By Bruce Einhorn Few dot-coms better symbolized the excesses of Hong Kong's Internet bubble than tom.com, the portal controlled by billionaire Li Ka-shing. The young company's initial public offering in early 2000 created near hysteria in Hong Kong, where people spilled onto the streets as they lined up for hours to buy a few shares. This was for a company that barely had an operating Web site, let alone any signs of profits. Still, the magic of Li's name convinced thousands of Hong Kongers that this was a dot-com with a good chance of outlasting the competition.
Since then, tom.com's stock has fallen to its IPO price. Like most other stocks on Hong Kong's Nasdaq-like GEM board, which got its start in 1999, tom has languished in near obscurity after its brief moment of fame.
Still, tom.com is controlled by Li Ka-shing's Hutchison Whampoa and Cheung Kong Holdings. That means it still deserves attention. The recent news, however, hasn't been great: On June 27, Ohio-based sports-promotion company IMG filed suit in a Hong Kong court against tom.com. The U.S. company alleged that tom.com had reneged on a deal to sponsor a Chinese soccer league and asked for $10 million in damages.
While it might seem odd that an Internet company would even be mentioned in the same sentence as sports events in China, tom.com has aimed to diversify from its online roots and become more of an Old Economy media company. While the company won't comment on the IMG case, I was able to speak recently with Sing Wang, tom.com's CEO and executive director, about a strategy that is, for Chinese-language dot-coms, unique in its willingness to go well beyond traditional online businesses in the search of sustainable revenue.
Q: Recently tom.com has ventured far from your core Internet business into such areas as sports promotion, print magazines, and outdoor media. Why?
A: If you're going to be purely an online [business] and pursue a content-driven model with no other revenue source than Internet advertising, then to break even you have to wait a few years. It takes different resources to really make it work in China.
Q: How is your portal doing?
A: We have 50 million daily page views and 15 million registered users -- [we're No. 5.] In terms of revenue, we're No. 2. In online revenue in the first quarter, [Chinese language portal] Sina.com had $5.8 million, and we had $2.3 million [in online revenue] -- up 18%. Our total revenue was $9.9 million. Most of the others have seen their revenue go down. But for us, the trend is up again.
A: We have successfully built a national sales network, with more than 40 people. And we have a cross-media strategy. When we approach a client, we sell them on more than online. People who used to be only buying billboards are now buying online. There's an online-offline synergy and an offline-online synergy.
Q: Are you as down as everybody else on China's Internet sector?
A: It's an endurance game. Some of the most popular sites seem to be falling apart. We believe in the Internet business, but it will take time.
Q: What makes operating a dot-com in China so hard?
A: The advertising market in China is 60 to 70 billion yuan RMB. The online advertising market is just 400 to 500 million yuan RMB. (The current exchange rate is about 830 yuan RMB to the U.S. dollar.)
Q: That's tiny.
A: Yes, it's pretty small.
Q: But won't it be growing to huge numbers? That's the promise that everyone has hyped.
A: The total ad market in China will be $12 billion by 2004. The online ad part of that 2004 figure will be about 2% -- $240 million. That's it.
Q: Given those paltry numbers, what are you doing in the offline market to adjust?
A: What we're doing is quite different than the other portals. We are cross-media, with outdoor advertising, online, events, and print. We're targeting the top 20 cities in Greater China, and for each of the four categories we want to be No. 1 or No. 2 in each market.
Q: Outdoor advertising? That doesn't sound like a very exciting business.
A: In China, there are several hundred players in outdoor advertising. It's a very fragmented market. We're consolidating that market. In Shanghai, we have close to 3,000 bicycle shelters, plus 2,000 light boxes. We have acquired businesses in Kunming, Guangzhou, Beijing, and Chengdu, too. The aim is for outdoor to be a major, major player. We're already No. 2 or 3 in China.
Q: You're also getting into the magazine business, buying stakes in Chinese-language publications in Hong Kong and Taiwan. Why?
A: Chinese will be an important language for the publishing business. Now there is no universal Chinese print media group. We own 49% of PC Home, which is the biggest magazine publisher in Taiwan. We'll look for more opportunities in mainland China and will seek a separate listing on the Hong Kong exchange.
A: As soon as possible. Hopefully, within this year.
Q: How are your relations with Li Ka-shing's companies Hutchison Whampoa and Cheung Kong? Do you enjoy an advantage thanks to them?
A: We're an independent business. We deal with other Hutchison units on arms-length terms. When we go to [Hutchison-owned retailer] Watson's to solicit an ad, it's like any other client. We have to fight hard. But since Hutchison and Cheung Kong are such important companies in Hong Kong and globally, it gives tom.com a great shareholder base and credibility among potential advertisers, investors, and users.
Q: Are you interested in buying any Chinese portals?
A: Would we consider it? Absolutely, yes. But it's not a must. We have to keep our eyes open and look at the landscape. As any responsible major player, you have to be evaluating every opportunity. But that doesn't mean that we must do a deal.
Q: Tom.com suffered a lot of criticism when it had its IPO, since the company barely had a business. In hindsight, was the early IPO a mistake?
A: I would argue that tom.com IPOed a little bit early. I would be the first to admit that, in a normal capital market, we would have let the company grow a little bit more. But [the early IPO] subjected the company to a much greater degree of public scrutiny early in its life. In the end this was a good thing. It enabled us to build a household Internet consumer brand as a very low cost. And it put the entire company under very strong pressure to create shareholder value.
One of the common failures of Internet businesses worldwide is weak understanding of shareholder value. As a publicly listed company, our No. 1 priority is creating shareholder value. Mr. Li takes every opportunity to remind us [of that].
Q: How have you changed things since the boom days?
A: A year ago, we had a burn rate of $7 million per month. That was a lot of money, given that we had a very small -- you can say minuscule -- revenue base. Now our burn rate is below $3 million per month for the online operation. The other businesses are profitable. We now have less than 50 people in Hong Kong [working at tom.com]. At the peak we had more than 200. Clearly, we were way overstaffed.
Q: How's you cash holding out?
A: The IPO raised $114 million. At the end of the first quarter of 2001, we had $100 million.
Q: When will you break even?
A: We don't think it's productive to be too precise. We will be 12 to 18 months ahead of the other [Chinese-language portals], like Sina.com and Netease.com.
Q: But given their dire financial position now, they might not even exist much longer. So saying that you'll be more profitable than them is not saying very much, is it?
A: We will be ahead of a lot of other people. Einhorn covers technology for BusinessWeek from Hong Kong. Follow his column every week, only on BW Online