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Portals Growth Stalled on Troubles with SMS

The Chinese mainland's three leading Internet portals continued to report increased revenues and profits for the recently ended fiscal quarter, but restrictions on charging services to users' phone bills are forcing them to find new growth steams.

NetEase.com Inc, which is listed on Nasdaq together with its peers Sohu.com Inc and Sina Corp, posted its third-quarter earnings yesterday, showing slower growth than it enjoyed earlier this year.

NetEase reported an 84.09-million- yuan (US$10.13 million) profit for the quarter, an 11 percent rise from the second quarter. Revenues for the period also jumped 7.4 percent quarterly to hit 146.2 million yuan.

Revenues grew by 15.5 percent in the second quarter, while profit was up 10 percent in that period.

But revenues attributed to services sold by the portal through mobile phone short messages - or SMS - decreased by 20.7 percent to 62.7 million yuan for the three-month period that ended on September 30, compared with the previous quarter.

The company's stock dropped dramatically in after-hours trading due to the news, falling from US$65.85 at close of trading on Tuesday to US$54.61.

"China Mobile's suspension of collecting short message fees for us affected our SMS business." said NetEase CEO Ted Sun. "But rapid growth in the online-game business and increasing advertising revenues shored up our growth."

Prior to August, Internet users could pay for many services - including e-mail boxes - by sending an SMS message to the Website and having the fee charged to their phone bill. In early August, however, China Mobile stopped offering that payment service to Websites as some smaller sites were selling pornography and a growing number of users complained about unauthorized fees.

The country's second-largest mobile service provider, China Unicom, still allows Websites to charge fees to its users' phone bills.

Large sites, like NetEase, Sina and Sohu were forced to find other methods of collecting fees, such as credit cards.

Sohu recently announced that its third-quarter non-advertising revenue - a bulk of which comes from SMS - increased only by 6.2 percent to US$13.3 million, compared with the quarterly growth of 25 to 30 its enjoyed since early last year.

"That drop means the fast growth era for SMS business is gone," said Sun Weijia of Beijing-based Analysis Consulting Co Ltd.

"The SMS market is close to saturation and those Internet portals will have to look for new profit engines," said analyst Sun.

IT consultant iResearch Inc expects the online SMS market size will reach 2.77 billion yuan this year, an increase of 201.1 percent year-on-year. But it expects growth to drop to just under 60 percent next year.

"In the future, we will focus on our online game market," said NetEase's Sun. "We planned to promote two new self-developed online games next year."

NetEase has already developed an online game based on famous Chinese novel "A Journey to the West."

(Shanghai Daily October 30, 2003)

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