Legend, AOL seal China Internet pact

Mainland computer giant Legend and AOL have forged a $200 million pact to develop interactive services for the China market

By CNN's Kristie Lu Stout

HONG KONG, China (CNN) -- China's largest computer maker Legend and Internet giant AOL Time Warner announced a $200 million deal Monday to develop interactive services for China.

The joint venture marks AOL's first step into China. Legend will own 51 percent of the joint venture. But industry watchers say AOL will enjoy more perks, getting access to a fast-growing market of 22 million Net users.

Observers also see Legend-AOL alliance as a giant that will shake the battered sector, forcing China's struggling Net firms to consolidate.

AOL has more to gain

QUOTE "I believe this cooperation is a strategic move which will have a profound impact on the China Internet industry." - Legend chairman Liu Chuan Zhi

AOL will provide its marketing prowess, benefiting from Legend's experience, a statement announcing the deal said.

"I am pleased to see Legend joining forces with AOL, the world's leading interactive services provider, to promote the development of Internet applications in China," said Legend chairman Liu Chuan Zhi.

"I believe this cooperation is a strategic move which will have a profound impact on the China Internet industry."

Benefits less clear for Legend

Analysts say AOL has the most to gain.

"AOL needs Legend's brand presence in China more than Legend needs AOL in China," said Nomura technology analyst Theodore Teo. "It gives them instant branding."

Legend chief executive Liu Chuan Zhi said recently in Hong Kong that his company had 30 percent of the domestic PC market.

Legend also has an extensive customer base. Software to access its FM365.com flagship portal has been preinstalled on each Legend PC -- an arrangement that could lead to the bundling of AOL Internet services.

The benefits for Legend are less clear.

"The only thing attractive for Legend is to ensure that a world-class player such as AOL does not partner with any other ISP [Internet Service Provider] in China," Kim Eng Securities said in a recent research note.

Rocking the sector

China's portal business is already seeing a wave of merger and acquisition activity as portals scamper to trim down and consolidate.

"The online advertising revenue market in China has taken a precipitous drop right now," Kristian Kender of Strategic Intelligence told CNN.

"Now with the AOL-Legend link-up, you have an 800 pound gorilla coming in and sitting on your living room couch in terms of advertising spend."

Analysts say all four Nasdaq-listed China portal firms -- Chinadotcom, Netease, Sina.com and Sohu.com -- need to boost revenues in a crowded market that will only get more uncomfortable when Legend-AOL enters the fray.

All four Web sites are vying for control of China's limited $100 million Internet advertising market.

Every Nasdaq-listed player except Sohu.com is reportedly considering consolidating. Sina.com is seen as a Chinadotcom acquisition target.

Hong Kong pay-TV operator I-cable is reported to be in talks to buy China portal Netease.com. Netease founder and majority owner William Ding agreed to sell for $85 million in cash. But the deal is reported to have hit a standstill.

Last week, chief executive of China's leading portal Sina.com Wang Zhi Dong resigned, possibly to make way for a more-suitable CEO as Sina woos potential buyers.

Sohu.com senior vice president Victor Koo told CNN that the current activity would hit the whole sector.

"My view is that the competitive landscape is stepping up again and Sohu is actively looking at our strategic options as well, but probably too early to announce specifics at this point," said Koo.

"AOL-Legend will probably take some time to gel but will become a key player by next year."

AOL is a wholly owned subsidiary of AOL Time Warner, the parent company of CNN.