Chortals Reinvented
By Eric Ransdell, Thu May 22 12:45:00 GMT 2003

Thanks to mobile data, China's Internet portals are actually making money. How did they do it?


Not many CEOs of Internet portals are contemplating Mount Everest expeditions these days. Brought down from their once lofty heights by collapsing share prices and declining ad revenues, the last thing most Web portal execs need now is a reminder that life is all about the struggle to survive. But not Dr. Charles Zhang, an experienced mountaineer whose day job is CEO of the Chinese Internet portal Sohu.com. Zhang is part of a 12-member team that is climbing Everest to commemorate the 50th anniversary of the first ascent of the world's highest peak. When Zhang reaches the 8,848-meter summit, he will become the first person in history to send an MMS and SMS message from the top of the world. It's a publicity stunt, to be sure; one designed to launch Sohu's new MMS service. But it speaks volumes about how China's Web portals have reinvented themselves as high-flying mobile data service providers.

For Sohu.com and China's other two leading Internet portals - Sina.com and NetEase - it's been a long and difficult climb back to the top. Founded during dot.com boom of the late-1990s, the three Chinese portals, or "Chortals", saw their stock prices take off into the stratosphere and then come crashing back to earth. Last year, with their share prices in the $0.75 to $3.00 life-support range, many Hong Kong-based analysts who cover the three NASDAQ-listed companies were told by their bosses not to bother. But those were the dark days before China's portals discovered how to transform their free Web users into paying mobile data consumers.

Today the Chortals are enjoying a revival most dot.coms can only dream about. NetEase, whose stock price rose from $0.75 to $11.45 last year, distinguished itself as the biggest gainer for 2002 on the NASDAQ exchange. As of May 14 of this year, its stock price had risen to $26.98 thanks largely to its mobile data services, which accounted for a whopping 48 percent of revenue. For Sina.com and Sohu.com the story is the same. In the first quarter of 2002, Sohu.com's mobile data revenues, for example, amounted to only $900,000 out of total revenues of $4.5 million. For that same quarter in 2003, mobile data earned Sohu.com an unprecedented $8.7 million out of $14.4 million in total revenues.

The Evolution of a Revolution

How did the Chortals do it while Internet portals around the globe are struggling to make the wireless transition? To answer that question we must go back to the Sydney Summer Olympics of 2000. That was the first trial run of mobile data services by the mainland's largest wireless operator, China Mobile, who invited established Internet players and up-and-coming mobile service providers to participate on the content side.

Sohu.com's experience was typical of the three portals. After signing up for the SMS trial it launched a service whereby subscribers would receive a message every time a Chinese athlete won a medal. Thanks to China's stellar 56-medal performance, Sohu.com made $18,000 in revenues in the first two weeks. Though it was a paltry amount, it represented the first time the company had ever been paid for its content. "Our CEO didn't stop talking about mobile data after that," says Caroline Straathof, Sohu.com's director of investor relations and communications. "He kept saying, 'This is such a big thing for China and it's going to be a big thing for us.'"

Once China Mobile launched Monternet, its wireless data platform and billing system that gives content providers 85 percent of every transaction they generate, the Chortals rushed headlong into the fray. But they soon found it almost impossible to differentiate themselves when their every product - from ringtone and logo downloads to "push" horoscope and weather services - was being offered by every player in the space.

"We felt it was too competitive, it wasn't scalable and it wasn't going fast enough, so we began thinking about what else we could offer," says Sohu.com's Straathof. "Meanwhile we were finding that direct (person-to-person) short messaging was growing the fastest. So that led to our decision to develop products our users could use among themselves to contact each other."

Which is exactly what Sohu.com's 50 million users were already doing in its chat rooms and online meeting spaces. Nine months ago the company launched a wireless dating and friendship club that has proven to be a huge hit. To join, users type in their mobile number and the charges are added to their phone bill. Sohu.com adds value by keeping the process confidential - members never have to reveal their names or phone numbers - and thereby retains control of the business. Today, subscription-based services like its friendship or alumni club (which has 30 million online members) account for two-thirds of Sohu.com's mobile data revenues.

NetEase and Sina.com have had similar success leveraging their huge user bases into subscription-based services for wireless chat, news and other services that already represent their core competencies as Web portals. And China's two mobile operators take care of the billing.

The Next Peak and a Potential Valley

Wireless games have yet to become major revenue earners, but with GPRS already operating in China, it's clear the Chortals are looking to gaming as the next frontier. In January of this year, for example, Sina.com acquired a Guangzhou-based MSP called Xinlong whose history-based game set during China's Three Kingdoms era had attracted 2 million paying customers. The $20.8 million deal represented one of the first acquisitions of a wireless game company by a Chortal. "I think a lot of people saw this as proof that there's money in mobile data," says Craig Watts, an analyst with Norson Telecom in Beijing.

But trouble could be on the horizon. "It's clear that the portals are driving the growth of Monternet and the mobile data industry in China," says Cheryl Chong, founder of the Shanghai-based MSP eDong City. "And I think the operators are starting to see them as a threat."

"The worry," adds Norson's Watts, "is that they might become more powerful than the operators, who own the pipes while the Chortals own the customers."

What's protecting the Chortals is that with two highly competitive national operators - China Mobile and China Unicom - neither can afford not to have them on their networks. That could change as GPRS develops in China. There are already rumors that the operators may launch their own self-branded portals along the lines of NTT DoCoMo's iMode. But for now, China's once-moribund portals continue to enjoy the view from the top.

Eric Ransdell is the former Silicon Valley Bureau Chief for US News and World Report magazine. Now living in Shanghai, he covers mobile technology in Asia.