Suddenly, Sohu Is Looking Ho Hum

The Net comet has squandered its headstart, irking investors

Nobody in China's Internet industry was flying higher in January, 1999, than Charles Zhang. His, based in Beijing, was the hottest Chinese-language portal in a market where Web use is growing explosively. While rivals scrounged for money, the 34-year-old Massachusetts Institute of Technology PhD counted Intel Corp. and Dow Jones & Co. as investors. Net guru Nicholas Negroponte even traveled to Beijing to help Zhang generate buzz.

That buzz has quieted fast. Zhang's company is no longer the only portal with high-powered foreign backers, and in July it was beaten to the market by Corp. as the first mainland Internet initial public offering on Nasdaq. Meanwhile, several top executives have quit, investors are griping over performance, and Communist authorities have raised hackles over content. With its headstart over rivals, "Sohu should have been everywhere," says University of Hong Kong telecom expert Peter Lovelock. Now, "Sohu will have to rebuild itself."

For Zhang, it's part of the challenge of trying to pioneer something as fast-changing as the Internet industry in one of the world's toughest environments for private entrepreneurs. Rather than expecting results in Net time, Zhang now urges patience. In China,he says, things "just take longer than in the U.S."

But another part of Zhang's problem may be that he is not following the Silicon Valley model closely enough. For example, he has been slow to offer top executives stock options that could translate into lucrative stakes when it goes public. Several former Sohu employees say that is why top staff have left recently, including the directors for design, technology, and new products. Several have defected to local rivals that are more willing to share

the wealth. Zhang "would always promise options to senior managers and never come through," gripes one former exec. Zhang dismisses the defections as unimportant. "There are always people who come and go," he says.

Zhang also has had trouble keeping foreign investors happy. Early this year, sources say, he had a run-in with Intel, which wanted a bigger stake in the company after Zhang had failed to meet previously agreed revenue targets for 1998. Moreover, Zhang cut several advertising deals and attempted to count them in his 1998 figures--a practice that Intel rejected. Neither Sohu nor Intel confirm whether there was any change in equity stakes. Eric Levin, Intel's treasurer for Asia Pacific, says that Sohu's performance is "saTisfactory."

The Chinese government also has slowed Sohu's momentum. Over the winter, the public security bureau raided its offices because it found that some customers could view pornographic sites through the portal. More recently, officials temporarily shut down the E-mail services of Sohu and other Chinese portals during its crackdown on the Falun Gong religious movement.

HACKER ATTACK. Despite the difficulties, Zhang says Sohu remains a leading Chinese Internet company. "Sohu's brand is way ahead of others," he maintains, adding that Sohu has the most revenues of any Chinese portal. But he won't say how much those revenues are, and independent estimates are hard to come by. Zhang blames rumors of trouble at Sohu on misinformed foreigners. "What really works in China can not be correctly understood by the international community, because China itself is hard to understand," he says.

At any rate, Zhang vows not to retreat. To generate some new buzz, he is launching additional services. They include finance and sports sites and another for Net-savvy Chinese teens. He's also promoting an education channel. But nothing's easy. During one recent promotional event, a hacker flooded its system with bogus questions. Zhang believes it was the work of a rival portal firm. "Business is still like in the Wild West," he sighs. And China's Internet frontier won't be getting any tamer.

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