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Chinese Telecoms Face Giant Challenge

BEIJING -- Investors looking for a little relief from the barrage of bad news in China's wireless sector didn't get much help from Tom Online (TOMO). Late Thursday, the Beijing-based firm 'fessed up to a massive shortfall in third-quarter sales guidance, predicting sequential revenue could fall by up to 35%. More than one analyst used the word "shocking" to describe it.

Friday morning, Piper Jaffray downgraded Tom to market perform from outperform, but the stock was up fractionally in recent trading.

The sharp slump isn't entirely Tom's fault. It's partially the result of a government regulatory crackdown that is forcing all wireless companies to abruptly switch to flat-fee subscriptions and start offering lengthy trial periods for new services.

Based on Thursday's close of $10.41, Tom shares have lost 39% of their value since the policies were announced on July 6. Peers Linktone (LTON), KongZhong (KONG) and Hurray! Holding Co. (HRAY) have seen similar stock-price plunges.

Granted, the sector's regulatory woes will pass as companies adjust. If that was all executives had to worry about, they might shoulder through a slightly miserable summer and forget about it.

What's worrisome is that the new policies are proving a distraction at a time a much bigger problem has emerged: titan China Mobile (CML), which owns two-thirds of the mainland cell phone market, is moving onto the service providers' turf. And it looms as a giant competitor.

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