Sohu: So Far, So Good -- Sort of


By Bruce Einhorn While American investors were hammering Intel, Sun, and other tech titans last week, in Beijing the man who would be king of the Chinese Internet had some surprisingly good news for the few people still interested in taking a chance on risky Net stocks. Charles Zhang, founder and chief executive of Sohu.com, a Chinese-language portal that is traded on the Nasdaq, proudly announced that the company had recorded its first-ever quarterly profit.

True, it was small -- just $77,000 on sales of $6.13 million. And the earnings weren't net profit, just EBIDTA (earnings before interest, taxes, depreciation, and amortization) profit. On a net basis, Sohu still lost $870,000 for the quarter. Still, how often has anybody had the chance to use the words "Sohu" and "profit" in the same sentence? (Variations on "Sohu stands no chance of ever making a profit" don't count.)

WORLD CUP BOOST. The news is especially surprising given that many people -- including me -- had long ago come to regard Sohu and its two other Nasdaq rivals -- Sina and Netease -- as the walking wounded. All three Beijing-based portals generated tons of hype during the heady days of the Internet bubble, attracting big-name backers like Intel, Goldman Sachs, and News Corp. All three managed IPOs in 2000, pulling in tens of millions of dollars from investors. And all three saw their stock prices collapse when the Nasdaq crashed, with their shares now hovering just over the dangerous $1 mark.

Without access to more cash and little advertising revenue to sustain them, things weren't looking good for the Little Three. And then the picture darkened further when America Online announced last year that it wanted to launch a service of its own with local computer heavyweight Legend Holdings. That was considered the coup de grace. Yet all three portals have hung on.

Admittedly, the chances of long-term survival still aren't great. The surprising news about Sohu's second-quarter numbers may prove to be a one-off, resulting from great Chinese interest in June's World Cup, which was held in Korea and Japan. Interest was heightened because the tournament was held in Asia for the first time. Sohu and the other Internet companies cashed in by selling World Cup-related advertising and services.

Without that revenue, can Sohu remain on the road to profitability? The company says yes. But given the history of so many dot-coms, let's not hold our breath.

BIG BROTHER. Another problem: the continuing hostility that the Chinese government is showing toward the Net. Take the recent crackdown on Internet cafés, following a tragic fire last month at a Beijing café that killed 25 people. According to the Associated Press, the government not only shut down all 2,400 Internet cafés in Beijing itself but also closed hundreds more nationwide. Because many of the portals' users depend on these outlets for computer access, a prolonged crackdown could put a real dent in the numbers for Sohu and its peers.

And the Chinese Internet outfits must still find ways to deal with the government's suspicions about content. In mid-July, just a few days before Sohu's big news, Beijing unveiled its latest set of rules to govern the Net. According to the Web site of the New York-based Committee to Protect Journalists, the regulations forbid online news reports that harm national unity, reveal state secrets, damage national honor, or encourage social stability. Other taboos include news "advocating cults or superstitions" -- a none too subtle reference to Falun Gong, the movement that has been the target of a fierce crackdown for two years.

Chinese Internet executives have long been aware of what subjects are forbidden. And with the government able to send in the police to raid their offices or shut them down, it's not surprising that the Beijing-based portals are eager to make sure the government leaves them alone. That means self-censorship, as the CPJ notes with alarm. "The regulations, together with a voluntary pledge signed by more than 300 companies and organizations -- including the U.S.-based Yahoo! -- to prevent distribution of 'harmful' material online, indicate a clear step backward for freedom of expression in China," states the CPJ.

"HIDING IN PLAIN SIGHT." The Internet companies face yet another threat. In mid-July, a hackers' gathering in New York announced that the release of new software, dubbed Camera/Shy, that makes it easier for dissidents to avoid government censors. "Camera/Shy was developed for democracy activists operating from behind national firewalls," the group, Hacktivismo, wrote in a press release on its Web site (cultdeadcow.com). The software "enables users to share censored information with their friends by hiding it in plain view as ordinary .gif images," according to the group.

For Americans, that raises some obvious concerns about terrorists putting this software to use. But the Chinese government has its own domestic "enemies" to worry about, and it could go after them by attacking the portals. And it seems that Hacktivismo has its eye on the Communist government. The new Camera/Shy software is dedicated to Wang Ruowang, the Chinese dissident who died in American exile last December at age 83. Wang was "a study in courage," the hackers wrote, "and a lamp unto our feet."

Here's hoping that the Little Three continue to buck the odds and survive. Already, they're a study in perseverance, at the very least. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online


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