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A Portal To China - AOL Time Warner joint venture with Legend Holdings - Company Business and Marketing

Industry Standard, The, June 25, 2001 by Joanne Lee-Young

AOL TIME WARNER'S JOINT VENTURE WITH CHINA'S TOP COMPUTER MAKER MEANS BIG TROUBLE FOR THE COUNTRY'S LITTLE INTERNET PORTALS.

AOL Time Warner CEO Gerald Levin arrived in Beijing last week like a global pontiff ready to spread his largesse amid China's underachieving Internet market.

AOL Time Warner's hefty new joint venture with China's top computer manufacturer, Legend Holdings, will see both companies invest $100 million to develop interactive services for a market that already boasts some 22 million users. The deal promises to bring some maturity to Internet businesses in the People's Republic. It should also convince China's main domestic portals, Netease, Sina and Sohu, that they'll need some big brothers of their own if they're going to survive.

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For months, industry observers have argued that consolidation is the only path for these upstarts. Born out of an international investment boom that pumped billions of dollars into China's Net industry, these same companies now find themselves battling over a paltry online advertising market that many analysts, including Nicholas Spratt of Lehman Brothers in Hong Kong, peg as low as $50 million.

But some of the founders of these fleetingly powerful companies have been loath to give up control. On top of that, Beijing's draconian rules banning foreign ownership of online content providers make it difficult to attract the right foreign suitor. (Even AOL Time Warner, which is widely believed to have received preferential treatment from Beijing, had to settle, taking a 49 percent stake in its joint venture with Legend Holdings.)

Caught between bureaucracy, egotism and flaky business models, the stock prices of Netease, Sina and Sohu, not to mention the outlook of their investors, have sunk further and further.

Sohu, the third major Chinese portal, has seen its big-name foreign stakeholders, Dow Jones and Intel, cash out only to be replaced by unglamorous Chinese software firm Beida Jade Bird Group. And the crescendo around the AOL deal has seen the two other portals resort to drastic measures. Sina, the first domestic portal to resonate with the Chinese public, just shed 15 percent of its staff and ousted its independent-minded CEO and president, Wang Zhidong, because he resisted surrendering control of the company he had built.

Last week, Netease pushed out its CEO, King Lai, following an embarrassing accounting snafu that could involve $3 million in misreported revenue. Netease had been hoping to merge with Hong Kong conglomerate Wharf Holdings' i-Cable unit. Those plans have been postponed.

And then there are apparently healthy Chinese Internet companies like Hong Kong-based Chinadotcom. Another company listed on the Nasdaq, it has $400 million on hand.

Chinadotcom was one of the first regional Internet companies to expand beyond the portal business, into both Web consulting and advertising. But, according to Matt Adams, an analyst at Credit Suisse First Boston in Hong Kong, if the company wants to remain relevant and keep its market share in the shadow of the AOL Time Warner-Legend deal, it needs to acquire one of the existing portals.

It doesn't help the company's image or self-esteem that Chinadotcom had a licensing agreement with AOL in Hong Kong, but still failed to secure the U.S. giant's partnership in the larger Chinese market.

What few people in the region like to admit is that even consolidating the Internet market might not be enough to create a regional new-media moneymaker. "Institutional investors just don't care about this stuff," says one Hong Kong banker.

Even AOL Time Warner and Legend will have to wait for China's market to mature while stepping gingerly around restrictions on content and other red tape. Analysts point out that most investors haven't returned to the Chinese market since getting burned at the end of last year.

Given the current climate, they are unlikely to return just yet.

A Portal To China - AOL Time Warner joint venture with Legend Holdings - Company Business and Marketing

Industry Standard, The, June 25, 2001 by Joanne Lee-Young

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