Tech Market WatchBy Perry Wu
Just as the Chinese technology community was settling in to a week of good holiday cheer at the end of 2004, Darth Vader stepped in and spoiled Linktone's (LTON) holiday plans.

On December 22, we learned China Mobile penalized Linktone for supposedly violating some billing protocol. Apparently, Linktone mistakenly billed 27,000 customers for services that should have been free. Now, China Mobile will not pay Linktone any of its WAP revenues for a half-year beginning January 1, 2005.

And how does Linktone explain away this bad news? Raymond Yang, the CEO, gave the usual explanation: "To date, Linktone's WAP services have contributed a small percentage of our revenues, and this was expected to continue. As for our other service platforms, we plan to develop and promote the existing products in our broad service portfolio."

This is now a recurring theme with all these Chinese Internet companies after China Mobile lays on a penalty. The public relations strategy is simply to point out that wireless revenues make up a still minor part of overall sales. Sohu and others had the same PR strategy, even though for many previous quarters they had boasted of their wireless strengths.

But think about why that is not enough of an explanation.

Imagine you find out that your good friend just stole your wallet. The next day your spouse asks you how you now feel about your friend. You say, "No problem, there was only five yuan in the wallet. No big deal. He's still my friend because it's not a lot of money."

This is how Linktone and others are explaining away troubles with China Mobile. They are only concentrating on the fact that China Mobile is stealing a wallet with only a few yuan inside. But the larger issue is what kind of friend is it that would steal your wallet? "With friends like this…"

This situation began in the summer of 2004 when Sohu (SOHU) announced that it had been penalized by China Mobile. The fortunate thing about Sohu is that mobile and wireless content is just one part of its business; it still has its popular website and numerous other revenue streams. Quick note to Sohu: why the heck did you ever stop developing your search engine and instead dive into the muddied portal business?

So we have heard this story before, but to Linktone this penalty is especially severe. Unlike Sohu, Linktone is a pure, unmodified, unadulterated wireless company. If companies like Linktone and KongZhong (KONG), another wireless-only company, have a bad relationship with China Mobile (and as I repeatedly have said in other columns–China Mobile is the only game in town), the game is really over. Either some outlandish new technology has to be invented in the next couple of years making China Mobile obsolete (not likely), or Linktone has to do some heavy contemplation.

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.

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