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China's Internet Companies Roar Back to Life - Thanks to Mobile Phones

China's Internet Companies Roar Back to Life - Thanks to Mobile Phones

After years of losses, China's three biggest Internet portals are making a sharp turnaround, posting their first profits and turning into a rare bright spot on the slumping NASDAQ stock market. Investors can thank China's love affair with the mobile phone.

The services still have to contend with China's low incomes and slow adoption of online commerce. But the turning point came when China Mobile, the country's largest mobile-phone company, introduced a system last year called micropayment, which lets portals share in revenues for wireless Internet access. Now Inc., Inc., and Inc. can charge users who visit their Web sites via SMS. The portals get about 20¢ (1.5 Yuan) each time a mobile user downloads information or games.

"These guys are getting fat off the crumbs off China Mobile's table," says Steven Schwankert, an industry expert in Beijing. And analysts say that unlike Western markets, which are considered saturated, China still has plenty of room for more fast growth. China had 200 million mobile phone subscribers by the end of December 2002, and the number is rising by 4 million a month, the government says. China Mobile says users sent 80 billion SMS messages in 2002, up from 15.9 billion in 2001.

NetEase became the first to turn around losses, eking out a $4,600 profit for the three months that ended in June. Sohu said it made a $112,000 profit for the three months ending in September - its first under U.S. accounting standards. Sina says it expects to report a profit for the year.

Investors have responded by driving up the stock prices of the Chinese dot-coms. NetEase was the tech-laden NASDAQ's biggest gainer last year as its share price skyrocketed 1,661.5% to $11.45 - far from its nadir of 69¢ in October 2001. Sohu was the NASDAQ's fifth-biggest gainer, soaring 433.3% to $6.40 a share. It had traded as low as 87¢ in April 2002. Sina leapt from a low of $1.40 in April 2002 to $8.43 by the middle of January 2003.

China's Internet startups listed on NASDAQ in mid-2000 at the height of the Internet boom, raised a huge pile of cash. But all saw their share prices plummet as losses mounted. At one point, NetEase was threatened with removal from NASDAQ after it missed financial reporting deadlines. Hu Xiaodong, manager of a Chinese investment fund, said he started to notice the turnaround last year, about the time China made its debut appearance in the soccer World Cup in South Korea. Soccer fans piled into sports sites to follow the team.

"There was a big jump in revenues, but it gained momentum and continued to climb after that," says Daniel Mao, chief executive at

Transmission speeds have been rising, from below 9.6Kbps in the summer to as high as 30Kbps by November. Mao says that's because the amount of data is necessarily smaller than that which would be received by a PC; Web surfing is fast enough to be "bearable."

Moreover, the importance of wireless access has been growing for many, following a safety crackdown on Internet cafes that has left many with less access to computers. Chinese authorities have closed more than 3,300 cybercafes this year for failing to meet fire codes or lacking required licenses.

Hoping to build on their success with online gaming and text messaging, the companies are exploring new options, such as online dating services and stock trading. "SMS is still growing and there's no indication it will slow down," says Nathan Midler, an analyst with International Data Corp. in Beijing. "But the companies are all looking for ways to branch out beyond SMS," he adds.

Users of China Mobile cellphones can now opt for subscription services, via one of the big Web sites that, for example, will select 15 top news items to transmit daily. They can also download pictures of celebrities, cartoons like "Dilbert," or an assortment of icons, including "Hello Kitty" and "Miffy."

Mao says such services are now bringing in about $3 million per quarter. One of Sina's more popular ringtones features the calls of rare bird species. "Users are crazy for those things," he adds.

More Stories By Elaine Kurtenbach

Elaine Kurtenbach is a business writer with the Associated Press, and is based in Hong Kong.

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