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The Honolulu Advertiser
Posted on: Monday, June 18, 2001

AOL pact pleases China firms

Associated Press

BEIJING — America Online Inc. has given Chinese leaders a $100 million reason to rethink their opposition to letting foreigners own a stake in the country's floundering Internet industry.

Times are so bleak for China's Internet companies that they took AOL's announcement this week of a venture with the biggest Chinese maker of personal computers not as a competitive threat, but as a vote of faith in their future.

It didn't seem to matter that AOL's $100 million investment doesn't actually buy it a place in China's Internet. Or that there's no firm date for any foreigners to be allowed in.

"It's a positive sign for the industry, for AOL to be endorsing getting into the China market," said Daniel Mao, CEO of Sina.com, one of China's biggest Internet companies.

AOL, a unit of AOL Time Warner, said its Hong Kong-registered venture with Legend Holdings Ltd. would aim at replicating its Internet service in China. For now, though, its involvement will be limited to providing consulting to Legend's Internet portal, fm365.com.

AOL will hold 49 percent of the venture with Legend, which will match AOL's investment but hold 51 percent.

Chinese dot-coms are eager for outside help. They suffer from the industrywide problems of feeble revenues and stock prices. Companies are laying off staff and dismissing executives.

"At this point, things aren't going to get any better in the next 24 months, not in an advertising-based market," said Steven Schwankert, senior editor of Internet World Magazine (Asia), based in Hong Kong.

Regulators at first tolerated efforts by foreign Internet firms seeking a toehold in China but then shut them out by declaring that a ban on foreign investment in telecommunications applied to the Internet.

China has promised to let foreigners own up to 50 percent of Internet firms and other service ventures after it joins the World Trade Organization.

The country has just one authorized foreign Internet investment — a minority stake in a Shanghai venture. AT&T Corp. will work with two state-owned Chinese partners to provide broadband Internet service to Shanghai's new Pudong business district in a $25 million venture announced in December.

The Ministry of Information Industry, which regulates the Internet and fought to keep foreigners out, apparently isn't being swayed by the interest displayed by AOL and the prospect of badly needed money from abroad. It will stick with its ban on foreign ownership until China joins the WTO, the ministry said.

Even after WTO entry, the government will still closely regulate Internet businesses. All online content must come from state-approved sources. Violators risk running afoul of anti-subversion laws that can carry lengthy prison terms.

"AOL will need substantial support from Legend to come to grips with the Chinese market," said Stephen Yap, director of marketing and communications at iamasia, a Hong Kong-based Internet research firm.

AOL executives, in announcing the deal, acknowledged that uncertainty about operating in China made it hard to develop precise plans.

So far, other foreign Internet companies have made limited headway in China. Yahoo! and Microsoft, whose portals are based outside mainland China, are ranked No. 5 and No. 6 in registered users, with 2.3 million and 2.1 million respectively. That puts them well behind the more than 4 million claimed by each of the top three Chinese portals — Sina.com, Sohu.com and Netease.

Still, industry experts said that once the industry is opened to foreigners, AOL's venture with Legend will give it a presence in China at a fraction of the cost of acquiring one of the larger portals.