Less Wireless at NetEase

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Is Chinese online-gaming giant NetEase (Nasdaq: NTES) gnawing away at its roots? According to Reuters, NetEase will be laying off two-thirds of the workers toiling away in its wireless subsidiary.

Is one of the country's best success stories in retreat mode? Not even close. Cutting back makes sense this time. A couple of years ago, NetEase, SINA (Nasdaq: SINA), and Sohu (Nasdaq: SOHU) were tearing up the market on the strength of their wireless messaging services. Then regulatory forces began to crack down on the type of content that could be transmitted, and carriers began to squeeze their once-generous payouts. These days, the niche is just a fading speck in the company's rearview mirror.

Online gaming is the name of the game at NetEase. In China, young residents flock to Internet cafes to live virtually in the company's popular Fantasy Westward Journey game. The pipeline is rich with upgraded versions and entirely new games (including next week's beta rollout of Tianxia II). This past quarter, online games made up nearly 82% of the company's revenue. Advertising on its lively NetEase.com Internet portal accounted for a 15% slice of the revenue mix. Wireless? The segment that was once the company's bread-and-butter business brought in less than 4% of the company's revenues for the September quarter.

This doesn't mean that wireless, in general, is dead in China. Witness TOM Online (Nasdaq: TOMO), which is thriving by providing multimedia messaging services, peddling ringtones, and marketing the popular Dream China talent show contest.

NetEase could have gone the other way, ramping up its efforts to make a bigger splash in wireless, but it's hard to argue with the company's choice to concentrate on its high-margin gaming business. It's where the gamers are -- and where NetEase needs to be.

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SINA and TOM Online have all been recommended to Stock Advisorsubscribers. NetEase is aRule Breakersnewsletter pick. Try any of our Foolish newsletters free for 30 days.

Longtime Fool contributor Rick Munarriz is a fan of China's growth story, but he does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.