Web portal shakeout likely in China

Not enough room for China's longer-term online ad prospects? Hong Kong, July 7 (MaxisNet) - With ever-more general interest Web sites in China chasing limited advertising dollars and still-distant e-commerce revenue, mainland-focused portals face a shakeout, industry sources and analysts say.

Not enough room for China's longer-term online ad prospects?

Hong Kong, July 7 (MaxisNet) - With ever-more general interest Web sites in China chasing limited advertising dollars and still-distant e-commerce revenue, mainland-focused portals face a shakeout, industry sources and analysts say.

Investor skepticism was reflected in last week's initial public offering of Beijing-based Netease.com Inc, which landed with a thud on Nasdaq.

Already delayed and scaled-back, the Netease IPO was priced at US$15.50 a share and ended its first day of trading at US$12.125, recovering somewhat on Wednesday to US$13.125.

That reception could bode ill for rival China portal Sohu.com, which is set for a July 12 Nasdaq IPO, analysts said.

"There's only room for so many horizontal portals in any market, and China won't be an exception to that," said Stephen Moss, chief executive of online ad firm DoubleClick Asia, who said he is bullish on China's longer-term online ad prospects.

"You'll have a couple of dominant horizontal portals - three maybe - but I don't think the market can sustain the number of portals you have there today," he said.

Some analysts said China is such a large and diverse market it will be able to support five or six portals.

The future isn't now

Besides Netease and Sohu, Sina.com, Chinadotcom, upstart Tom.com and U.S.-based Yahoo! Inc are all portals slugging it out for "eyeballs" in China's fast-growing Internet market. U.S.-based Lycos Inc, which is awaiting a license from the Beijing government, also said it expects to enter the market soon.

"The China portal market was crowded a year-and-a-half ago," said Joseph Sweeney, research director at the Gartner Group, who forecast "a lot of bloodletting" among greater China portals.

Analyst Pete Hitchen of Salomon Smith Barney said portals outside of the top three "are going to be fighting for breath."

Still, the number of Internet users in China is poised to explode, from 7.2 million users this year to 44.2 million in 2005, Salomon Smith Barney recently forecast.

But Salomon Smith Barney also predicted mainland online ad revenue would total just US$26 million next year - at the low end of recent estimates. That figure could grow to US$111 million in 2005, the report said.

China e-commerce revenue, meanwhile, will total just US$4 million this year and US$15 million next year before mushrooming to US$496 million in 2004 and US$1.25 billion in 2005, according to Salomon Smith Barney's forecast.

Endurance test

In the near-term, then, stamina will be crucial to survival, analysts said, as portals try to attract as many users as possible, then figure out how to make money from them.

Sina, the market leader based on Chinese government polls, is burning cash at a rate of about US$7 million to $8 million a quarter with about US$133 million on hand, enough to pay for growth to mid-2003, a recent Lehman Brothers report said. The site more than doubled its registered users to five million between December and April, the report said.

Hong Kong-based Tom.com, which recently launched a series of "vertical" portals following a much-hyped IPO that raised HK$876 million (US$112 million), said its monthly "burn rate" was HK$40 million (US$5.13 million) as it develops its site.

"They're all hoping for substantial growth in the online advertising market, which I think will surprise people on the upside," said Lehman's McKeever. "Whether these companies can endure while the advertising market reaches a scale to generate some significant revenues - well, that's a question."

Consolidation among China portals appears inevitable, while less-popular sites could be doomed, industry sources said.

Lycos, for one, said it has a handful of joint venture prospects in China and is on the hunt for acquisitions. "We are thinking seriously of acquiring other good portals or Web sites," said James Cheng, Lycos general director for greater China.

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