CHINA'S decision to shut down several hundred online file-sharing Websites has grabbed the headlines since it was announced three weeks ago as part of a crackdown on pornography and other "improper content."

The move threw the baby out with the bath water, blocking millions of netizens from downloading the latest Hollywood blockbusters, popular songs, games and software through file-sharing Websites on the Internet and via mobile phones.

The government's action is expected to hurt domestic wireless services because qualified Websites and content are influenced by regulations. Meanwhile, the latest action will boost the growth of YouTube-like Websites providing online viewing services.

Among those hit are Chinese dot-com firms such as Nasdaq-listed KongZhong Corp and Sina Corp, and Youku.com, the country's biggest online video Website.

Need to change

"We will no longer solely depend on wireless services. We have to diversify our business income," said Wang Leilei, KongZhong's chief executive, after his company announced it would spend US$80 million to acquire a local online game firm.

The acquisition was disclosed just a week after Beijing-based KongZhong said its income from wireless services would be hurt by the government's actions.

Three weeks ago, several well-known Websites, including BTChina, were either shuttered or ordered to delete all download links by the State Administration of Radio, Film and Television and the Ministry of Industry and Information Technology. The government agencies said the Websites didn't have online video and audio broadcasting licenses.

At the same time, telecommunications operators, China Mobile, China Unicom and China Telecom, were ordered to check service and content provided by wireless service partners.

Shanghai to date has closed almost 1,900 Websites containing pornographic and other content deemed improper. The sites used to be accessible on mobile phones, according to the Shanghai Communications Administration.

The local branches of China Mobile and China Telecom have canceled 69 contracts with partner firms whose content includes obscenity.

China Mobile suspended billing for all of its WAP (wireless application protocol) services as part of the national campaign, the world's No. 1 mobile carrier by subscribers said last month.

On a national level, China Mobile has shut 626 sites hosting offensive or unauthorized content, including six at its own data centers.

Wang Jianzhou, China Mobile's chairman, said last month it would invest 100 million yuan (US$14.7 million) on technology to screen out mobile porn.

The Chinese wireless services industry is in the throes of change because of the government's crackdown on Websites and other "policy risks," industry officials said.

In the third quarter, the revenue of value-added services in the industry jumped 17 percent from a year earlier to 39.2 billion yuan, compared with a 40 percent growth in the same period last year, said iResearch Inc, a Shanghai-based Internet consulting firm.

KongZhong, which recently lowered its fourth-quarter revenue forecast to between US$34 million and US$35 million from US$37 to US$38 million, plans to acquire Shanghai-based Dacheng Network in a cash-and-shares offer valued at US$80 million. The transaction is expected to be completed in the first quarter of 2010.

The company is seeking to generate half its future income from online games, according to Wang.

In 2009, Sohu.com Inc spun off game division ChangYou for a listing on United States-based Nasdaq. Sina's joint venture, China Real Estate Information, is also listed on Nasdaq.

Meanwhile, Sina, the country's No. 1 Internet portal, has been promoting a new social network product called Wei Bo, a twitter-like service in China.

The online video industry, in particular, is bracing itself for a restructuring after the government's swoop on file-sharing Websites, industry officials said.

Most file-swap Websites use a technology called P2P, or peer-to-peer. Users distribute content through P2P networks comprising participants who make a portion of their resources directly available to other network participants. Peers are both suppliers and consumers of resources.

The P2P technology, used by BTChina, had shielded the Websites from regulatory prohibitions on content containing pornography and copyright violations.

P2P technology sites have raised the hackles of mainstream, licensed online video providers, including YouTube-like Websites such as Youku.com, Tudou.com and Ku6.com, because they allow users to exchange pirated content.

Different from BTChina, major video Websites provide users only online viewing services but usually without downloading.

"The shutdown of BTChina and other Websites is good news to online video Websites and will change user habits," said an official from a major online video Website, who declined to be identified.

The shutdown of P2P Websites will force users to watch video online, instead of downloading content into computers or mobile phones. That gives the mainstream providers the opportunity to put advertisements into free video clips, which will help boost their revenue, analysts said.

Restructuring starts

The industry has already started to restructure.

Three weeks ago, Ku6.com was purchased by Shanda wireless subsidiary Hurray! Holding Co Ltd in an all-stock transaction. After the completion of the merger, Ku6 will retain its brand name and become a wholly owned subsidiary of Hurray!. The transaction is expected to close in the first quarter of 2010.

Last week, Youku announced it had completed its latest round of financing when it secured US$40 million from private equity firms such as Chengwei Ventures, Brookside Capital and Maverick Capital. Youku has received an aggregate US$110 million in private equity investment.

Youku will use the capital for media cooperation, Internet content creation and research on PC and mobile phone-related technologies, said Gu Yongqiang, its founder and CEO.

Sohu and Shanda's Ku6 announced last week that they will invest up to US$10 million in a new fund to buy Hollywood films and licensed TV content.

The shutdown of file-sharing Websites will enhance oversight of copyright protection in the competition among online video Websites, analysts said.

Last but not least, China Central Television, better known as CCTV, launched a national Internet TV station yesterday - an expansion that reportedly cost it 200 million yuan.

But the state-owned TV station's expansion into Internet has caused some people to ask the question: Was the government's crackdown on file-sharing Websites intentionally timed to enhance prospects for CCTV's new Website?