NTES – Tax and Currency

I am an absolute novice as far as reading financial statement goes. But NTES’s 1^st quarter report does intrigue me.

NTES provides its 1Q 2008 result. Its revenue blows away analyst estimate. Its gross margin hold steady. But its earning missed by 1 cent (30 cents rather than the analyst’s estimate of 31 cents). What gives?

I think I found the reason. Netease said the reason is the Chinese tax system. But I think the reason is two-folds.

The first reason is the Chinese tax system.

Before, in order to attract foreign investment, China provides preferential tax treatment to foreign companies. But China is suffering from too much of a good thing. So much foreign investment is giving China super high inflation (high commodity prices is the main culprit, but big foreign investment contributes to it also). To give its domestic companies a leveling playing field, and to cool the over-heated economy, China is completely re-tooling its tax system to a unified tax rate of 25% for both domestic and foreign companies.

This is good for NTES since it is a domestic company.

From what I understand, after a company starts to make money, the first 2 year is tax free and only pays 50% tax rate for the following 3 years. NTES is an established company and definitely won’t be able to qualify for it (unlike new companies like PWRD, etc.). But many of its divisions and subsidiaries are classified as High and New Technology Enterprise (HNTE) and can get tax benefit.

Starting January 1, 2008, China is starting its new tax regime of 25% unified tax. But companies had to re-apply for HNTE status. I think it will be a big surprise if most of NTES division won’t get this status. But still it will take time for the government to get the detail of the law out and to review and approve all of the companies applications. From NTES’s conference, the management is pretty confident it is going to be done this year. Once it is approved, the extra tax will be refunded back to the company.

The company think it would get an effective tax rate of 18% to 23%. If more divisions is able to get the HNTE status, the rate would be 18%. If the reverse is true, NTES would have to pay tax at a rate of 23%.

Now, we have enough information to calculate the tax refund NTES will get whenever Chinese government approves NTES’s applications:

Tax Rate	18%	20%	23%	Current (25%)
Income Tax	$11,791,165	$13,101,294	$15,066,488	$16,376,618
Tax Refund	$4,585,453	$3,275,324	$1,310,130	-
Extra earning Per ADS	$0.0354	$0,0253	$0.0101	-

Thus, in the future quarter when China approves NTES’s application, there will be a nice 1 to 4 cents pop to the bottom line.

Note that I think it applies to Sina, Sohu and other long established technology companies also. There will be nice pop to the bottom line whenever Chinese government finished reviewing company’s applications.

Without this issue, the earning this quarter would have been 31 cents to 34 cents. Not bad, but still not enough to explain the discrepancy. I think the bigger reason for the low earning is foreign exchange loss.

In this quarter, NTES take an expense of ($7,298,768) under the line item of “Other, net”. In both 4^th quarter 2007 and this quarters’ earning conference call, the management explain that this is due to the foreign exchange loss.

Just a comparison, this expense is 7.3 million in this quarter, 4.299 million in 4^th quarter 2007 and 0.104 million in 1^st quarter 2007.

This $7.3 million contributed to a loss of 5.6 cents to the earning.

Note that this is not technical loss since you can’t have loss converting from USD to USD. But this is really theoretical loss in that if NTES put its money in the Chinese currency (RMB), NTES would have add additional $7.3 million directly to its bottom line.

Now from this, we can work back to estimate how much money NTES has in USD.

From the following link, we can estimate the exchange rate:

http://finance.yahoo.com/currency/convert?amt=1&from=USD&to=CNY&submit=Convert

From the plot in the above link, we can estimate the exchange rate is 7.33 on 1/1/2008 and 7.02 on 3/31/2008. Thus, any money NTES has in USD would have a loss of 4.23% in the 1^st quarter. Working backward using the $7.3 million, we get an estimate of $172.6 millions.

Therefore, NTES has roughly $172.6 million in USD.

But why? NTES makes money in RMB and spend it in RMB. What compel NTES to put money in USD and incur this loss unnecessarily?

I think the reason is three-folds.

1) China doesn’t allow for free currency exchange. If a company needs to change currency from RMB to USD, it needs to apply in advance and may have to wait for a long time before it gets approved.

2) company needs it for its share repurchase program. It can spent up to $120 million before 7/1/2008. But it had only spent $46.4 millions by the end of 1st quarter. Therefore, it still have $73.6 millions in USD waiting to be spent for this purpose.

If NTES has this $73.6 millions in RMB, it won’t suffer the 4.23% currency exchange loss. Divide by the outstanding number of ADS, we got an extra 2.4 cents of earning. Instead of earning of 30 cents, we would have earning of 32 to 33 cents. Rather than miss the wall street estimate (31 cents), we would have beat the street estimate.

There is a big difference in psychology in missing estimate vs. beating estimate. Is it ironic? Company buy back shares to boost stock price. But in this case, it actually does the opposite.

3) Now we are getting to the third reason. There is still $172.6 million - $73.6 million = $99 million left. Why would NTES have $99 millions in USD?

Could it be that NTES is buying a small US game company, maybe a 3d engine developer?

Could it be NTES is going to license 2 or 3 US games? I think $99 millions is too much for 1 game. We might be talking about a few games.

Also, every day NTES put the money in USD, they lose money, they must be getting very close in negotiation to finalize the deal.

Now, we know the reason. What can we deduct for the future quarters. First, from the currency exchange history, it has been relatively flat in the 2^nd quarter. But why shall NTES even take the chance. We all know RMB is going up in the future.

For the 73.6 million left for the share repurchase program, either spend it or transfer the money back to China.

For the 99 millions for licensing games or buying US companies, either finalize the deal or transfer the money back to China.

It strikes me that the solution to solve this is quite easy. In the earning conference, the management said they will resolve this quickly.

For the share repurchase program, if they spend it this quarter, it will give a pop to the stock price. If they transfer the money back to China, there won’t be exchange loss. A win-win scenario.

For the 99 millions, if they are going to license games, it will definitely cause a pop in the stock price. Otherwise, if they can’t agree to a deal, they can just transfer the money back to China and no longer incur the currency exchange loss. Another win-win scenario.

But if they spend the 99 million on buying US game companies, it might not be positive on the stock price in the short term.

In summary, NTES shall have gotten from 1 to 3.5 cents of extra earning due to tax reason and 5.6 cents of extra earning due to foreign exchange loss. The extra tax will be refunded but the foreign exchange loss is gone forever. But the foreign exchange loss can be remedied easily and mostly likely significantly reduced in the 2^nd quarter.

Combine the two, we shall have an earning in the range of 37 to 39 cents per ADS in the 1^st quarter.

NTES - That $7,298,768 expense?

NTES just release its 1st quarter financial results.

Its revenue blow away the street estimate. Its gross margin hold steady. But its earning barely meets the wall street estimate.

Something is going on.

The biggest reason is the tax issue. I understand the tax issue. The company is paying the government a rate of 25% this quarter. But the real rate is most likely somewhere between 18% and 23%. If more NTES divisions can claim the preferential rate of 15%, the overall company tax rate will be closer to 18%. If less divisions can claim the high tech and new business rate of 15%, the overall tax rate will be closer to 23%.

Therefore, when the government gets its act together, a tax refund in the range of 1.3M (assuming 23% effective tax) to 4.6M (assuming 18% effective tax) will be returned to NTES. That will probably happen either in the 2nd or 3rd quarter.

But I think there is another factor at work here.

If you go to the 1st quarter financial result:
http://biz.yahoo.com/prnews/080521/cnw053.html?.v=1

In the section "Netease.com, Inc, Unaudited Condensed Consolidated Statements of Operations", under the part "Other income (expenses)", there is a line item named "Other, net". Under this line item, there is an expense of (7,298,768) in US dollars for 1st quarter 2008.

The same mystery expense in 4th quarter 2007 is 4.3 millions, and in 1st quarter 2007 is 0.1 millions.

In other words, NTES increased this "Other, net" expense by 3 million from quarter to quarter; and it increased this expense by 7.2 millions year to year.

I am not a financial guy. Can some of you smart folks out there help me understand what is this "Other, net" expense?

News Coverage Race for the Great Earthquake

My previous article on advertising can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/03/statistics-from-dcci-on-chinas-online.html

There is a magnitude 8.7 earthquake in China on 5/12/2008. It occurs on 2:28pm China time.

May I offer my utmost sadness to the people in China and best wish to you all. But I want to use this opportunity to check out the portals’ performance and how they can react to fast moving news.

All four major portals have dedicated section on this disaster. They are listed below:

Tencent: http://news.qq.com/zt/2008/dizhen/

Netease: http://news.163.com/special/00012MS5/sichuan0512.html

Sohu: http://news.sohu.com/s2008/dizhen/

Sina: http://news.sina.com.cn/z/08earthquake/index.shtml

It is now 3:13pm China time on 5/13/2008. It is exactly one day after the quake occurs (give or take 30 minutes). I did a quick count on the number of articles and number of video clips on each portal. The result is listed in the following table:

	NTES	Tencent	SOHU	SINA
# of articles	340	372	760	850
# of video clips	15	108	108	61

From the above table, Sina has the most amounts of articles. Sohu is not far behind. Sohu and Tencents both have large amounts of video clips. In terms of numbers of articles, Sina and Sohu have more than twice as many news articles than NTES and Tencent. NTES is behind in securing video reporting. I am a little surprised that SINA’s video clips are only half of that of SOHU and Tencent.

Overall, I would say SOHU comes out on top, SINA comes in number two, Tencent comes in a strong number 3 while NTES is little disappointing.

SINA has the reputation as being the king of content in China. SOHU’s content department is really catching up fast.

Another point that can be observed from this study is that competition in China’s portals is fierce. I don’t think CNN or MSNBC or Yahoo would have this much information in such little time. Granted most (if not all) of the articles and video clips are sourced from third parties, but the amount of information is still tremendous.

Finally, it will be impossible for any TV stations in China to compete with China’s internet portals for the amount of information available.

This definitely points out the inevitable trend from TV, radio, or print to the internet.

TX2 going open beta (commercial) on June 6, 2008

My last TX2 post can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/05/tx2-criticism-session-with-player.html

It is an exciting time for NTES. After three years of virtually no new successful games (XY3 are somewhat successful), there are a slew of new exciting games that will be in the market in the next 1 to 4 quarters. The XYQ is growing like crazy. The XY2 is growing as well. The XY3 has a good start, then slow some, but is now growing again. They are going to add many new contents for Datang. In addition, a free-to-play version of Datang will also be developed. They also talked about developing a free-to-play version of XY3. Fly for Fun 2 shall be out pretty soon also. Finally, they are continuing developing casual games.

But the most important of them all is probably TX2. From my last few posts on TX2, I suspected TX2 will go open beta on either June or July this year.

It looks like it will go open beta on June 6, 2008!

Netease released the official trailer for the new TX2 on 5/4/2008. You can download the official trailer from the following link:

http://czdltx2.163.com/tx2/tx2_blood.rar

You would need to have winrar to uncompress the file. The trailer is very nice. Watching movie trailer is definitely one of the more enjoyable thing to do when one trying to analyze a stock.

One can compare the official trailer from the old TX2, that trailer came out in about the same time (around May) in 2006. The old TX2 trailers has a lot of group fighting. That is to be expected. The old TX2 is centered on castle siege and global domination.

The current TX2 trailer is very similar to the official trailer for World of Warcraft. If one read my previous articles on TX2, I said that if TX2 can be converted to a Chinese clone of World of Warcraft, TX2 will then be a very successful game. So far, from all the users' feedback, it does seem that NTES is trying to emulate World of Warcraft. It seems to be very user friendly, especially for new users. It had upgraded the game engine so that it is no longer a game for only those users with fast computers. In addition, it will also keep a lot of group fighting features of the old TX2.

In a nutshell, the new TX2 is going to be a Chinese version of World of Warcraft. In addition it will have quite a few group/gang/tribe fighting features that WOW doesn't have.

But the most exciting thing about that trailer is that it announced at the end of trailer that the game will be operational on June 6, 2008.

Another thing I find useful to me is somebody had developed a flash player instruction on how to play the game. One can go to the following web site to see the user interface in flash form:

http://tx2.17173.com/guide/tx2mn.shtml

Finally, something I don’t like. Just like the marketing effort for the old TX2 (or more precisely, the lack of effort), there is no marketing effort for TX2 yet. It is less than 1 month from the official launch, NTES still have not started the marketing campaign!!! I hope NTES is not going back its old bad habit of pinching pennies.

FF2 Game Information

My last article on FF2 can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/05/ff2-update.html

There are some user reviews on the new FF2.

http://ff.netease.com/viewthread.php?tid=3471790&extra=page%3D1

http://ff.netease.com/viewthread.php?tid=3573457&page=1#pid7958697

http://ff.netease.com/viewthread.php?tid=3572389&extra=page%3D2

http://ff.netease.com/viewthread.php?tid=3572276&extra=page%3D1

At this early stage, it is difficult to tell from the user review how good this game is. Most of user complaints are something that can be solved by the developers.

Usually at this early stage, most users complain of little playability of the game. But it is to be expected because developers are concentrating on the foundation.

The above 4 links have hundreds (if not thousand) of in game graphics. At this point, the in-game graphics are expected to be incomplete, and they are. The background are sparse and the graphics in many locations are incomplete.

Any way, let me put some in game graphics to illustrate what kind of game this is:

Where one enter the game:

In some village:

One can tell the game developers haven’t build this location yet:

FF2 means Fly for Fun 2. It means the characters are usually flying:

Beautiful Building:

One can tell FF2 is catering the the young and female gamers. Its main competitors are the QQ Games that made Tencent so much money.

One can tell this game is not games based on ancient Chinese stories. The background and stories are based on western .

You will never see anything like that in any game based on Chinese mythology:

Hanging out with friends:

Everything about this game can be described as “cute”:

OK, this is all I have on FF2 so far.

FF2 Update

My last post on FF2 can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/01/ff2-status.html

On 2/1/2008, Ntes started the first stage closed beta of Fly for Fun 2. Any additional information had been extremely hard to find.

But I did find some information that shed some light to the status of FF2.

http://ff.netease.com/viewthread.php?tid=3543948&extra=page%3D1

From the above forum posting, FF2 might come out some where around September this year. Note that this is not the announcement from the company. It is just a guess from one of the FF2 development team. It is purely based on the development progress. It is entirely possible that Ntes could delay it due to market timing.

But at this point, it does look very likely that FF2 could start commercial operation starting 4^th quarter this year.

I don’t think FF2 will be a blockbuster. But I do think it is very possible that FF2 can add 5 to 10 million per quarter to the bottom line.

TX2 criticism session with player representatives

My previous article on TX2 can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/04/ntes-xyq-and-tx2-update.html

On 4/18/2008, NTES having a player criticism session. One can find the video of that session here:

http://www.56.com/u36/v_MzMyNTgzOTM.html

NTES’s TX2 closed beta users elected about 12 representatives among them. On 4/18/2008, NTES paid them to come over to NTES’s headquarter to have a player criticism session with all of TX2 developer team.

In the video, the person in the green stripe shirt is the CEO of NTES. The complaints from users representatives were pretty technical. But I am pretty satisfied by the answers from the developers team. I think these complaints were solvable.

Interestingly, many other developers from NTES’s other games were present as audience.

I think this is a very good and cheap way for NTES to get its developers good ideas about real players concerns.

Typically, a session like this indicated that the game is getting ready. From the players feedbacks, none of the concerns requires NTES long time to correct.

Another confirmation that TX2 is getting ready to rock.

New Update on XY2

My last article on XY2 can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/03/xy2-and-xy3-server-status-part-1.html

From the above article, I used my server count to derive an estimate of Average Concurrent Users (ACU) increase of 5.4% from the 1^st quarter 2008 over the 4^th quarter 2007. Because I only have partial server counts (I am not going to stay late and get up early every day to check for servers), there is always some doubt on how accurate my server count is.

On 4/29/2008, the CEO of NTES talked about XY2. One can get more information in the following article:

http://xy2.163.com/news/2008/4/29/1082_188228.html

Let me translate the main points:

1. NTES will no longer do players migration from XY2 to XY3. NTES will devote complete effort to continuing develop XY2.

2. Ever since October of 2007 when NTES revived XY2, the number of players continues to increase. Its PCU had increased to 409k.

3. NTES is working on the expansion pact for XY2. It will be out in the 3^rd quarter 2008.

Not much is new except for the new PCU estimate. In 4^th quarter 2007, XY2’s PCU is 387k. It means it had a PCU increase of 5.7%

Again, this is another confirmation that XY2 is growing nicely. Considering that XY2 starts commercial operation on 8/15/2002, it is a 6 years old game already.

Even though the complete transition from XY2 to XY3 had proven to be a failure, but its un-intended effects winds up to be better than what NTES can ever hoped for.

Now XY2 is behaving like a 2 or 3 years old games. It will most likely have another 2 or 3 solid years ahead. In addition, XY3 becomes a complete new game and have a solid start in its young life.

It never cease to amaze me how different the Chinese market is to the west.

NTES - XYQ and TX2 Update

My last post on XYQ can be found here:
http://chinese-net-gaming-stock.blogspot.com/2008/03/xyq-server-update.html

My last post on TX2 can be found here:
http://chinese-net-gaming-stock.blogspot.com/2008/03/new-tx2-status-update.html

There are two piece of amazing news tonight.

First, XYQ just blow away its old record. On today, 4/27/2008, it had a new PCU of 2.08 million. Its last PCU record occured on 4/6/2008 and with the old record of 1.67 million. The following is the link to the official announcement:
http://xyq.163.com/2008/4/28/99_188170.html

This is just amazing. XYQ is accelerating its growth. It blows away all my expectation.

There is also an important news on TX2, the most important game in NTES's upcoming game. The following is the semi-official announcement:
http://tx2.netease.com/viewthread.php?tid=315173&extra=page%3D1

TX2 had started small scaled closed beta from 2/29/2008. Now they are going to enter into large scale closed beta on 5/4/2008. In addition, they will enter "open beta" in June.

For most "free-to-play" games, open beta usually means commercial operation.

Thus, I will say TX2 will enter commercial operation either on June or July.

So far, from what I observes, TX2 had addressed most of my concerns. I am pretty certain that it will be a block buster for NTES.

Sohu interview

My last post relates to Sohu’s advertising market can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/03/statistics-from-dcci-on-chinas-online.html

This is old news. But it still might be valuable.

On 3/12/2008, Sohu’s CEO gave an interview. There are several interesting things that deserved to be written. The interview in Chinese can be found here:

http://it.sohu.com/20080312/n255666563.shtml

Highlight of the interview:

1. Sohu’s Olympics strategy just getting started. We haven’t really seen its fruit yet.

2. He hopes Sogou will really shine in 2009 and becomes the third legs of Sohu (besides advertising and games).

3. Olympics give Sohu a opportunity to grab internet users away from their competitors. Olympics is not an end by a start. That is why when a lot of people say that Sohu’s brand advertising will go down after Olympics, he feels it will be exactly the opposite.

4. Target of Sohu is when China’s internet population reaches 500 millions, Sohu will be China’s top 2 or 3 internet companies (not just China’s portals, but among all internet companies in China).

5. He is confident that by the next quarter (before the Olympics), Sohu will generate more revenue than Sina.

6. Except for online gameing (TLBB is in Vietnam now), there is no interests in expanding to overseas.

I am mostly impressed by what he said on number 5. The wall street analysts are expecting Sina to generate revenue of 81.9M and Sohu to generate a revenue of 76.1M (from Yahoo finance site). He is not going to know how Sina does this quarter or next quarter. But for him to make a claim like that, Sohu must be doing extremely well so far this quarter as well as having good visibility going into next quarter. There might be a little bravado on his part, but I don’t think he would make that claim if he doesn’t think there are excellent chances of that happening.

TD-SCDMA Cost comparison and potential problem areas

My last post on TD-SCDMA is as follows:

http://chinese-net-gaming-stock.blogspot.com/2008/04/other-related-td-scdma-news.html

The following is another comparison site by Netease Tech department.

http://tech.163.com/mobile/special/001127IM/td_scdma_useful.html

There are a lot of photos in this site. Not much new information from the last review by Netease. But it does have the cost structure in the table form. I will list the cost comparison between TD-SCDMA vs GSM in the following table:

	Type		TD-SCDMA	GSM
Monthly Fee	Monthly Fee		50/month	50/month
Phone	Voice	Local	Caller = .4/min, Called = Free	.4/min
		Roaming	Caller = .6/min, Called = .4/min	Caller = .6/min, Called = .4/min
		Long Distance	.07 per 6 second	.07 per 6 second
	Video	Local	Caller = .6/min, Called = Free	NA
		Roaming	Caller = .9/min, Called = .6/min	NA
		Long Distance	.1 per 6 second	NA
	Package Deal		$28 for 150 minutes	NA
			$58 for 350 minutes
			$88 for 600 minutes
CRBT	Domestic		.6/message	.6/message
	International		.8/message	.6/message
Internet	Internet Cost		$10 for 30MB	$5 for 10MB
			$50 for 200MB	$20 for 50MB
			$200 for 4GB	$100 for 800MB
			$300 per 8G	$200 for 2GB

From the above table, the better service (TD-SCDMA) actually cost less than the existing and inferior service (GSM) for services common to both. In addition, for services that are unique to TD-SCDMA, the cost is extremely reasonable.

Considering how Chinese youth regards their mobile phones as status symbols, I am certain there will be a lot of demand for this service. Also considering that this is a brand new service, I am also certain that the handset makers are probably going to be conservative in producing the mobile phones. Thus, I think the supply will be limited.

From the review so far, this technology seems to be more mature than I originally thought. But several problem areas may start to emerge. I will list them out below:

1. Lack of coverage. This is to be expected at this early stage of network deployment.

2. Good voice but unstable video. As video requires more resource for the network, lack of network coverage may contribute to this. But other factors that may point to the fundamental deficiency of the TD-SCDMA may be involved. If China Mobile build out the network, and this problem still exist, we may have a problem.

3. Unstable coverage while moving. If there are insufficient coverage, as the caller or the called moved around, it went in and out of areas that have coverage, the result is of course unstable coverage. But if may also point to problems that is more fundamental. This is another area to be looked at.

4. Power consumption issue. There are conflicting report on this. But we know only a handful of companies have build handsets for this standard so far. Most of these companies are domestic and not very sophisticated in designing handsets. In addition, there are usually significant power saving between the 1^st and 2^nd generation handset design by the same company. I don’t know if the standard itself caused the power consumption issue. But it is probably going to take 1 year until the second generation handsets start to arrive before we can say with any certainty about the cause of this issue.

5. Good voice and video service but unstable internet browsing experience. This actually could be a problem that is difficult to solve. Again, have to keep track of further review that come out to see if this is a problem.

6. Nobody to call because nobody have the 3G service yet. Well, this is the chicken and egg question. This is really to be expected.

7. Only 6 handset makers and very little handset selections. Again, this is the chicken and egg question. This is to be expected.

8. Very little new ingenious services that uses the extra bandwidth. Since this is the start of 3G, this is to be expected. But there are another factor involved. If Chinese government allows its mobile operators such as China Mobile to be both the competitor and regulator, like what happed with the WVAS area, then there won’t be any new ingenious service. At this point, China Mobile and China Unicom serve as monopoly in the area of WVAS. As a result, there is no inventiveness. The small WVAS have to resort to junk emails, or porns to stay alive. Unless China government changes the underlining structure, nothing is going to happen in this area.

9. People are waiting for the real 3G. It is possible that most people are waiting for the roll out of WCDMA and CDMA2000. This could be the big one. I don’t know about the psychic of average Chinese youth. Do they go after the latest fad or do they think TD-SCDMA is just a precursor to the real thing (WCDMA and CDMA2000).

In my mind, TD-SCDMA will either get 60% of the market share of China or 0%. Nothing in between. In pure free market condition, TD-SCDMA will not have a chance in hell when compared to the more established standards. The only way it can survive is if Chinese government give TD-SCDMA a 3 to 4 years head start by a proven operator (that is China Mobile). Yes, it will not be permitted by WTO. But I fully expect by the time WTO has furnished its verdict, it will be fate-accompli. If that is the case, I don’t think average Chinese youth will wait that long to use the 3G service. Therefore, TD-SCDMA will get the dominate share of China’s market.

We will probably have to wait for a few months for more reviews to see how the trial goes. But so far, everything look good so far. That may mean we may be seeing a short trial period and roll out can be as soon as this summer. If that is the case, we are most likely seeing demand far exceeds supplies.

Finally, a kick ass TD-SCDMA phone. It is made by Lenovo. See the following two links for the video demonstrations.

http://www.slashgear.com/lenovo-ideapad-u8-more-details-and-a-video-of-the-interface-0811094.php

http://www.engadget.com/2008/04/02/video-lenovos-ideapad-u8-mid-teases-with-intels-atom/

The name of the phone is Lenovo Ideapad U8. It is still in prototype. The phone is just awesome. If TD-SCDMA solved all its technical and roll-out issues, there is no way the average Chinese youth won’t go after this handset.

Other related TD-SCDMA news

My last post on the TD-SCDMA can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/04/negative-review-of-td-scdma.html

I am going to put some miscellaneous information about TD-SCDMA in this article.

From the following article:

http://www.thetelecom.co.uk/20080228/td-scdma-sales-in-china-level-off/

China Mobile Communications, China Telecom and China Network Communications purchased 969M of TD-SCDMA equipment in 4Q07. ZTE accounts for 45.8% of total, Datang with 27.2% and TD tech with 14.9% of total.

A iPhone clone that is more iPhone. http://www.mobilemag.com/content/100/340/C11524/

How about an iPhone clone that can provide 3G services and have better camera than the iPhone? You think an “iPhone” that is even better than a real iPhone can sell in China? Oh, yes!

From the following news: http://tech.sina.com.cn/t/2008-04-03/07202117436.shtml

China Mobile announced that they had already build 14119 base stations for TD-SCDMA. They said within the same 8 trial cities, they had build more infra-structure for TD-SCDMA in 300 days than they did for GSM in 10 years.

From the following site: http://shanghaiist.com/2008/04/01/china_rolls_out.php

One can see that the price of TD-SCDMA services are extremely competitive. If China Mobile keeps these prices and there are no show-stoppers in the trial, given how the young Chinese considering their mobile phones as status symbol, this thing is going to explode.

Finally, let me see how can SPRD take advantage of the coming roll-out of TD-SCDMA.

They have two chips that support TD-SCDMA. The first chip is SC8800D:

http://www.spreadtrum.com/chs/service.asp?name=mobile&product_name=mobile_SC8800D

It can support GSM, GPRS, and TD-SCDMA. It has a maximum download speed of 384kbps and upload speed of 128kbps. It uses a 100MHz ARM processor core.

The second chip is SC8800H:

http://www.spreadtrum.com/chs/service.asp?name=mobile&product_name=mobile_SC8800H

It can support GSM, GPRS, TD-SCDMA, and HSDPA. It has a maximum download speed of 1.6Mbps. It can support 5M pixel camera. It uses a 200MHz ARM processor core.

I believe the SC8800D is out on 2004 and the SC8800H is out on 2007. At this point, China Mobile’s trial is only for the 384kbps version. Thus, only the SC8800D will benefit. But the SC8800H will benefit as China Mobile rolls out the HSDPA version of TD-SCDMA in the future.

Negative review of TD-SCDMA

My last report on TD-SCDMA can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/04/evaluation-of-td-scdma-by-sina-tech.html

The review so far had been good. But I am sure there are negative report also. I found one and it can be found here:

http://tech.sina.com.cn/t/2008-04-07/09452121655.shtml

It is in a newspaper called People’s Net Market Paper. I will translate the main point below.

TD-SCDMA has excellent voice quality. It is even better than the existing GSM.

There is a lot of coverage issues. There are a lot of areas that only have one or two bars. Some places doesn’t even have any bars. The calls are very unstable in places where the coverage is bad. There are places that one can’t even make a call successfully.

The reviewer made a video phone call. The quality is good. But there seem to be delay once a while. The download speed is very good. The reviewer can get a download speed up to 200kB/second (the advertised top speed is 385kB/second).

When it is stationary, the reviewer can have excellent video phone or video/TV programming. The TV volume is loud and clear for the TV programs. But when moving, such as in the subway or on the bus, the speed degrades badly. In a lot of cases, the connection will break.

But there is a very serious battery issue. After only 20 minutes of phone calls and after downloading several short video clips, it already spent half of the battery.

Some customers complained about the instability of the calls. Some calls gets disconnected. It seems like the instability of phone calls are the biggest issue.

From this article, it is hard to tell what caused the instability of the call. If it is the coverage issue, it is to be expected. It can be easily solved by adding more base stations. Mobile operators such as China Mobile are doing that any way. This is really not the issue of the standard itself and can be solved easily by adding more base stations to provide better coverage.

But if the instability is caused by the underlining technical deficiencies of the standard itself, then we will have a big problem. This then become a fundamental problem that no amount of additional infrastructure build can remedy.

It is hard to tell which is the case at this point. But during this early stage, the lack of coverage is to be expected.

Another problem is the power consumption issues. There seems to be conflicting reports on whether this is the issue. Even if it is, it is not clear whether the issue is caused by the standard itself or caused by the deficiency of the handset design. If it is the handset design, it will be solved easily by the future design optimizations of the handset companies. But if it is the technical deficiencies of the standard itself, it could present a very big problem.

At this point, we will probably have to wait for a couple of months of trials to see whether there are patterns emerge.

Evaluation of TD-SCDMA by Sina Tech reporter

My last post on the TD-SCDMA can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/04/evaluation-of-td-scdma-by-sohu-tech.html

Netease and Sohu both have reports on the TD-SCDMA. Sina is of course not going to be left out. For Sina’s case, they did a video review:

http://video.sina.com.cn/tech/other/bn/2008-04-01/21153581.shtml

One can see TD-SCDMA in action in real time. Since this is only a 5 minutes review, this is not going to be a detailed review. But seeing a TD-SCDMA phone in action provides a lot of insight that a written review can’t.

In this video review, Sina’s tech reporter talked about the five advantages of TD-SCDMA phones over the existing 2G and 2.5G phones in China.

First, the phones are multi-standards. The caller can use TD-SCDMA or the existing 2G/2.5G services on the same phone.

Second, it provides high speed internet browsing. Compare to the existing 2G or 2.5G services, TD-SCDMA behave like a broadband service (borrowing the term used for ADSL or Cable Modem). The current version of TD-SCDMA can support up to 384kbps. Sina’s reporter of course went to www.sina.com.cn for demo in this review.

Third, it has video phone feature. In the demonstration, the quality seems very nice.

Fourth, much higher multi-media capability. Now, when one wants to watch TV programs, video clips, or sounds, one doesn’t have to wait forever to download the files. With real time streaming, one can watch these multimedia programs in real time. Again, the demonstration of watching a movie in real time is very nice. The quality of the movie seems to be very nice.

Fifth, the high speed allows for high quality JAVA applications. Sina’s reporter uses the example of keeping track of stocks and stock technical analysis (in real time) as an example.

Finally, the reporter also talked about the extremely competitive pricing of TD-SCDMA announced by China Mobile.

Overall, I will have to say this review gives a glowing report for TD-SCDMA.

On a related subject that I had been keeping track of, the subject of the intense China’s portal’s video/TV war, Sina also had another video report on the TD-SCDMA trial. That video is here: http://video.sina.com.cn/tech/t/bn/2008-04-01/12093579.shtml

There weren’t anything technical about this report. But one can see that Sina is really starting to behave like a CNN or a MSNBC. Sina has really transforming itself from a text based company to a video/TV/multimedia based company.

My last post on the subject of portal’s video war can be found here:

http://chinese-net-gaming-stock.blogspot.com/2007/09/sohu-video-tv-stations-opened.html

At this point, Sina seems to be doing the best job. But with Sohu’s Olympic initiative, it is going to be a war between the two.

Evaluation of TD-SCDMA by Sohu Tech reporter

My last post on the TD-SCDMA can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/04/td-scdma-reviewed-by-netease-tech-news.html

After Netease did a review for the new 3G service trial, Sohu will of course not going to be left out of this. A Sohu tech reporter did a three part reviews as well. I will give a brief translation.

On 4/1/2008, he did the first part of the review:

http://macropandabo.blog.sohu.com/83451568.html

This is the first day that TD-SCDMA can be tested. Most people this reporter called haven’t got the new features yet. Not much can be said in this report. The only thing is that this reporter think the quality of the voice call is excellent.

In the second report, it is probably later on in the same day, 4/1/2008, he talked about a little bit of more features:

http://macropandabo.blog.sohu.com/83530680.html

In this report, he talked about using the video phone feature. It seems like the quality is very good. He is even able to see the background of the other caller clearly. He also talked about the video phone feature when both caller and receiver are traveling with speed. He was on a bus traveling about 80km/hour (about 50 miles/hour) while the other caller is in the subway traveling about 80km/hour (50miles/hr), there are degradation to the voice and video quality of the call. But overall, it is acceptable.

Out of 20 video phone calls he made that day, one can’t receive the video image. But that is probably more to do with the problem with the mobile handset of the received caller.

He also talked about the battery issue. For that day, that reporter made 20 voice calls, 20 video calls, 10 short messages, and 10 minutes worth of WAP. Afterward, the battery is virtually out. The reporter felt it is very battery consuming.

The third report is based on his experience on the same day (4/1/2008) also.

http://macropandabo.blog.sohu.com/83618512.html

In this report, he talked about his experience on the fastest train in the world, Shanghai’s Pudong Airport Maglev (Magnetic Levitation) train. Some information about this train can be found here:

http://home.wangjianshuo.com/archives/20030809_pudong_airport_maglev_in_depth.htm

He arrived at the Shanghai airport and took the Maglev train. He made a video phone call while on the train. At the beginning, with the train stationary, the quality of the call is excellent. But as the train started moving and getting to about 50 km/hour (31 mile/hour), he started to notice the degradation of the quality of the call. When the speed of the train gets to 180 km/hour (112 miles/hour), the call is disconnected. The speed of the train gets faster until it reaches about 300 km/hour (186 miles/hour). At that speed, video phone is not possible. However, even at that speed, he is able to conduct voice call. There are degradation to the quality of the voice call at 300 km/hour, but the phone call is understandable and acceptable. That reporter believed that TD-SCDMA passed the speed test since it will not be possible for 2G phones to keep the link at this extreme speed.

Overall, he felt the quality of various services for the TD-SCDMA is excellent. But there are coverage issues. There are some problem inside the hotel, inside the subway and in Shanghai’s rotating tower.

Also, he already receive his first SMS junk mail. (Remember the issue with FMCN, I guess SMS junk mail is really bad if people already start to receive junk mail on the first day of a trial).

In summary, Sohu’s report seems to suggest two possible problems. First, he thinks there might be power consumption problem. Second, there might be coverage problem.

But from the amount of phone calls he made, I am not quite sure this is the problem. If I made the same amount of calls, it will probably drain the battery of my mobile phone also. In addition, usually the first generation handsets are electricity hogs. They are usually corrected in a few months. With better handset design (which is not an issue for the standard itself) and larger battery capacity, this doesn’t seem like a problem.

The second problem he mentioned, the coverage problem, is really to be expected. It is going to take China Mobile and China Unicom a few years to install tens of thousands of base stations all over the country. There will definitely be coverage problem at this early stage.

Interestingly, he didn’t mention the problem pointed out by Netease’s review, the instability of mobile internet browsing. That actually could be a bigger problem. We will just have to keep track of different reviews to see if unstable internet browsing is epidemic.

Finally, I think this review give me the impression that TD-SCDMA is more matured than I thought originally. It seems they had solved one of a supposed weakness, performance when one or both of callers are traveling at high speed.

As far, both reviews give me a lot of hope that speedy expansion of 3G is possible in China. Major expansion in months rather than in years seems more likely.

But we need to keep track of more reviews. There might just be some issues out there that nobody thought of that might come back to haunt us.

TD-SCDMA reviewed by Netease Tech News

My last post on China’s new 3G mobile phone (TD-SCDMA) can be found here:

http://chinese-net-gaming-stock.blogspot.com/2008/03/china-to-launch-trial-of-3g-mobile.html

On 3/26/2008, Netease Tech. department did a review on the new service. I believe it is the first such review. The article is as follows:

http://bbs.tech.163.com/bbs/tech02/67358158.html

My brief translation is as follows. The article had a lot of pictures. I would not copy the pictures here.

Starting April this year, China Mobile will provide TD-SCDMA trials on 9 cities in China.

The cost of the service is video phone of 0.6 RMB/minute and voice phone of 0.4 RMB/minute. The monthly service is 10 RMB/month for 30MB (?) of data, 50 RMB/month for 200MB of data, 200 RMB/month for 4G of data, and 300 RMB for 8G of data.

The SIM card for the TD-SCDMA is different than that of other standards. They are not inter-changeable.

First, Netease conducted voice phone calls. They found the voice quality very clear. As clear as the GSM network. There were no voice spike or fade or any other interruptions. For this test, they can only do the stationary voice calls. They will conduct the voice call when traveling in high speed in the future.

(My note. Phone call during high speed travel is one of the more problematic areas for cellular phones. Too bad Netease is not able to test this aspect.)

Next, Netease tested the video phone option. They found the image to be very clear. The video refresh rate is about 5 to 8 frame/seconds. It is less than regular TV (30 frame per second), but they found it acceptable for this purpose.

Next, they test the TD-SCDMA’s internet capability. At this point, they can support two capabilities, TD-CMWAP and TD-CMNET. At this point, the data rate supported by TD-CMWAP can be found by GPRS/EDGE. Therefore, it won’t be the selling point for TD-SCDMA. However, TD-CMNET is another story.

To use TD-CMNET over the existing 2G or 2.5G is almost like the difference of using ADSL (broadband) vs. 56k analog modem dial-up for desktop internet browsing.

Of course, Netease went to www.163.com for internet browsing test. They found it much faster than the existing GPRS/EDGE. It only take 3 to 4 second before the page start to load. The browsing afterward is extremely fast also.

At this point, the maximum data rate is 384kbps. They also heard that the next (half) generation TD-HSDPA 3.5G shall be here soon.

Next, Netease tested the TV viewing. It only takes 3 to 4 seconds before the TV program showing up. The quality is excellent. It has the about the same quality as the watching TV at home. The sound from the speaker phone is very good also.

In addition, one can use TD-SCDMA to perform remote control or remote surveillance functions. For example, to check the traffic condition of one’s travel destination. Or use TD-SCDMA phone to control the computer at home or home appliances.

They also watch an NBA game on the phone and found the quality excellent.

But they did found a few minor problem. They found, at the location where they done the test, the connection to the internet is not very stable. It disconnects a few times. They hope this is just a phenomenon during the trial.

In addition, they think the next generation TD-HSDPA shouldn’t be too far away. The license to operate TD-HSDPA had been recently granted to a few phone manufacturers. It shouldn’t be very long for this new service to come out.

Finally, they predict TD-SCDMA will be offered to the general public in June this year.

This concludes the review by Netease Tech department. From the review, it looks good. While I am certain there will be a lot of teething problems in the next two years, I believe Chinese users will tolerate them as long as they are not show stoppers. Except for the unstable internet connection, there doesn’t seem to be any show stoppers. We have to however, keep an eye on that as more reviews come in.

If TD-SCDMA can really get into commercial operation by June this year, it will really be great news to equipment manufactures such as SPRD and WVAS content providers such as SINA and KONG.

Sohu’s search monetization strategy

Just want to talk a little bit about how Sohu is going to monetize its search engine, Sogou.

My last post that is sogou related is here:

http://chinese-net-gaming-stock.blogspot.com/2007/09/cnnic-2007-search-market-survey.html

It has a two prong strategies. First, it is going to use all of Sohu’s properties to sell Sogou. See the following web site:

http://www.sogou.com/fuwu/jingjia/tushi.html

If a company buy a key word on Sogou, it will not only be buying a presence on the search engine, sogou, it will also buying a presence in other Sohu properties such as emails, blogs, portal channels (news, sports, etc.), etc.

In addition, on 3/14/2008, it also start a service called Sogou 800. See the following web page:

http://www.sogou.com/fuwu/ppc.html

If a company become Sogou’s consumer and buy a key word, and when an internet user search on Sogou using that key word, that company information will of course be part of the search result. Nothing different here from other search engines.

But now, there will be a little green telephone sign next to the search result. The internet user can then click on that sign and give sogou his or her phone number. Sogou then will connect between that internet user with the customer service department of that small company. The first 10 minutes of phone service will be paid for by Sogou.

It is an interesting service. I have no idea how effective will this service promote Sogou.

But if it is effective, Sohu will incur some additional expenses in return for being a player in China’s search engine war. On the other hand, if it is not effective, Sohu won’t have to spend much.

It is what a hit game like TLBB can do for Sohu. Now, Sohu makes tons of cashes from that game. These extra money enable Sohu to spend a lot of money to promote her other services.

For Netease, I think it is dumb for them to get into search now. But for Sohu, I think they might still have a chance.

In addition to the above two strategies, their Olympics connection might give them a head up during Olympics. Search is a force of habit. If they can convert enough users to use Sogou during the Olympics, those users might just keep on using Sogou afterward.

Finally, Sogou might have a secret weapon in its disposal. It is just purely a guess on my part right now. If I have some more time, I will probably talk more about this “secret weapon” in the future.

Netease start to monetizing its search engine

My last post that is Yodao related is here:

http://chinese-net-gaming-stock.blogspot.com/2007/09/cnnic-2007-search-market-survey.html

On 3/6/2008, Netease started to monetizing its new search engine, Yodao. See the following link:

http://a.yodao.com/login.s

From now until 3/30/2008, it also has a promotion where if a small company can get 100 dollars in promotion money when they put in 1 dollar. See the following:

http://a.yodao.com/campaign/200801/index.html

Yadao hadn’t done much and I don’t think it is even close in popularity to the top four search engine yet. When Sohu started its Sogou search engine, it waited for a long time before it started to monetize its search engine.

I doubt this will add anything of any significance to Netease’s revenue. I hope I am wrong, but it is just too late to get into search engines in China now. Baidu is just too good in technology, execution, management, and a tremendous head start. I have the feeling that Netease is just pumping money into a hopeless mis-adventure.