Chinese Web portals are facing a crackdown by mobile operators, over irregularities in their IVR (interactive voice response) offerings.

Should the crackdown occur, China's Web portals would be under greater pressure to boost revenues, especially after heavy declines in SMS (short messaging service) in recent months due to the government and mobile operators' stricter regulations.

IVR service allows mobile phone users to dial a number and then listen to pre-recorded voice content, such as songs and jokes, or chat with friends online.

Typically, IVR users are charged 1 yuan (12 US cents) per minute.

Sina Corp has become the target of tighter supervision.

The NASDAQ-listed firm last week said its IVR service with China Mobile was temporarily suspended, due to its violations involving some of China Mobile's operating policies relating to IVR services.

In a statement, Sina warned its "revenues from mobile value-added service and our net income for September quarter and future quarters will be negatively impacted" if it fails to restore its IVR services or China Mobile imposes monetary penalties on it.

Sina's revenues from IVR service with China Mobile accounted for about 7 percent of its revenues from mobile value-added services, or approximately 4 percent of its total revenues for the quarter ended June 30, 2004.

For the second quarter, Sina reported US$49.2 million in net revenues.

Industry observers believe the crackdown largely resulted from adult (pornographic) offerings in Sina's IVR services.

Sina Corp and its rival, Sohu.com, have witnessed revenues from SMS drop in the last quarter, due to the government and operators' tighter regulations on SMS content and billing schemes.

NetEase.com has also warned its revenues from SMS will fall.

Tom Online Inc managed to increase its SMS revenues by a slight 3 percent in the second quarter, compared with the previous quarter.

Tom Online relies less on SMS than does its peers.

Industry observers are worried that an extended crackdown on irregularities in IVR offerings may eventually hit Tom Online hard.

The firm is the undisputed market leader in IVR service.

Tom Online holds a 49.5 percent share of the IVR market, estimated Zhou Yi, an analyst with Beijing-based research house Analysys International.

Sina Corp holds 19 percent of the sector.

Rock Mobile Corp, in which Siemens and Acer's venture capital arms have invested, has a 12.5 percent share of the market. Beijing-based Unihub Global Network holds 9 percent of the sector.

Hong Kong-listed Tencent Holdings Ltd holds 7 percent of the IVR market.

The size of China's IVR market last year reached 200 million yuan (US$24.10 million).

Analysts once predicted the market will reach 1.5 billion yuan (US$180 million) this year.

However, concerned about the impact of the crackdown, the research house last week downgraded its prediction to 1.35 billion yuan (US$162.6 million).

"The stricter regulations are beneficial to the sector's long-term healthy development," Zhou said.

He estimated more than 70 percent of the IVR products in the market are related to pornographic content, which is prohibited in China.

"In the short term, some portals may see revenues decline in IVR," he said.

Sohu.com and NetEase.com, newcomers to the IVR market, are still minor players. That means the tighter supervision will have little effect on them.

However, the stricter supervision will pose a severe challenge to Tom Online, which has been relying heavily on IVR services.

The portal, in the second quarter, saw its revenues from IVR products and services grow 43 percent, to US$8.19 million, compared with the first quarter.

IVR services accounted for 28 percent of Tom Online's total wireless Internet revenues.

That compared with 10 percent during the same period last year, and 24 percent in this year's first quarter.

Its wireless service contributed 93 percent to Tom Online's total revenues.

Zhou urged Tom Online, and other major IVR players, to "fine-tune" their IVR offerings to cushion the negative impacts resulting from the stricter regulations.

IVR content must be rated to meet demands from different users, he added.

A large number of users are, in fact, willing to buy adult content in the IVR services, although it is against traditional Chinese culture, observers said.

If the portals provide IVR products and services that have nothing to do with adult content, most users will turn away, they said.

That explains why most portals are providing some quasi-adult content on SMS, MMS, IVR and other services.

"Web portals have been playing games with regulators in a smart way," said a Beijing-based telecoms analyst, who asked not be named.

"Mobile operators have been tolerant, due to the earlier stages of the development of the markets, as strict regulations might slow the take-off of the markets.

"But now, operators realize there is a heightened need to tighten regulations. Otherwise, it will harm the long-term development of the markets."

(Business Weekly August 22, 2004)