Cyber fizz

Global Finance, Sep 1999 by Marriott, Cherie

Asia's Internet companies are trying to make it big-with a faulty formula.

If Asian Internet company China.com had to pay for every column centimeter devoted to its July listing on NASDAQ, its marketing budget would be wiped out in one fell swoop. Journalists and commentators lavished as much attention on the rare offering as investors, who added 235% to the stock's value on its first day of trading. Besides being a juicy story, the success of China.com proved that Internet entrepreneurs in Asia can make it just as big as their US counterparts-using the same faulty formula of mediocre content and inflated advertising revenue projections.

At the moment China.com shares the publicly listed space with only one other true Asian Web company, Pacific Internet, an Internet service provider (ISP) in Singapore, which floated on NASDAQ in February. But the success of China.com's debut has prompted a number of other Internet plays to announce their intentions to list within the next 12 months, including two other Chineselanguage portals, Sina.com and Netease, both of which claim higher traffic volumes than China.com. Behind these two, a host of other companies are ready to try their luck on the stock market, and they are being encouraged by bullish investment banks such as Lehman Brothers and Goldman Sachs, both of which have set up special high-tech and Internet teams in Asia in the past year.

The hope is that the Internet revolution and investors' infatuation with it will continue long enough for these companies to cash out, but in all the hype not much is said about what happens after a company goes public. Creating shareholder value and ensuring a steady flow of good news are issues that these historically closely held companies will need to tackle head-on.

Asian Internet companies face some unusual challenges that don't concern their US counterparts, and until they learn to deal with them, their share prices will suffer. Pacific Internet's price has retreated to near IPO levels of $30, having traded as high as $104. "Pacific Internet is having trouble sticking by a lot of the promises it made to investors on the road show," said an executive at China.com in July, just days before that company floated. "Answering to shareholders is really going to change the way we do business."

Shareholders should be happy if they are investing based on the phenomenal growth of Internet usage expected in Asia. International Data Corporation claims that usage in the region will grow at a compounded annual rate of 33%,the fastest in the world, so that by 2002 there will be 35.5 million people hooked up to the Net. If you include Japan, this figure is 57 million.Asians are also very willing to spend money on the Net. One estimate is that there are 75 Internet brokerages open for business in the region, while Lehman Brothers expects personal on-line spending will increase by an average 208% this year, compared with 1998. China can expect a 410% growth in spending over last year.

Granted, this is starting from a small base-on-line spending in China last year was a measly $2.6 million.The only country in the region where the Internet industry is fairly developed is Australia, where users spent $154 million on-line last year and are expected to part with $421 million this year.Take in businessto-business E-commerce activity, and that figure is much higher, at $ 1.08 billion in revenues for 1999. Investors, too, are more Internet-savvy in Australia, where a collection of thriving companies are listed on the Australian Stock Exchange.Aus tralia has six large ISPs and a number of other E-commerce plays listed on the exchange, including Travel.com.au, an on-line travel company; Ecorp, an Internet investment company and portal owned predominately by media magnate Kerry Packer; and Liberty One, an Internet services company that holds the Asian rights to Excite.

Not surprisingly, the companies hoping to follow in China.com's footsteps all cater to the millions of Chineselanguage speakers around the world. Netease was founded in Beijing two years ago by a young entrepreneur and now averages 2.8 million page views a day. Before it lists, in the next 12 months, the company will roll out an English-language site and open an office in New York in an attempt to boost its overseas profile. Another IPO hopeful, Californiabased Sina.com claims the greatest audience reach in its category, attracting 1.7 million page views per day from its North American audience alone. Its last round of fund-raising attracted $25 million in venture capital from the likes of Goldman Sachs and Japan's Softbank. Finally, there is Beijing-based Sohu.com, another Chinese-language portal providing popular content to the masses.

The challenges facing these companies include limited access to good people to power their businesses. A lot of Asia's high-tech junkies reside in the United States, where they work for cutting-edge firms in Silicon Valley and have the chance of becoming their own Internet millionaires. To date, these sorts of opportunities have not existed in Asia, and the concept of rewarding employees with generous stock option packages is still in its infancy. Only a handful of senior staff at China.com were given stock bonuses in the company's IPO, according to a group of disgruntled junior employees, who are now said to be taking up offers elsewhere.