By Perry Wu
So what were the big China Internet events of 2004? There were so many stories–some published and some yet to be released–that shaped this year's events. In general we can look at four main areas: China Mobile used its strength, the bubble did not burst on China, America started getting serious about Chinese online ventures again, and new rules were made to govern how Chinese netizens interact online.

1. China Mobile Flexes Its Muscle

By far, the biggest China Internet story of the year was China Mobile's decision to use its enormous clout to show smaller companies "who's their daddy". In a spring column on Linktone, I predicted that the grossly unbalanced power relationships between China Mobile and the mobile content providers would inevitably make China Mobile snap. And several week later in the summer of 2004, China Mobile unfortunately did just that.

Using the pretext of an incredibly small number of text messages that Sohu (SOHU) had delivered in violation of its contract, China Mobile banned Sohu's (and a few smaller companies') messaging services for a full year. All the shares of the Chinese listed portals fell on the news. Charles Zhang, the CEO of Sohu, tried to sugarcoat by saying the suspension would not have a material effect, but the damage was done. After 2004, investors now have (or should have) a keener appreciation of China Mobile's ability to stifle smaller content competitors, at will.

Investors should also have a very clear understanding that the portals like Tom.com (TOMO), Netease.com (NTES), and Sina.com (SINA) do not make a truly impressive amount of money off their relationships with China Mobile. I warned two years ago, and again earlier this year, that receivable cycles were tortuously long in the China telecommunications sphere. And sure enough, last year and again this year we saw many times where the portals issued guidance that they were having problems collecting from their daddy. Funny thing, as I write these words and you read this, many investors probably still do not understand what I'm talking about and will continue to trudge into the Chinese Internet blackhole. Darwin will always win, I guess.

Honestly, I did not expect China Mobile to use its power so soon in the game. But it is yet another example that the oriental veil that foreign investors throw over Chinese listed companies to make themselves believe that the companies are operating in the same regulatory and user-friendly environment as, let's say, a Yahoo is purely an opium pipe dream.

2. No Bubble-Bursting

One big story of the year is what didn't happen: with the big run-up in share prices of Chinese listed stocks such as Sohu, Sina and Netease in post-SARS 2003, many thought the stocks were due for a big correction, a big bursting of the bubble. The surprise: it did not happen. While share prices of most Chinese tech companies hover far below their all-time highs, the share prices remain at lofty levels. Mary Meeker should be proud.

Sohu's Charles Zhang, in the last month, even publicly said that investors would be sorry for valuing his stock lower than main rivals Sina and Netease. Netease's stock traded about 100% more than Sohu's through most of the year while Sina's traded between 25-50% higher. The man has pride!

We found this year that second acts are possible in a bubble, even when you ran your last company in to the ground. Yunfan Zhou and Nick Yang, both veterans of ChinaRen and Sohu, came back this year with a new company called KongZhong (KONG). Zhou and Yang sold ChinaRen to Sohu.com in 2000, and joined Sohu as executives. With Sohu's stock price hitting single-digit lows in early 2002, the two-person team showed their concern when the going got tough by jumping ship in March 2002. Only two months later they struck again and founded KongZhong, wasting no time in doing its IPO this year.

Other companies took advantage of the bubble to do their public offerings: Shanda (SNDA), Ctrip (CTRP), eLong (LONG), 51Job (JOBS) and many more. However, solid-looking clicks-and-mortar listed businesses like Ctrip and 51Job may suffer next year if Internet-only comrades like Linktone (LTON), KongZhong and Tencent (0700.HK) stumble: the downside of riding a bubble is that when any part of the bubble decompresses, all the players come tumbling down.

3. The American Occupation

No, I'm not talking about Iraq, though the United States government should take a page from the expansionist English (with utmost respect to our friends of Scottish, Welsh and Irish descent) of olde and provide better tax breaks and guarantees to its American expatriates working overseas to bring the Stars and Stripes its global glory. Ahem.

I'm referring to America's occupation of the China Internet scene. This was the year when the large American online players began to make their move on the Chinese Internet sites. There was Amazon buying a stake in Joyo.com, one of China's leading online booksellers. Barry Diller's IAC took a controlling stake in eLong, a top Chinese online travel site. Yahoo (YHOO) and Google (GOOG) moved in on Chinese search and auction sites. And of course NASDAQ, NYSE, and lots of banks and funds made hundreds of millions this year from the Chinese technology companies' public offerings.

At the end of the year though America gave back a little of what it had gained: IBM sold its personal computer division to Lenovo. If companies operated with patriotism, rather than shareholder value, as their most important value, IBM's surrender to Lenovo would be just that. But thankfully we won't have pocket-protector wars between the geeks of IBM and Lenovo and hopefully the consumer will win with better designs and cheaper prices for IBM products. And that all translates to more people online.

4. Technology Rules and Regulations

No central government can operate without rules. The scope of laws governing business practices increased in China this year and we saw rules about Internet cafes, laws governing media joint ventures, jail for online editors, edicts to halt the spread of spam, and online pornography crackdowns.

Unsolicited commercial email, or SPAM, is still a big problem and China held a historic meeting in 2004 where chiefs from eBay, AOL, Yahoo, and Microsoft joined in Beijing with the Internet Society of China (ISC) in drafting rules to help stem the tide of spam emanating from China. However, according to international groups like Spamhaus, Chinese authorities still seem mired down and are having difficulty responding to international complaints of errant Chinese provincial Internet service providers who are still hosting spam and pornography websites. Enforcement, then, seems to be in order for 2005.

Interestingly, this year saw a spate of court cases where normal users sued websites and software companies for loss of virtual property. In February, the Beijing Arctic Ice Technology Development Company faced a second lawsuit in only a year after one of its users claimed he suffered the loss of a virtual CNY5000 worth of virtual weapons and equipment. And in November a player sued Kingsoft for US$11 because the software giant froze the player's online game assets. With all these lawsuits one does start to think that games may be a corrupting influence…

Following an Internet cafe fire that killed many youngsters, China's police issued new guidelines to govern how an Internet cafe could be opened. This was followed throughout the year by many more closures of illegal cafes. The re-opening of the cafes has been hailed by online game developers as a boon for attracting (addicting, might one also say?) young players.

Ok, those are the top four stories, as I see it. Yours may be different. Throughout this year I have enjoyed receiving mail from all the users, traders, and public relations officers–keep the feedback coming. So what is going to happen in 2005? It will definitely be a chicken.

About the author:
Perry Wu is a writer and correspondent for ChinaTechNews.com and can be reached here at the site. Perry Wu does not hold any positions, long or short, on any of the Chinese or American company securities mentioned in this article.