China's days of free Internet lunch ending

HONG KONG, China -- The free lunch for many of China's 20-million-plus email users is ending.

Internet portals in China, desperate to turn their popularity into profits, are starting to charge for user services as online ad revenue proves insufficient.

China's listed portals, surviving off sizeable but shrinking piles of cash raised in initial public offerings, must find revenue to reverse the bleeding.

Sina, Sohu.com and Netease are trading at tiny fractions of their IPO prices.

Surviving the long haul

"If they don't start charging for the services they provide, I don't think any of them will survive in the long haul," said Jack Lin, chief investment officer of Internet group chinadotcom.

Chinadotcom, which operates a mainland portal, plans a host of fee-for-service initiatives beginning in August, including email, to help the company in its quest to break even.

Up for review are chinadotcom's roomy 80-megabyte free email boxes. Microsoft's Hotmail offers just two megabytes.

Rival Sina plans fees on some services, including email, "definitely" before year-end, a spokesman said.

A number of portals in China, including 163.net, the mainland arm of Hong Kong's Tom.com, have already introduced fees for email. Its Web site says 163.net charges $6-$14.50 per year depending on the level of service.

A spokeswoman with 163.net said the fees were introduced at the end of June and it was too early to determine their impact on usage.

Others that charge include www.21cn.net and www.263.net.

Netease said it had no current plans to collect fees for its services, but did not rule out the possibility in the future.

Among top Chinese portals, only Sohu.com was adamant about not charging for email. The company said at the current early stage of China's Internet development, it did not make sense to charge for email.

"Email is so essential," said Sohu.com CEO Charles Zhang.

Will users agree to pay?

There is no guarantee that China's Net users will be willing to pay for a service that had been free.

"What got the Internet off the ground was the thing about people wanting to communicate with each other. And email is the most obvious part of that," said David Cui, an analyst with Merrill Lynch in Hong Kong.

Sina said it expected users to be prepared to pay about $2.41 (20 yuan) a month for "value-added email service" that provides higher security and bigger memory.

But Cui said he suspected some users would be ready to cough up just five yuan.

"I think only very heavy users would be prepared to pay 20 yuan a month," he said.

Analyst Matthew McGarvey at IDC in Beijing does not expect email to be a big money spinner for China's portals.

"It certainly doesn't hurt," he said. "But by no means can they turn it into a substantial revenue flow."

Getting users to agree to pay is only part of the challenge.

"Micro payment in China is a problem that everyone faces," said chinadotcom's Lin. Small payments make it uneconomical to bill individual users across the vast country.

Lin said chinadotcom would reveal in August how it would collect small payments from subscribers.

Chinadotcom has a venture with mobile phone distributor CellStar Corp for a Web-to-mobile message service to be launched soon.

Lin hinted chinadotcom might tap the service to collect micro payments. Texas-based CellStar has over 7,000 outlets across China.

Lin acknowledged chinadotcom might lose some users to rivals when it imposed fees. But the rivals will in turn face pressure to impose fees as they are flooded with capacity-craving users, he said.

"What's the point of having many users if you can't monetize them," Lin said.

Reuters contributed to this report.