Not Everything Is Flying High in China

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In most cases, investors would expect the mixture of three tantalizing ingredients -- wireless, China, and advertising -- to result in hockey stick stock charts. But in the case of several companies providing wireless value-added services (WVAS) in China, the recipe is causing more cases of indigestion, with many stocks down 50% or more so far this year.

China's WVAS market is made up of companies such as KongZhong (Nasdaq: KONG), Linktone, and Hurray! Holdings (Nasdaq: HRAY), which offer wireless access to content such as games, music, and messaging applications. But these players are increasingly moving to diversify away from purely wireless offerings in light of a rapidly changing marketplace.

While many competitors have already turned in retreat, KongZhong believes that the wireless Internet holds great potential and is still in its early stages in China. The company recently reported earnings that were largely in line with expectations, commenting that WVAS revenues were flat on a sequential basis. With leading wireless operator China Mobile (NYSE: CHL) making up 75% of these revenues, the company was feeling the negative impact of new policies China Mobile put in place that favor its own embedded offerings.

Still, KongZhong is working to develop a wireless advertising business line to make up for an uncertain future in the wireless services segments. The company has so far had success courting customers such as Nike (NYSE: NKE), BMW, and Blackberry maker Research In Motion (Nasdaq: RIMM). Competitor Hurray! has taken a different tack in light of dismal performance, however, choosing to merge with private Chinese media content and production company Enlight Media. This move will broaden the combined company away from its wireless focus and make it a cross-platform media provider.

Even online media purveyor SINA (Nasdaq: SINA) has chosen to ditch its wireless business in favor of competing with Baidu.com (Nasdaq: BIDU) for advertising dollars -- er, make that advertising yuan. That may sound a little crazy -- like opting to bypass a lightweight fighter in your own class and instead step up 100 pounds to the ear-biting ranks of heavyweights. But the move shows that SINA is willing to slug it out in a larger market where it sees more growth and stability.

Either way you slice it, there's a lot of regulatory and market uncertainty for third parties focused on wireless value-added services in China. Investors should be wary of companies heavily dependent upon this segment and adjust their risk accordingly.

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