Slapped by regulators last year, portals' prospects seem bright as online merchants spend more on advertising to catch e-shoppers. Players leaning heavily on one crutch, like short messages or games, face uncertain times.
Shanda, which grew wealthy from online games played by thousands simultaneously, saw the writing on the wall. More competitors, and parents and teachers taking a dim view of youths whiling away hours in dingy, smoky Internet cafes heralded watchdog action. Regulators pull the plug on hundreds of Internet cafes at a time in regular blitzes.
Shanda spent US$91.7m for a controlling 29% stake, subsequently rising to 38%, of Korean rival Actoz last November. It is looking to tie up with Microsoft's Xbox console. But growth lies in advertising, searching, multimedia messaging and online shopping. So China's top online gamer took aim at China's largest portal. Sina, owned by legions of small shareholders, was in no mood for playing games.
As Shanda's stake rose, Sina's board held up a 'poison pill', broker slang for issuing heavily discounted new shares to existing shareholders once a rebuffed suitor's stake exceeds a certain size. Shanda's stake is now stuck at 19.5%, leaving marriage plans in Multimedia messaging is the new game Photocome limbo. Other portals are tougher nuts, with Sohu 25% owned by Charles Zhang and Netease in William Ding's hands.
Last year portals, whose business spans the Internet economy, received hefty fines and temporary suspensions for charging consumers for undelivered messages or unordered premium services. Providing content or services too risqu? by watchdogs also drew wrath.
Such action seems overly particular, given easy access to pornographic movies costing a few yuan on any street-corner. But regulators are starting to regard the Internet with the same wary eye they watch over a mass medium like television. Indeed, distinctions between the two could one day disappear.
For many firms dependent on wireless value-added services, the beatings were worse. Their outlook is cloudy because the networks are now forcing transactions through their own premium messaging billing gates to stop phony billing. They will probably cut access for services providers, from around 3,000 now to a few dozen trusted vendors, at most, like leaders Kong Zhong, Hurray and Linktone.
The networks' slice of premium messaging fees is rising from 15% to anywhere between 35-50%, typical of other countries. For portals with fingers in many fast-growing pies' this is no big deal. For players with most of their fingers in one pie, there may be just crumbs left. That makes meeting new capital requirements laid down by regulators harder to execute.
Local and foreign portals and messagers are circling, looking to snap up those with long customer lists. Buying short message service (SMS) provider Crillion noticeably boosted Sina's revenues. Stone Group, which helped Sina get its portal going in 1998, is reportedly among those shopping for messaging firms. For others their only prospect, a difficult one, is producing irresistible video, music, picture and game downloads.
Such multimedia message services (MMS) will really take off after June, when cheaper, more capable phones are widely available, especially network-branded handsets designed for encouraging MMS downloads. Such developments may push the market's value past US$7bn this year, against just over US$4bn last year. A big jump, but still slower than ads and search.
Consumers are more likely to buy online, thanks to larger phone screens and easier Internet browsing, making a repeat of the 2001-2004 SMS boom unlikely. Broadband 3G, perhaps starting in 2007, raises questions about messagings' prospects. However, many customers will likely stick with trusty 2G phones, just as they have in 3G Hong Kong or the UK.
Ad revenue lift-off
Meanwhile portal advertising revenue is taking off. Sohu's ad revenue rose 89% to US$55.7m in 2004, while Sina's was up 59%, reaching US$65.4m. Big e-commerce players like eBay, Amazon's Joyo, and Alibaba's Taobao are spending heavily to tell shoppers about good deals online.
With Sohu and Taobao joining hands, and Sina teaming with Yahoo for 1pai, Netease, Tom and Tencent should pick-up much of eBay's advertising spending, a cool US$100m this year reckons Paul Waide, an analyst with PacificEpoch in Shanghai.
Search revenues, from ads and sponsored links, are also rising fast. Portals are in on the action, as is Google and China's number one search engine Baidu, which plans a stock-listing later this year. "Online advertising we forecast will grow 30-40% annually for the next few years, searching will see growth of 50%," says Jim Sun, an Internet analyst at Evolution Securities in Shanghai.
Online shopping is still in its infancy, like electronic payments systems. Waide reckons profits will only start rolling come 2007. Indelibly planting themselves in consumers' minds takes time, changing habits from shops to clicks even longer. Many likely e-shoppers are still spending parents' money playing online games. As the Internet generation graduates from colleges to jobs, shopping online will seem natural though, thinks Sun.
Smoother payment for online deals should boost the market. Now relatively few Chinese wield credit or debit cards – though the latter are spreading fast – hampering everything from buying books to air tickets and hotel rooms. But change is coming: in March, Visa signed a five-year deal with China's largest travel portal e-Long. And messager Linktone just spun out its Smartpay mobile payment platform. "Mobile payments will take off this year; it's a huge business linking mobile accounts to bank accounts," says Waide.
Alibaba's Zhi Fu Bao payment platform, used by 310,000 online retailers, tied up with Industrial and Commercial Bank of China in March. Payments through Zhi Fu Bao via Taobao now regularly hit RMB3.5m (US$0. 42m) daily.
Small change today, but with ubiquitous broadband, 3G looming large on the horizon and fast-rising incomes, China's online economy will be delivering big, big money in the not-too-distant future, creating Chinese pretenders to the crowns held by the likes of Amazon and eBay today.