By Jonah Greenberg
(Virtual China News, May 30) China's two most heavily capitalized portal Web sites are moving ahead in fierce competition, spurred on by last week's passage of a landmark trade bill that permanently normalized trade relations (PNTR) between China and the U.S.
The Hong Kong-based Internet company Chinadotcom (ticker: CHINA) said it will invest US$250 million in cash and equity into its mainland China portal network. The company's CEO, Peter Yip, made the announcement a day after the PNTR bill passed last Wednesday.
"PNTR and the WTO provide us a better environment to be able to justify these large sums of investment," said Andrew Miller, Chinadotcom's vice president of sales and marketing in the U.S. The company will invest in improving the content on its portal network, which includes China.com, Taiwan.com, and HongKong.com. They will acquire other Web sites in China and increase editorial staff, Miller said.
The Sina Playbook
Sina.com (ticker: SINA), Chinadotcom's main competitor in China's Web portal market, answered back that it will likely accelerate development of its editorial services after PNTR's passage, and that it plans to spend around $100 million on its Web site.
Hurst Lin, U.S. general manager of Sina.com, said that its spending plans had been announced long before the PNTR bill was passed, and that in any case, Chinadotcom was largely playing catch-up with Sina with its plans to improve editorial content.
Sina.com as the right to make the claim -- its editorial content has made it the most frequently visited Web site in China, according to official Chinese government statistics, while China.com is number eight.
"They're taking a page from our playbook," Lin said. "They feel our editorial team has its fingers on the pulse of what the users want to know."
While Sina's two biggest competitors, Netease and Sohu.com, offer standard news content, Netease is largely known for its email and community services, while Sohu emphasizes its search engine as its main feature.
Sina.com largely won over its readers by providing quality news content, Lin said. Even now, its most sought-after type of content is news.
Chinadotcom plans to establish a training center in mainland China where the company will cultivate its own corporate reserve of "human capital," including a large number of skilled programmers and Web developers, Miller said.
Training and Education
"The money goes quickly," Miller said. The Pan-Asian Internet company will invest in technology, server and distribution technology, people, training and education, and acquiring companies.
"The prospect of the Internet sector in China is very huge, so I'm not surprised to see foreign investors investing in that area," said Richard Gao, portfolio manager of the US$7 million Matthews Dragon Century China Fund.
Gao's fund does not own Chinadotcom stock, but has invested in AsiaInfo (ticker: ASIA), a systems integrator and software company in China.
Sina sold four million shares at $17 during its NASDAQ debut, raising US$68 million. The float provides the company with much-needed financial leverage in competing with heavily-capitalized competitors like Chinadotcom, whose market capitalization is nearly US$2 billion.
Pace to Quicken
Passage of the trade bill will raise the stakes in the struggle to win the largest audience in China, said Lin. A competitor of Sina.com's, Lycos Asia, Monday launched their mainland China portal. Lycos Asia is a joint venture between Lycos Inc. (ticker: LCOS) and Singapore Telecom.
"It accelerates our need to move quicker," Lin said of the PNTR vote. "There will be more businesses coming our way. A lot of Fortune 500 businesses were sitting on the sidelines because they weren't sure if China was the place to make investments. You're going to see more moves and more product introductions -- more partnerships, alliances, and mergers. You're going to see the pace quicken."
Shares of multinational equipment vendors with ties to China's telecommunications and Internet sector saw a boost in their share price Wednesday. Swedish wireless giant Nokia (ticker: NOK) and Canada's Nortel Networks (ticker: NT) both went up $2, and Silicon Valley-based Cisco Systems (ticker: CSCO) rose $4 on the news.
Stock Climbed Slowly
Listed China-focused Internet companies, however, saw a lackluster reaction to the otherwise positive marketplace news, with both Sina.com and Chinadotcom losing ground last week. Many traders bought shares of China Internet companies ahead of the House vote, planning to sell on the news, Gao said.
"I'm not surprised to see that correction, because many investors were already expecting the passage of PNTR," he said.
Chinadotcom shares, which fell to as low as 6 1/8 last April, when many NASDAQ Internet stocks, climbed slowly this month, reaching 30 last Thursday, one day after the trade bill passed in the House.
Sina.com shares dropped last week from 50 Monday to 33 1/4 Friday.
Dramatic losses on the NASDAQ exchange over the last two months showed withering investor confidence in "content plays," or Internet companies that mainly seek to attract users by offering news, entertainment, or other multimedia information.
Internet and Telecom
For China-focused portals this skeptical trend was compounded by expectations that the Chinese government will crack down on Web content, blocking Web sites which do not conform to official censorship standards.
Few analysts expect concerns about content regulation to affect the stock value of companies like Chinadotcom and Sina.com.
"With China entering the WTO, the regulation issue, which is the most important issue right now, will become less of an issue," Gao said.
"In the short term I think we'll see the government stick to regulation of content, but they will gradually realize that it's too difficult and will put less and less control in that area," Gao said. "They can control one or two Web sites, but they just cannot control every Chinese Web site on the Internet."
"The Internet and telecom sectors in China are very distinct," said Joe Ngai, chief executive officer of Delirium, a pan-Asian e-business consulting and solutions company with offices in Beijing, Hong Kong, Taiwan, Korea, and New York. "Investors might be more enthusiastic about the telecoms sector than the Internet sector, where there still seem to be uncertainties about regulations."
Two Trends
The Chinese government is expected to issue new policies affecting e-commerce and content on the Internet, as well as regulations for ownership structure and requirements for foreign listing efforts, over the next few months.
While Sina.com separated its overseas parent company from its mainland China-based portal company in order to list on the NASDAQ exchange, these kinds of convoluted ownership structures are not ideal for investor security.
"We wouldn't be investing US$250 million into an uncertain regulatory environment," Andrew Miller of Chinadotcom said. "We will increasingly invest larger amounts for what we would expect will bring larger returns."
Miller is not overly concerned that Beijing may attempt to impose more regulation of Internet content. The more dominant trend, he says, is that the Chinese government -- as well as consumers -- have wholeheartedly taken to the Internet.
"In the big picture, the discussion of content on a day-to-day basis is like little blips on the radar screen," Miller said. "The important story is that China is embracing the Internet, and that China has moved extraordinarily fast to take advantage of it. What is going on in China is nothing short of revolutionary."
Chinadotcom retains 500 employees in 12 different offices in China, with a total of 1600 employees and 25 offices throughout Asia.
To reach Jonah Greenberg email: jgreenberg@virtualchina.com
