Sohu's Drop Cracks China Net Sector

Sohu.com's (SOHU) disappointing outlook Monday heralded a retreat among Chinese Internet and wireless content stocks.

Shares in Sohu.com fell as much as 14% Monday, and other Chinese new media stocks fell as well, led by Sina (SINA), NetEase.com (NTES), Tom Online (TOMO) and Shanda Interactive (SNDA).

Sohu.com, which gains most of its revenue these days from online advertising, forecast first-quarter sales in the range of $22.5 million to $23.5 million, short of the Thomson First call expectations of $25 million.

The company also forecast earnings per share of 14 cents to 16 cents, below the First Call number of 17 cents.

Sohu.com's outlook calls for sequential growth in ad revenue but flatness in its nonadvertising business comprising wireless value-added services, online games and e-commerce.

The company's wireless business fell off a cliff last year upon China Mobile's (CHL) initiation of a one-year suspension in some of Sohu.com's wireless business for violations of China Mobile's operational guidelines. China Mobile also insisted Sohu.com make price cuts in other services.

Monday's numbers illustrate some of the fundamental challenges for investors in Chinese new-media content companies. While the size of China's population and the prevalence of wireless phones holds out the promise of Google (GOOG)-like growth, the relevant companies aren't necessarily able to come through on that growth as quickly as investors might hope.

In addition, investors have to contend with the fact that business rules are different in China. That one-year suspension for Sohu.com, after all, was punishment for the company's sending out an unauthorized marketing message to 1,374 customers that resulted in 23 subscriptions to a service costing $1.20.

It seems unlikely that a punishment as draconian as what Sohu.com suffered -- it said at the time that wireless revenue would be cut $1.5 million to $1.8 million in the third quarter of 2003 alone -- would be enforced by a U.S. wireless carrier in response to any similar policy violation by a content provider.