In early September, leading China portal Sina.com revealed it got nailed again for breaking state-owned China Mobile's rules – in this case, overstepping contract provisions with its toll-free wireless telephone service. Like most providers, Sina delivers wireless services via CM's nationwide network. China Mobile Communication Corp cited Nasdaq-listed Sina for distributing "inappropriate content" (which some have labeled porn) and for increasing , without authorization, the number of dialing numbers it made available to customers on its integrated voice response (IVR) service. Investors responded to the news by immediately knocking 5% off Sina's share price September 8.
With the latest sanctions, China Mobile, according to Sina, will now delay approval of any Sina applications for new IVR services for three months and will suspend approvals of any new products and services the portal has planned for its advanced multimedia service (MMS) for a whole six months.
Not wanting to stand in the dock alone, Sina pointed out that 27 wireless providers had been charged with various offences – up from a count of 22 a couple of months ago.
China Mobile, the Mainland's big mobile provider, offers basic mobile services, and Internet service providers devote great sums of money and resources cooking up a vast array of "value-added" wireless services to sell via CM's network. Some services are simple – for instance, if you're all thumbs when it comes to text messaging, you can use a Sohu window and type messages on a PC the old fashioned way to communicate with more dexterous mobile subscribers. But some services offer data-rich features such as passing photo and video messages between mobile subscribers.
Without China Mobile's national network, the value-added providers are sunk. Sina had to briefly withdraw special email services during the summer when CM last cited the company for disseminating "inappropriate" content.
Sohu.com was especially hard hit in August when it was served with a 12-month suspension starting September 1 for sending out spam email. The shock of the suspension sent its Nasdaq share price down 20% at one point before it recovered half of that by the close of trading the same day.
Coming on top of Beijing's crackdown on porn sites (a summer sweep closed down 700), it looked like the central government was using a new tack, in this case rising above the server technics and monitoring activity, and simply sending unequivocal signals to investors in China's top portals via China Mobile's suspension announcements.
The suspensions were bad enough, without bothering investors about it. Wireless is supposed to be on the cusp of being all the rage.
That was supposed to be a welcome change from seeing wireless income growth stall for months as portals waited for phone subscribers to migrate up from 2G phones to 2.5G phones, which can handle significantly more data faster, accommodating an array of new services.
For many, these services now have to stay on hold. Hong Kong-based chinadotcom corporation, the first of Greater China's portals to go for a Nasdaq listing, revealed its Go2joy site was cited for various infractions.
Part of chinadotcom's mobile services arm, Go2Joy was called on the carpet for charging inactive users in Shanxi province and, in Hunan province, for migrating users to a CM competitor's short message service platform "without positive confirmation of the users or approval from [China Mobile]." The telecom further found that the company had been sending what parent chinadotcom described as "inappropriately worded SMS promotional messages" and that Go2Joy "had inadvertently continued to charge some cancelled accounts for SMS services."
Inadvertent was chinadotcom's word for it. Indeed, it has been the word of the hour, Sohu blaming a dysfunctional server for inadvertently letting that expensive spam out to users – the trigger that led to China Mobile suspending Sohu as a photo message supplier for a full 12 months, an eternity in the fast-changing Internet sector.
In a conference call, Chairman and CEO Charles Zhang blamed technical errors for triggering the spam message to 1,374 customers in Sichuan – back in June. He said the error was magnified because it happened just when China Mobile was clamping down on shady marketing practices on messaging networks. "It is just unfortunate that these things happen when China Mobile is in the midst of a clean-up campaign."
Zhang made it sound like Sohu was an accidental catch, not one of the bigger fish China Mobile was trolling for in its sweep. "There has been an overall crackdown by MII [the Ministry of Information Industry] and China Mobile across the wireless value-added service provider segment, hitting a variety of service providers," a well-placed industry source told China Economic Review.
"But they made a special case of hitting the big ones, so that they can take credit for it internally for 'facing the problem squarely'. Accordingly, he said, Sohu got hit for MMS, Sina got hit for IVR and Chinadotcom got hit for SMS. "They just want to ensure that they can sanction one major player for each of the wireless categories."
On balance, he said, the penalty for Sohu's Sichuan spam was harsh compared to the light suspension Sina.com originally got for letting porn out on its IVR service, "which is arguably more serious." The IVR sanction for Sina has been well known for a while now, but there was another notice by China Mobile a few days ago, the source said, indicating that Sina had just been cited again.
Sohu's Zhang conceded there was little hope in appealing the decision because contractual agreements were ironclad. Sohu had apparently informed China Mobile officials in Sichuan of the spam after it went out but didn't think it warranted telling top management. "It was an oversight on our part," Sohu CFO Carol Yu told a press briefing. She said third-quarter revenue could, as a result, fall below estimates (around US$27 million) by as much as US$1.8 million, and US$1.3 million or so in projected profit would be wiped away by the suspension – and reduced messaging charge rates, recently imposed by China Mobile.
Sohu has seen better summers. Its photo messaging service was earmarked for fast-track growth and now it is off the menu, while business in that area goes to competing portals.
Go2joy has to do a number of things before it can resume SMS services, including setting up a system allowing China Mobile to keep better tabs on activity. For its various offences, CM suspended approval of Go2joy's application to operate on new platforms until the end of this year and suspended approval of Go2joy's application to offer new SMS and IVR products and services on all existing platforms until the end of June, 2005. It also fined Go2Joy US$160,000. CM did not rule out lifting sanctions earlier if Go2Joy got on CM's page quickly.
Peter Bullock, a Hong Kong partner of UK law firm Masons, once voiced the view that while China was doing its best to control information disseminated on the web, its capacity to do so was reaching its limit as information kept multiplying. Asked if China Mobile was being used as a proxy enforcer of Beijing's rules, Bullock told China Economic Review he didn't think so, because the sanctions did not look like a clampdown on free access to information, but simply China Mobile enforcing contractual terms it had with service resellers of SMS, MMS and IVR. "Admittedly, with the increasing convergence of Internet, mobile and wireless services, the distinction will blur. But in the current instance I understand that the main complaints were that these resellers were, among other things, spamming users with SMS and charging them for service when they had used none."
But he said that there are good investment reasons for Beijing to lighten up.
"Western telecoms investors may be less likely to invest in China if they consider that the government will step in to enforce an oppressive information policy, effectively pulling the economic rug out from under their feet."