guangzhou in July of 1997," she said.

NetEase describes itself as an online media and entertainment company and says it pioneered development of applications, services and other technologies for the Internet in China.

That may sound like a bold claim, but the company has more than 127 million registered users and boasts 320 million pageviews daily. Although it is currently in a quiet period before announcing earnings, Wang suggested that observers stay tuned.

Sina Stays Strong

Another of the portals, Sina Corp., was born from the merger of two companies, SRS International and SINANET.com. SRS started as a Chinese language input software company in 1993, whereas SINANET.com was founded in 1995 as a Chinese news site operating in the United States.

When the Internet began to catch on in China, the two companies decided to join forces. "We were surprised by how rapidly the Internet and mobile data markets in China have taken off," Hurst Lin, co-founder and COO of Sina, told the E-Commerce Times.

Sina's revenue has doubled each year, Hurst noted. That kind of growth has made U.S. investor interest less surprising than the Internet's sudden emergence in China.

"China has been receiving an enormous amount of attention from the rest of the world as the only robust major economy in the world," he explained, "so being in China ... gives Sina additional visibility."

In This Corner, Sohu

Meanwhile, Sohu.com was founded in 1996 by one of China's Internet pioneers and is holding its own against Sina and NetEase. In a recent earnings release, company CEO Charles Zhang boasted that the portal had emerged unscathed through tough times.

"All our business lines grew at a rapid pace," he said. "[This underscores] how our diversified business model fared well even under unpredictable circumstances created by SARS."

The company posted better than expected results in the second quarter, with 216 percent revenue growth.

Despite a steady rise, however, the company is not above executing spectacular stunts to stay on top -- literally. In May, it sent a team of employees and the company president to the top of Mount Everest. The event was broadcast live on China Central Television and drew a sizable audience to the site's news center.

Investor Focus

The success of these portals may have been unexpected, but it remains to be seen whether they can sustain their growth. Unlike some U.S. competitors, the Chinese portals are more limited in their strategy.

"It's mostly SMS (short message service) revenue, from revenue share with the mobile carriers," said Andrew Chetham, an analyst in Gartner's (NYSE: IT) Hong Kong office.

He noted that NetEase was on the verge of Nasdaq delisting just a few months ago, until a deal with China Mobile changed its fortunes. NetEase now receives the bulk of the revenue for every SMS message delivered through its portal. Sohu and Sina have similar arrangements.

Exchanging messages via cell phones and handheld devices is a common practice in China, Chetham added, noting that most people cycle through a mix of news, games, horoscopes and "quasi-porn" material, all preselected on the portals and then downloaded for viewing.

Mobile Future

Since SMS is staggeringly popular in China, it may not be a problem for the portals that revenue comes almost solely from the mobile realm.

"The portals have seen an opening, and they should get credit for that," Chetham said.

However, even as they bask in the glow of investor interest, the companies must contend with difficulties that go beyond a narrow revenue model and the threat from U.S. portals.

"Government regulations, disregard for intellectual properties and increased competition are all barriers," Sina's Lin said. "Only the largest players will have the wherewithal to meet these challenges."

It remains to be seen if the companies can move from their small revenue base of just months ago into the big leagues of high profit.

"Anything that seems to work in China is jumped on by investors," Chetham noted, "especially if it mixes the words 'mobile' and 'China' with 'content' and 'profit.' Those are four pretty magic words."