Back from the Brink

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Not long ago, the three NASDAQ-listed Chinese Internet portals, or chortals, were serious dogs. Trading in NetEase was suspended for four months last year as the company sorted through earnings misstatements and a shareholder lawsuit. Sohu's stock bottomed out in April 2001 at 60, and Sina's shares dove from $54.50 that spring to $1.07 some 18 months later.

But now, the dogs are having their day again, with chortal stocks among the best performers of 2002. NetEase, which resumed trading in January after appealing its delisting, closed last week at $8.26—a gain of 895% for the year. Sina is up 325% in 2002, and Sohu has soared 475%. "I've had more funds call me in the last six weeks than in the last two years," says Sohu's CFO Derek Palaschuk.

The bubble revisited? Maybe not. Rather than trumpeting page views, registered users and other flaky metrics that mattered back then, chortals are now focusing on more prosaic matters, such as lowering costs and boosting revenues. And two of them have a profitable quarter under their belts—a rare distinction for any Internet company. The secret? Unlike Yahoo, Terra Lycos or most international competitors, chortals have found ways to parlay their user bases into sales by taking a new approach to selling ads, collecting fees for wireless services and harnessing the craze for online games. "Chinese portals originally followed Yahoo. Now they have become a leader," gushes Chang Qiu, managing director of Forun Technologies, a research company that focuses on China's tech sector.

While the world frets about Beijing's Net-unfriendly ways, the country's Internet population has ballooned to 55 million users, transforming chortals into full-fledged media companies. According to a new report from Harvard Law School, the Chinese government regularly denies access to more than 19,000 websites. Yet, in a country still dominated by state-run media, chortals deliver what no one else in China does: edgy, cool—sometimes subversive—content. News, much of it reflecting poorly on the Party, tends to break first on the Net. Chat rooms buzz with risquE flirtations. Dirty jokes abound. And chortals have taken advantage, successfully selling themselves as the best way to reach the young, affluent, educated consumers that advertisers crave. In the midst of a global advertising depression, the three chortals posted ad-revenue gains of between 9% and 22% during this year's third quarter.

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All three sites are also finding new sources of nonadvertising revenue, such as short-messaging services (SMS) for mobile phones. When subscribers sign up for one of the portals, they submit their cell-phone number. They are then offered a range of extras, such as games, chat, ring tones and picture downloads. The phone operators reap a commission on the charge for each service and pass the rest of the revenue on to the portal. Chang argues that this business, already successful, has plenty of room to grow: "SMS penetration is only about 10 million out of 190 million mobile subscribers, and portals will take a big share of this."

NetEase, the sector's most striking turnaround, has been especially aggressive in tapping what many consider the Internet's true killer app: massive, real-time, multiplayer online games. In August, NetEase began charging for Westward Journey II and Priston Tale, both of which have huge followings in China. Though he won't provide exact figures, acting NetEase CEO Ted Sun says "a substantial proportion" of the company's $7.3 million in third-quarter nonadvertising revenues came from games. (Just last week Sina followed suit by inking a deal with NCsoft, a major Korean game company.)

Ironically, just when things are starting to pick up, there are few cheerleaders left to hail the good news. The army of brokerage analysts that once followed the chortals' every move has been routed. "I'm sorry," laments a p.r. person at Goldman Sachs in Hong Kong, "but we don't have any more Internet-sector analysts." Chastened dotcom CEOs are stressing humility. Sina's CEO Daniel Mao says the rally is "the beginning of a healthy comeback—but we still have a long way to go." Indeed, despite their successes, these remain tiny companies, each with annual revenues well under $50 million (compared with Yahoo's nearly $1 billion in sales). "NetEase isn't a rocket in flight," says one Internet-industry consultant. "It's only made it to the launch pad again." In the end, obscurity may be the best thing to happen to chortals. "It's been good that the spotlight hasn't been on them," says Steven Schwankert, an independent China-technology analyst based in Beijing. "They haven't had to be movie stars and were able to go back to running normal businesses."