CHINA INFORMATION TECHNOLOGY LAW NEWSLETTER
Vol. 4, No. 7 - May 12, 2003
TOPICS THIS ISSUE:
- Chinese Court Rules on Internet Cafe Fire
- Yao Ming Basketball Distributed Via China Unicom's 'U-Magic' Service
- China Mobile Expands in Fixed-line Arena
- China's Dotcom Comeback
- MII tackles Unauthorized Mobile Carriers
- Online Games Work for NetEase
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Chinese Court Rules on Internet Cafe Fire
A Chinese court sentenced two Internet cafe operators to prison Monday for running the Beijing business without a license last June when arsonists torched the shop and killed 25 people.
The blaze at the Blue Speed Cyber Cafe prompted a nationwide safety crackdown on Internet cafes - many of which were operated illegally. Iron bars over the windows trapped the screaming victims in the packed cafe in the northwestern Haidian university district.
Under the verdict handed down by the Beijing No. 1 Intermediate People's Court, one of the cafe's operators, Zheng Wenjing, was sentenced to three years in prison and fined 300,000 yuan ($36,145), Xinhua reported.
The other operator, Zhang Minmin, was sentenced to one year and six months in prison and fined 200,000 yuan ($24,100).
Last August, a Beijing court sentenced two boys to life in prison for setting the pre-dawn fire at the 24-hour cafe. The youths allegedly torched the business to get revenge after arguing with employees.
(Source: Xinhua News Agency)
Yao Ming Basketball Distributed Via China Unicom's 'U-Magic' Service
QUALCOMM Incorporated and Sorrent recently announced that Yao Ming Basketball by Sorrent, a wireless game based on QUALCOMM's Binary Runtime Environment for Wireless, featuring the likeness and characteristic playing style of basketball star Yao Ming, will be introduced exclusively for China Unicom's "U-Magic" wireless data service. Yao Ming Basketball by Sorrent takes advantage of the full features of BREW 2.0 to deliver the sounds and sensations of a fast-paced basketball game with 3D rendered animations and competitive, two-on-two action.
"Like basketball, video games and technology are a big part of my life," said Yao Ming. "I've been playing a preview version of the wireless Yao Ming Basketball game for a few weeks now and I know that China Unicom subscribers will enjoy the fast-paced action of being able to play a pick up game whenever and wherever they choose."
China Unicom is expected to introduce the game to wireless subscribers this summer. Yao Ming Basketball is one of the most anticipated data applications to be introduced by China Unicom following the operator's successful launch of its BREW-enabled service and its CDMA2000 1X network.
Yao Ming Basketball by Sorrent is the first wireless basketball game endorsed by a professional basketball player.
(Source: PR Newswire)
China Mobile Expands in Fixed-line Arena
China Mobile has quietly built out a nationwide fixed-line backbone network, including national Internet protocol (IP) backbone CMNet, pending the grant of a full telecommunication license by the industry regulator. The fixed-line network is said to enable the cellular carrier to compete with wired carriers on the domestic local voice and data access front. The carrier leased lines within cities linking high-traffic base stations and even international bandwidth.
In January, the then-minister of information industry Wu Jichuan said China was planning to develop four integrated telecoms carriers to provide a full range of telecoms services, ranging from local wireline services to cellular services to ensure sufficient competition in the industry.
China United Telecommunications Corp Group, the parent of red-chip China Unicom, is the only fully integrated telecoms carrier on the mainland although it generates about 85% of revenue from mobile services.
China Mobile is the dominant cellular operator, and China United and China Netcom Corp Group offer wireless services in southern and northern China respectively.
Investors had sold down China Mobile's shares following the comments of Wu Jichun because they were wary of the wireless carrier's earnings being dampened if it was forced to provide lesser wireless services, coupled with an expected increase in competition from fixed-line carriers with wireless licences.
Despite China Mobile executives repeatedly insisting it would focus on the wireless business and was not interested in a fixed-line business, its aggressive build out of nationwide fixed network and IP backbone indicates the carrier is doing otherwise.
China Mobile management told analysts at last week's meeting that these fixed-line networks were built to support rapidly increasing voice wireless network traffic and to make savings on leased line and interconnection costs.
The mobile operator saw its interconnection fees, on a pro-forma basis, decrease by 1.5 billion yuan (about HK$ 1.4 billion) or 9.2% to 14.84 billion yuan last year, while it recorded a 6.9% or 440 million yuan saving in leased line fees last year.
(Source: South China Morning Post)
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China's Dotcom Comeback
It is perhaps time for dotcoms to be making their comeback in the world's most dynamic economy. In China, Internet start-ups are getting a second lease on life.
Shares of Sohu.com and other Nasdaq-listed Chinese Internet companies are booming. Sohu's stock is up more than 119% this year, while shares of Sina Corp gained more than 57%. Netease.com, the best-performing stock on the Nasdaq last year, is up 81%.
Is China merely experiencing an Internet bubble akin to the one that burst in the US in 2000? After all, China's three biggest Internet portals went public in mid-2000, at the height of excitement over companies that would use the Web to generate revenue and profit. Not necessarily.
The reasons for China's dotcom boom are many- on one hand, its growth is roaring along at a time when the world's biggest economies are stumbling. On the other, the nation's 1.3 billion-person market and demographic trends generally point towards exponential growth in Internet usage for years to come.
But the main reason is profits. China's dotcoms are doing what much bigger and better known ones like Amazon.com Inc never did - turning in annual profits.
China's Internet outfits learned from dotcom disasters a few years back. A key mistake made by Silicon Valley's dotcoms was taking on too many staffers and relying on funding sources and income streams that never materialized. In most cases, all bets were on advertising revenue that never came.
So instead of relying on advertisers, Chinese start-ups are focusing on offering services consumers were willing to pay for, like so-called short messaging services and multiplayer on-line games.
The nation's 216 million cellphone users, for example, are paying to send news, pictures, music and romantic prospects to their handsets. The message traffic skyrocketed during last year's World Cup, and China's Internet companies haven't looked back.
More recent events, like war in Iraq, also have given a boost to companies such as Sohu, Sina and NetEase. Users signed up to receive instant message updates on the war, boosting profits. Moreover, the phenomenon highlights the decreasing influence of China's state-controlled media that control information.
Dotcoms also look at steady increases in the number of users thanks to China's infrastructure challenges. Fixed-line phones, for example, can be harder to come by than mobile ones. Considering that more than a billion Chinese have yet to use these services, exponential growth seems virtually guaranteed.
Investors searching for the next big thing in a world of weak growth and falling stocks are noticing China's promise. It has six of the world's 10 best-performing stock indexes this year, even though it also has the most cases of a deadly virus that has hurt businesses and markets around Asia.
Now the dark side of all this is China's economy. It is indeed ironic that the very thing investors like most about China - its impressive growth rates - should also be their biggest worry. Beijing claims 9.9% growth in the first quarter, the fastest pace in seven years.
Problem lies in China's growth comes from two sources: public spending and foreign direct investment. If Beijing stops spending or investment dries up, the economy shrinks.
The rising number of bad loans at the four state-run banks raises questions about how much longer it can finance the boom. And China's manner in handling SARS has damaged the nation's global standing. According to reports, its efforts to hide the magnitude of its epidemic and putting the economy before the safety of people is causing a global backlash, causing serious dent to foreign investment.
Investors are concern that if Beijing do not properly report a non-ideological public health issue like SARS, how can investors expect to get reliable information on companies and the economy? How can economists trust China's GDP figures?
Yet many investors are willing to take their chances, if the performance of China's stocks is any guide. Buyers do not seem troubled that rallies are coming amidst Beijing's efforts to play down SARS and its effects on the country's still-closed financial system. Investors belief that it's business as usual and that SARS is not a big deal for China, seems overly optimistic.
Still, dotcoms such as Sohu, Sina and NetEase are making profits and share prices began at a low base. They are also listed on the Nasdaq, which, in theory, makes them more transparent than most Chinese companies. The fact their shares are traded on an international exchange may give investors more confidence in owning them.
China's Internet outfits certainly have had corporate governance problems. NetEase, for example, was nearly delisted by Nasdaq for not reporting quarterly results on time in May 2001. The company also admitted to "misrepresentations" in its reporting. Its shares were suspended for four months.
A cautionary tale for sure, NetEase's experience also set an example in China that may convince executives of the importance of credible reporting. Nasdaq-listed companies now know more than ever that what they do and say will be watched carefully, a dynamic that should hearten investors.
China may just prove that dotcoms were not such a dismal idea after all.
(Source: New Straits Times (Malaysia))
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MII tackles Unauthorized Mobile Carriers
Fixed-line carriers have been ordered by the Ministry of Information Industry to dismantle some of their wireless local-loop operations. The ministry criticized subsidiaries of China Telecom and China Netcom for using 450-megahertz code-division multiple access technology to operate Xiaolingtong city-wide wireless services without permission. The action will mean that China Unicom remains the only CDMA network operator in the country.
Although the CDMA 450 service has been rolled out in only a few cities, some commentators believe the move could be the start of a tightening of regulations on Xiaolingtong, which has been eroding the earning capacity of authorized mobile carriers.
(Source: China Economic Review)
Online Games Work for NetEase
NetEase surges on strong demand for its home-grown online games. The Nasdaq-listed Chinese portal posts impressive quarterly profit figures of 68.9 million yuan (HK$ 64.48 million), compared with 43.1 million yuan profit in the previous quarter and a 17.8 million yuan loss a year earlier.
It had revenues of 117.9 million yuan in the three months to March, a 23.2% rise from the previous period and an almost 400% surge from the first quarter, last year.
Online games contributed about 31% to the total revenue, while wireless services 48% and 10% from advertising.
NetEase offers two online games and its self-developed multi-player role-play game Westward Journey Online enjoyed higher popularity, according to acting chief executive Ted Sun. According to Sun, their in-house game development capability is a very important competitive strength as most of their competitors are just licensing from Korea or Taiwan. Furthermore, in the operating stage, new features can be added and upgraded to new versions according to the market needs rather than relying on the timetable of the licenses.
NetEase charges players 4.40 yuan an hour and player numbers topped 80,000 in March. The firm is developing two online games, targeted for launch at year-end or early 2004.
The usage of online games had dropped after China recently closed down some Internet cafes to combat the SARS outbreak but Sun said the impact was not significant.
NetEase was looking to growth from wireless services such as short messaging and multi-media messaging services (MMS). According to Sun, the revenue contribution from MMS in this quarter might not be too significant because the penetration of color screen and MMS enabled phones in China are still low. However, there is strong potential growth when the price of these phones comes down.
(Source: South China Morning Post)
The China Information Technology Law Newsletter is intended to be used for news purposes only. It should not be taken as comprehensive legal advice, and Lehman, Lee & Xu will not be held responsible for any such reliance on its contents.
Lehman Lee & Xu
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