20-F 1 a12-7070_120f.htm 20-F

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

o

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

 

 

For the transition period from                       to

 

 

 

Commission file number: 000-30698

 

 

 

SINA CORPORATION

 

(Exact name of Registrant as specified in its charter)

 

 

 

Cayman Islands

 

(Jurisdiction of incorporation or organization)

 

 

 

37F, Jin Mao Tower
88 Century Boulevard, Pudong
Shanghai 200121, China

 

(Address of principal executive offices)

 

 

 

Chief Financial Officer
Phone: +8610 8262 8888
Facsimile: +8610 8260 7166
20/F Beijing Ideal International Plaza
No. 58 Northwest 4th Ring Road, Haidian District, Beijing, 100080, People’s Republic of China

 

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

Ordinary Shares, $0.133 par value

 

The NASDAQ Stock Market LLC

Ordinary Shares Purchase Rights

 

(NASDAQ Global Select Market)

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

 

 

Not Applicable

 

(Title of Class)

 

 

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

 

 

Not Applicable

 

(Title of Class)

 

 

 

As of December 31, 2011, there were 66,143,434 shares of the registrant’s ordinary shares outstanding, $0.133 par value.

 



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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x Yes   o No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o   No   x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x   No   o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x   No   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

 

 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP x

 

International Financial Reporting Standards as issued
by the International Accounting Standards Board
o

 

Other o

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17   o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No x

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

Yes o   No o

 



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TABLE OF CONTENTS

 

INTRODUCTION

2

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

3

PART I

 

4

Item 1.

Identity of Directors, Senior Management and Advisers

4

Item 2.

Offer Statistics and Expected Timetable

4

Item 3.

Key Information

4

Item 4.

Information on the Company

30

Item 4A.

Unresolved Staff Comments

54

Item 5.

Operating and Financial Review and Prospects

54

Item 6.

Directors, Senior Management and Employees

71

Item 7.

Major Shareholders and Related Party Transactions

80

Item 8.

Financial Information

84

Item 9.

The Offer and Listing

85

Item 10.

Additional Information

86

Item 11.

Quantitative and Qualitative Disclosures About Market Risk

90

Item 12.

Description of Securities Other than Equity Securities

92

PART II

 

92

Item 13.

Defaults, Dividend Arrearages and Delinquencies

92

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

92

Item 15.

Controls and Procedures

92

Item 16A.

Audit Committee Financial Expert

92

Item 16B.

Code of Ethics

93

Item 16C.

Principal Accountant Fees and Services

93

Item 16D.

Exemptions from the Listing Standards for Audit Committees

93

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

93

Item 16F.

Change in Registrant’s Certifying Accountant

93

Item 16G.

Corporate Governance

93

Item 16H.

Mine Safety Disclosure

93

PART III

 

94

Item 17.

Financial Statements

94

Item 18.

Financial Statements

94

Item 19.

Exhibits

94

SIGNATURES

98

 



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INTRODUCTION

 

In this annual report, except where the context otherwise requires and for purposes of this annual report only:

 

·            “we,” “us,” “our company,” “the Company,” “our” and “SINA” refer to SINA Corporation, its subsidiaries, and, in the context of describing our operations and consolidated financial information, include our consolidated variable interest entities (“VIEs”) in China;

 

·            “China” or “PRC” refers to the People’s Republic of China solely for the purpose of this annual report, and do not include the Hong Kong Special Administrative Region, the Macau Special Administrative Region or Taiwan;

 

·            “GAAP” refers to generally accepted accounting principles in the United States; “PRC GAAP” refers to generally accepted accounting principles in the PRC;

 

·            “shares” or “common shares” refer to our ordinary shares;

 

·            all references to “RMB” or “renminbi” are to the legal currency of China, and all references to “$,” “dollars,” “US$” and “U.S. dollars” are to the legal currency of the United States; and

 

·            all discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

 

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 20-F contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.

 

Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made under the caption “Risk Factors” included herein.

 

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PART I

 

Item 1.           Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2.           Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3.           Key Information

 

A.      Selected Financial Data

 

The selected consolidated financial data present the results for the five fiscal periods ended and as of December 31, 2011. The Company’s historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data below should be read in conjunction with our consolidated financial statements and notes thereto, “Item 5. Operating and Financial Review and Prospects” below, and the other information contained in this Form 20-F.

 

 

 

Years Ended December 31,

 

 

 

2011(1)

 

2010(2)

 

2009(3)

 

2008(4)

 

2007

 

 

 

(In thousands, except per share data)

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

482,829

 

$

402,617

 

$

358,567

 

$

369,587

 

$

246,127

 

Gross profit

 

267,481

 

234,207

 

200,275

 

219,252

 

151,425

 

Income (loss) from operations

 

(33,662

)

96,243

 

37,202

 

74,581

 

51,014

 

Income (loss) before income tax expense

 

(297,417

)

(10,903

)

420,628

 

95,209

 

60,619

 

Net income (loss)

 

(302,418

)

(19,339

)

412,305

 

81,167

 

54,115

 

Net income (loss) attributable to SINA

 

(302,092

)

(19,094

)

411,895

 

80,638

 

54,115

 

Net income (loss) per share attributable to SINA

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(4.64

)

$

(0.31

)

$

7.53

 

$

1.44

 

$

0.98

 

Diluted

 

$

(4.64

)

$

(0.31

)

$

6.95

 

$

1.33

 

$

0.97

 

Shares used in computing basic net income (loss) per share attributable to SINA

 

65,121

 

61,261

 

54,722

 

55,821

 

55,038

 

Shares used in computing diluted net income (loss) per share attributable to SINA

 

65,121

 

61,261

 

59,259

 

60,474

 

60,020

 

 


(1)          Fiscal year 2011 included $350.1 million in impairment charges, including other-than-temporary impairment of $230.3 million related to our equity investment in China Real Estate Information Corporation (“CRIC”), other-than-temporary impairment of $50.9 million related to our equity investment in Mecox Lane Limited (“MCOX”) and goodwill impairment of $68.9 million related to our MVAS business.

 

(2)          Fiscal year 2010 included an other-than-temporary impairment of $128.6 million related to our equity investment in CRIC.

 

(3)          In 2009, the Company spun off China Online Housing Technology Corporation (“COHT”) and merged it with CRIC, a real estate information and consulting services subsidiary of E-House (China) Holdings Limited (“E-House”), following CRIC’s initial public offering (“IPO”). The Company recorded a one-time gain of $376.6 million resulting from the sale of its 66% equity interest in COHT in exchange for CRIC’s ordinary shares. Beginning October 1, 2009, the Company no longer consolidates the financial results of COHT and instead accounts for its interest in CRIC using the equity method of accounting.

 

(4)          In 2008, the Company restructured its real estate and home decoration channels and related business into a new subsidiary, COHT, and sold a 34% interest to E-House. The operating results of COHT were subsequently consolidated.

 

 

 

As of December 31,

 

 

 

2011

 

2010

 

2009

 

2008

 

2007

 

 

 

(In thousands)

 

Financial position:

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

673,475

 

$

882,835

 

$

821,518

 

$

603,824

 

$

477,999

 

Working capital

 

627,167

 

760,635

 

694,484

 

498,524

 

377,608

 

Total assets

 

1,391,447

 

1,636,090

 

1,613,842

 

822,494

 

662,263

 

Long-term liabilities

 

128,355

 

147,540

 

166,729

 

4,039

 

1,337

 

Total liabilities

 

329,098

 

395,564

 

391,143

 

197,946

 

167,287

 

SINA shareholders’ equity

 

1,055,670

 

1,239,308

 

1,221,727

 

620,505

 

494,976

 

Total shareholders’ equity

 

1,062,349

 

1,240,526

 

1,222,699

 

624,548

 

494,976

 

 

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B.     Capitalization and Indebtedness

 

Not applicable.

 

C.     Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.      Risk Factors

 

Due to the rapidly evolving market in which we operate, we cannot predict whether we will meet internal or external expectations of future performance.

 

Our primary market is in China, where the operating environment is less predictable and mature than those of developed economies and where the Internet industry is rapidly evolving, with new products, new business models and new companies continually entering the market. In addition, sudden regulatory changes can have a sudden and significant impact on many aspects of our business. We believe our future success depends on our ability to significantly grow our revenues from new and existing products, business models and sales channels. However, market data on our business, especially on emerging products, business models and sales channels, are often limited, unreliable or nonexistent. Accordingly, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in a fast changing market where there are abundant private and public capital to support competing new product developments, new business models and new companies. These risks include our ability to:

 

·                                          offer new and innovative products;

 

·                                          attract advertisers;

 

·                                          attract a larger audience to our network;

 

·                                          react quickly and effectively to regulatory changes;

 

·                                          derive revenue from our users from fee-based and other Internet services, including our social media product “Weibo;”

 

·                                          respond effectively to competitive pressures and address the effects of strategic relationships or corporate combinations among our competitors;

 

·                                          attract buyers for our mobile value-added services (“MVAS”);

 

·                                          maintain our current, and develop new, strategic relationships;

 

·                                          increase awareness of our brand and continue to build user loyalty;

 

·                                          attract and retain qualified management and employees;

 

·                                          upgrade our technology to support increased traffic and expanded services;

 

·                                          expand the content and services on our network, secure premium content and increase network bandwidth in a cost-effective manner; and

 

·                                          develop a sufficiently large customer and user base and develop monetization models acceptable by the marketplace for our Weibo service, so as to recover the cost for developing and marketing the business and cause it to eventually achieve

 

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profitability.

 

Due to the rapidly evolving market in which we operate, our historical year-over-year and quarter-over-quarter trends may not provide a good indication of our future performance. For certain business lines, we have experienced high growth rates in the past and there may be expectations that these growth rates will continue. For other business lines, we have experienced declining trends. Many online advertising companies in China with varying monetization models and product lines have recently received private and/or public capital funding and are seeking to grow their online advertising revenues and gain market share, often with apparent little regard to profit margins. In the past, we have relied on the growth of our online advertising business to derive profitability, which we have used to fund new initiatives, such as Weibo. Our online advertising business may suffer from price competition from other online advertising companies who seem to be willing to grow their advertising revenues and market shares at low margins or at a loss. We may have to lower our profitability or operate at a loss in order to adequately fund critical initiatives that we believe will create value for our company and strengthen our market position over the long run. Our operating results have in the past fallen below the expectations of industry analysts and investors and may do so again in the future. Our share price may decline significantly as a result of not meeting internal or external expectations of future performance.

 

You should not place undue reliance on our financial guidance, nor should you rely on our quarterly operating results as an indication of our future performance, because our results of operations are subject to significant fluctuations.

 

We may experience significant fluctuations in our quarterly operating results due to a variety of factors, many of which are outside our control. Significant fluctuations in our quarterly operating results could be caused by various factors, including but not limited to, our ability to retain existing users, attract new users at a steady rate and maintain user satisfaction; the announcement or introduction of new or enhanced services, content and products by us or our competitors; lack of significant news events in the current period, resulting in lower website traffic; technical difficulties, system downtime or Internet failures; changes in demand for advertising space, new advertising formats or new advertising products from advertisers; seasonality of the advertising market; the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure; operators’ policies; governmental regulation and potentially sudden changes in policies affecting our businesses; seasonal trends in Internet use; a shortfall in our revenues relative to our forecasts and a decline in our operating results due to our inability to adjust our spending quickly; decreases in earnings from equity investments; impairment of our equity investments; lower interest income resulting from decreased in interest yield and cash balance; and general economic conditions and economic conditions specific to the Internet, wireless, e-commerce, media/advertising industry and the Greater China market. As a result of these and other factors, you should not place undue reliance on our financial guidance, nor should you rely on quarter-to-quarter comparisons of our operating results as indicators of likely future performance. Our quarterly revenue and earnings per share guidance is our best estimate at the time we provide guidance. Our operating results may be below our expectations or the expectations of public market analysts and investors in one or more future quarters. If that occurs, the price of our ordinary shares could decline and you could lose part or all of your investment.

 

We are relying on advertising sales as a significant part of our future revenues, but the online advertising market is subject to many uncertainties, which could cause our advertising revenues to decline.

 

The online advertising market is rapidly evolving in China. Many of our current and potential advertisers have limited experience with the Internet as an advertising medium, have not traditionally devoted a significant portion of their advertising expenditures or other available funds to web-based advertising, and may not find the Internet to be effective for promoting their products and services relative to traditional print and broadcast media. We may not be successful in attracting new advertisers, convincing our current and potential advertisers to increase their budgets for online advertising or securing a significant share of those budgets. If the Internet does not become more widely accepted as a medium for advertising, our ability to generate increased revenue could be negatively affected. Our ability to generate and maintain significant advertising revenues will depend on a number of factors, many of which are beyond our control, including but not limited to:

 

·                                          the development and retention of a large base of users possessing demographic characteristics attractive to advertisers;

 

·                                          the maintenance and enhancement of our brands in a cost-effective manner;

 

·                                          increased competition and potential downward pressure on online advertising prices and limitations on web page space;

 

·                                          changes in government policy that curtail or restrict our online advertising services or content offerings or increase our

 

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costs associated with policy compliance;

 

·                                          the acceptance of online advertising as an effective way for advertisers to market their businesses;

 

·                                          advertisers’ preferences for new online advertising formats, products or business models offered by other competitors and our ability to provide similar or competing new formats, products and solutions;

 

·                                          the development of independent and reliable means of verifying levels of online advertising and traffic; and

 

·                                          the effectiveness of our advertising delivery, tracking and reporting systems.

 

In 2011, approximately 86% of our advertising revenues were derived from the automobile, fast-moving consumer goods, Internet and financial services, IT and telecommunication sectors. If there is a downturn in advertising spending, especially in these sectors, our results of operations, cash flows and financial condition and our share price could suffer. Our growth in advertising revenues will also depend on our ability to increase the advertising space on our network and develop new advertising inventory offerings, such as those tied to video content and user-generated content in social media or social networking environments and performance-based inventories. If we fail to increase our advertising space at a sufficient rate or fail to develop new advertising inventory offerings that achieve market acceptance, our growth in advertising revenues could be hampered and our share price may drop significantly. Further, the increasing usage of Internet advertising blocking software may result in a decrease of our advertising revenues as the advertisers may choose not to advertise on the Internet if Internet advertising blocking software is widely used. Our advertising revenues may also be significantly adversely impacted if we are unable to develop effective advertising offerings for our mobile traffic, as Internet users in China more and more rely on mobile devices, such as smart phones and tablets, to access the Internet.

 

If our social media Weibo fails to achieve success and yield profits, our share performance could suffer significantly and your investment in our shares may be adversely affected.

 

We have not yet established a monetization model for Weibo. Weibo is a form of social media featuring microblogging services and social networking services and, thus, is subject to competition from developers of both types of services and potential new types of online networking services. Monetization has been a challenge for other microblogging services and social networking services, and it could be a challenge for us as well. We cannot guarantee that the monetizing methods adopted by other microblogging services and social networking services will work with Weibo. In our efforts to build scale and increase user base and user stickiness, we have significantly increased and expect to further increase investments in Weibo in areas such as technology, infrastructure and marketing, which have caused our profitability to significantly decline and may result in further declines. In addition, we cannot assure you that the investments we make will result in increased Weibo users and traffic. If our monetization efforts are not successful, then our investments in Weibo could significantly depress our profitability, and if we are unsuccessful in growing Weibo’s user base and traffic, our share performance could be materially adversely affected, the price of our ordinary shares could decline and you could lose part or all of your investment.

 

The microblogging services and social networking services sector is highly competitive in China. The major Chinese portals, including Tencent Holdings Ltd. (“Tencent”), Sohu.com Inc. (“Sohu”) and NetEase.com Inc. (“Netease”), offer similar products that compete with us for users and traffic, as well as content, talent and marketing resources. In addition, there are many websites that specialize in developing microblogging services and social networking services, including Kaixin001.com, Renren.com, Giant Interactive Group Inc. (“Giant Interactive”) (51.com) and China Mobile (139.com). We may be unable to compete successfully against these competitors or new market entrants, which may adversely affect our financial performance.

 

In addition, government regulation and censorship of information disseminated over the Internet in China may adversely affect our ability to operate Weibo. See “Even if we are in compliance with PRC governmental regulations relating to licensing and foreign investment prohibitions, the PRC government may prevent us from advertising or distributing content that it believes is inappropriate and we may be liable for such content or we may have to stop profiting from such content.” below for further details. Although we attempt to monitor the content posted on Weibo, we may not always be able to effectively control or restrict the content generated or placed on Weibo by our users and the PRC government may increase the level of Internet censorship. On March 31, 2012, we had to disable the comment feature of Weibo for three days to clean up comments related to certain rumors that were posted on our website. If in the future the PRC government authorities decide to restrict the dissemination of information via microblogging services or online postings in general, Weibo could be impaired or even ordered to shut down, which may adversely impact our website traffic, ability to monetize this aspect of our business and our brand equity.

 

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Furthermore, we may be subject to claims based on the user-generated content posted on Weibo. See “We may be subject to litigation for user-generated content provided on our websites, which may be time-consuming to defend.” below for more details.

 

We rely on MVAS for a significant portion of our revenues. Our MVAS revenues have experienced an overall decline and may decrease further in the future.

 

In 2011, 2010 and 2009, MVAS revenues accounted for 18%, 22% and 33% of our total net revenues, respectively. Our MVAS revenues declined 3% year over year in 2011 and 28% in 2010, and may further decline in the future. If users do not adopt our MVAS at a sufficient rate, our overall MVAS revenue growth could be negatively affected. Factors that may prevent us from maintaining or growing our MVAS revenues include:

 

·                                          our ability to develop new services that become accepted by the market;

 

·                                          our ability to retain existing customers of our subscription services;

 

·                                          our ability to attract new subscribers in a cost-effective manner;

 

·                                          our ability to provide satisfactory services to our customers;

 

·                                          competitors, including operators, may launch competing or better products than ours;

 

·                                          changes in policy, process and/or system by China Mobile Communications Corporation (“China Mobile”), China United Network Communications Group Co., Ltd. (“China Unicom”) or other operators, on whom we rely for service delivery, billing and payment collection. Examples include limiting the service offerings and partnerships allowed for each Short Messaging Service (“SMS”) service code; requiring additional notices and customer confirmations in the MVAS ordering process; complicating the product launch approval process; and shifting our products to more costly platforms. In the past, the mobile operators have made sudden changes that have significantly impacted our revenues and may continue to do so in the future; and

 

·                                          changes in government regulations, which could restrict our MVAS offerings, curtail our ability to market our services or change user adoption or usage patterns in a negative way. For example, in August 2007, the Ministry of Information Industry (superseded by the Ministry of Industry and Information Technology established in March 2008, both of which are referred to as “MII”) tightened the regulations over direct advertising in China, which reduced the effectiveness of our direct advertising on MVAS and increased the difficulties of new user recruitment. In December 2007, MII unified the dialing codes of each service provider (“SP”), which increased the number of digits a user must input to subscribe to an SP’s MVAS, thereby making the purchasing process more complicated. MII has proposed requiring mobile users, including pre-paid card subscribers, to register their real identity. Implementation of these types of changes has led to in the past and may lead to in the future fewer subscriptions of MVAS and a decrease in new customers.

 

We cannot assure you that our new MVAS offerings will be accepted by the market, in light of evolving and/or unclear policies and regulations, will meet the requirements of operator policies and government regulations upon release, or that we will be able to develop new MVAS that will provide meaningful margin contribution, especially in the current competitive landscape where MVAS providers are willing to accept lower revenue shares to acquire marketing channels and MVAS content and where operators are increasing revenue shares for new MVAS offerings and MVAS offerings using their newer platforms. If revenues from our MVAS services do not grow significantly or generate profits, our financial position, results of operations and cash flows could be materially and adversely affected, the price of our ordinary shares could decline and you could lose part or all of your investment.

 

With respect to MVAS, we rely on China Mobile, China Unicom and other operators for marketing, service delivery, billing and payment collection, and we may be negatively affected by changes that they may make suddenly and unilaterally.

 

Our MVAS offerings depend mainly on cooperation arrangements with China Mobile and China Unicom and, to a lesser extent, China Telecommunications Corporation (“China Telecom”). We rely on the operators in the following ways: utilizing their network and gateway to recruit and provide MVAS to subscribers; utilizing their billing systems to charge the fees to our subscribers through the subscribers’ mobile phone bills; utilizing their collection services to collect payments from subscribers; and relying on their infrastructure development to further develop new products and services. As of December 31, 2011, we offered our MVAS through 31

 

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provincial and local subsidiaries of China Mobile and 12 provincial subsidiaries of China Unicom. As we have limited bargaining power against the operators, we may be required to enter into cooperation agreements on terms that are unfavorable to us. The operators may also unilaterally terminate or amend the agreements at any time. If China Mobile, China Unicom or other operators choose not to continue the cooperation arrangements with us or if they unilaterally amend the cooperation arrangements with terms significantly unfavorable to us, our MVAS revenues and operating profitability could be materially and negatively affected.

 

In the past, operators have made sudden and unexpected changes in their policies, processes and systems, which have harmed, and may continue to harm, our business. For example:

 

·                                          In April 2007, China Unicom changed its service fee settlement method with service providers from estimated collection to actual collection. As a result of the switch, fee settlement, based on the receipt of billing statement, with China Unicom has taken up to four months, which has negatively impacted our cash flows. In addition, if we are unable to rely on historical confirmation rates from China Unicom as a result of the change in fee settlement method, we may need to defer recognition of such revenues until the billing statements are received.

 

·                                          In July 2007, China Mobile began implementing a score and ranking system that rewards larger, higher growth service providers with fewer user complaints. Receiving a low score or ranking, e.g., as a result of too many complaints filed by our MVAS customers, could result in a negative impact to our results of operations, cash flows and financial condition.

 

·                                          In August 2007, the MII tightened the regulations over direct advertising in China. This change reduced the effectiveness of our direct advertising on MVAS and increased the difficulties of new user recruitment. We believe it has had and will continue to have a significant negative impact to our MVAS business.

 

·                                          In December 2007, the MII unified the dialing codes of each service provider by adding a four-digit code to each service provider’s product. This complicated the purchasing process of MVAS and reduced the effectiveness of our direct advertising and increased the difficulties of new user recruitment.

 

·                                          In November 2009, China Mobile implemented a series of measures targeted at eliminating offensive or unauthorized content for the WAP product line. As part of this effort, China Mobile has suspended billing customers of Wireless Application Protocol (“WAP”) services since 2009, including those that do not contain offensive or unauthorized content, on behalf of third-party service providers of such services. China Mobile has not yet indicated whether WAP billing will resume and, if so, when and under what conditions.

 

·                                          In December 2010, under MII’s policy directives, China Mobile began requiring a subscription reminder to be sent for monthly MVAS subscriptions after receiving double confirmation of the subscription. Subscribers can cancel MVAS subscriptions by replying to the reminder notice. This has complicated the subscription process and reduced our ability to acquire new monthly subscribers in a cost-effective manner.

 

·                                          In January 2011, China Mobile implemented a series of measures that included limiting the service offerings and partnerships allowed for each SMS service code, preventing the television and radio promotion of certain interactive IVR products and requiring additional notices and customer confirmations in the MVAS ordering process. These measures have had a negative impact to our results of operations, cash flows and financial condition.

 

Our mobile operators have made other policy changes in the past and could make further changes at any time, including, but not limited to, requiring us to use the operators’ customer service and/or marketing service and charging for these services; requiring us to migrate our MVAS to an operator’s platform and increase the fees charged for using the operator’s platform; changing their fee structure or billing method in a way that would require us to delay the recognition of MVAS revenues from an accrual basis to when actual payments are received; implementing new billing rules, such as reducing MVAS fees that can be charged to users; disallowing us to bill certain inactive users and limiting the amount of MVAS fees that can be billed; requiring us to absorb end customer bad debts; issuing new rules on how WAP services are ranked on operator browsers, which significantly determines WAP revenues; refusing to pay us for services delivered; limiting the product offerings of SPs by working directly with content providers to launch competing services or giving exclusive rights to certain SPs to offer certain MVAS; complicating our product launch procedures by requiring approval at the provincial level of the operator; and prolonging the product launch review period from monthly to quarterly. Any change in policy, process or system by the operators could result in a material reduction of our MVAS revenues.

 

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China Mobile, China Unicom and other operators have in the past increased the fees charged for providing their services and may do so again in the future. If they choose to increase such fees, our gross margin for MVAS and our operating profitability may be negatively impacted. These operators have generally retained a certain percentage of the fees for MVAS we provided to our users via their platform for fee collection. In addition, they charge transmission fees for some products such as SMS and Multimedia Message Service (“MMS”) on a per message basis, and the rates of such transmission fees vary for different products and message volume. For 2011, we received on average 66% and 78% of the amount we charged to our users via the China Mobile platform and the China Unicom platform, respectively, after they deducted the fees for collection and transmission.

 

Our MVAS revenues could be negatively impacted if China Mobile, China Unicom or other operators restrict MVAS to be charged on a monthly subscription basis or disallow us to charge monthly fees for users who do not use our service in a particular month. For 2011, approximately 5 % of our MVAS revenues were derived from monthly subscription products, which mainly consist of SMS and MMS.

 

In the past, China Mobile and China Unicom imposed penalties on MVAS providers for violating certain operating policies relating to MVAS. In some cases, they stopped making payments to certain SPs for severe violations. To date, the accrued penalties we have received have been insignificant in dollar amounts, but it is difficult to determine the specific conduct that might be interpreted as violating such operating policies. Additionally, operators may unilaterally revise their arrangements with us at any time, which could result in us breaching the new terms and being subject to fines. In the future, if China Mobile, China Unicom or other operators impose more severe penalties on us for policy violations, our MVAS revenues and operating results may be negatively impacted.

 

We are potentially subject to liability and penalty for delivering inappropriate content through our MVAS. One of the violations cited in the notice for temporary termination of our IVR service at the end of July 2004 was that we had provided inappropriate content to our mobile subscribers through our IVR service. The definition and interpretation of inappropriate content in many cases are vague and subjective. We are not sure whether operators, including China Mobile and China Unicom, or the Chinese government will find our mobile content inappropriate and therefore prevent us from operating the MVAS relating to such content in the future. If they prevent us from offering such services, our MVAS revenues may suffer significantly.

 

A portion of our MVAS revenues is currently estimated based on our internal records of billings and transmissions for the month, adjusted for prior period confirmation rates from operators and prior period discrepancies between internal estimates and confirmed amounts from operators. Historically, there have been no significant true-up adjustments to our estimates. If there was no consistent trend of confirmation rates or if there were continuous significant true-up adjustments to our estimates under the new billing platforms, we will need to rely on the billing statements from the operators to record revenues. Due to the time lag of receiving the billing statements, our MVAS revenues may fluctuate with the collection of billing statements if we were to record our MVAS revenues when we receive the billing statements. For example, if an operator switches payment to SPs from estimated collection from users to actual collection, such policy change may cause us to delay the recognition of these revenues until we receive the actual billings and/or until we have reliable information to make such revenue estimates. For 2011, approximately 9% of our MVAS revenues were estimated at period end.

 

In the past, China Mobile has requested resettlement of billings that were settled in previous periods and on which payments have been made to us. We have had to accrued for such credits to revenues based on a rolling history and the true-ups between the accrued amounts and actual credit memos issued have not been significant. However, there is no guarantee that China Mobile or other operators will not request resettlement of previously received payments. If China Mobile or other operators request resettlement of billings for a previous period at amounts significantly larger than our credit memo accrual based on historical patterns, our operating results, financial position and cash flow may be severely impacted.

 

If China Mobile’s, China Unicom’s or other operators’ systems encounter technical problems, if they refuse to cooperate with us or if they do not provide adequate services, our MVAS offerings may cease or be severely disrupted, which could have a significant and adverse impact on our operating results.

 

The markets for Internet and MVAS services are highly competitive, and we may be unable to compete successfully against new entrants and established industry competitors, which could reduce our market share and adversely affect our financial performance.

 

The Chinese market for Internet content and services is competitive and rapidly changing. Barriers to entry are relatively low, and current and new competitors can launch new websites or services at a relatively low cost. Many companies offer Chinese language

 

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content and services, including informational and community features, fee-based services, email and e-commerce services in the Greater China market that may be competitive with our offerings. In addition, providers of Chinese language Internet tools and services may be acquired by, receive investments from or enter into other commercial relationships with large, well-established and well-financed Internet, media or other companies. We also face competition from providers of software and other Internet products and services. In addition, we compete with entities that sponsor or maintain high-traffic websites or provide an initial point of entry for Internet users, including, but not limited to, portals, search sites, microblogging, social networking and other online community services, desktop applications and mobile applications.

 

Our competitors include existing or emerging PRC Internet portals as well as vertical websites competing in a specific niche such as automobile, finance and IT information. Our competitors in these areas include Baidu.com, Inc. (“Baidu”), Tencent, Netease, TOM Online, Inc. (“TOM Online”), Sohu, iFeng.com, Hexun, East Money, China Finance Online, PCAuto, Auto Home, Bitauto, Xcar.com. ZOL.com, PCpop.com and PConline. Many of these companies are large, well-capitalized entities that currently offer, and could further develop or acquire, content and services that compete with those that we offer. Companies such as these may have greater financial and technical resources, larger and more active user base, better brand recognition, more developed sales and marketing networks, more customers, stronger government relationships and more extensive operating histories. As a result, such companies may be able to quickly provide competitive services and obtain a significant number of customers.

 

We also compete for advertisers with traditional media companies, such as newspapers, magazines and television networks that have a longer history of operation and greater acceptance among advertisers. Although outdoor media companies more directly compete with traditional media, such as television, they also indirectly compete with us to convert advertisers from traditional media to their own formats. These competitors include Focus Media Holding Limited (“Focus Media”), Air Media Group Inc., Vision China Media Inc. and other China-based private or public outdoor media advertising companies.

 

There is significant competition among MVAS providers. A large number of independent MVAS providers, such as Kongzhong Corporation (“Kongzhong”), Tencent, TOM Online, Hurray! Holding Co., Ltd. (“Hurray”), Sohu and Linktone Ltd. (“Linktone”), compete against us. We may be unable to continue to grow our revenues from these services in this competitive environment. In addition, the major operators in China, including China Mobile and China Unicom, have entered the business of content development. Any of our present or future MVAS competitors may offer value-added services or other mobile offerings that provide significant technology, performance, price, creativity or other advantages over those offered by us, and therefore achieve greater market acceptance than us.

 

Our other areas of focus for future growth include WAP portal, online video and Web 2.0 services. The main competitors for our WAP portal include Tencent and WAP portals operated by mobile operators such as China Mobile’s Monternet. We also face intense competition from companies offering online video and Web 2.0 services including public companies such as Baidu, Tencent, Netease, Sohu, Renren.com, China Mobile (139.com), Shanda (Ku6, Shanda Literature and Tuita.com), iFeng.com, Youku Inc. (“Youku”), Tudou Holdings Limited (“Tudou”), and Giant Interactive (51.com), as well as private companies such as PPLive, PPStream, Dianping.com, Meilishuo.com, Immomo.com, Kaixin001.com, Tianya.cn, Bokee, Blogbus, Poco, Blogcn, Hexun and Diandian.com. Web 2.0 companies are defined as those that offer tools to: (1) generate traffic through user-generated content, such as microblogging services and social networking services, light blogs, blogs, online video, online music and photo sharing and other online communities; (2) allow users to communicate, such as instant messaging, Walkie Talkie application and email, and/or (3) allow users to personalize individual sites and virtual communities.

 

In addition, we compete with companies who sponsor or maintain high-traffic websites or provide an initial point of entry for Internet users, including, but not limited to, providers of search services, desktop applications, mobile applications and operating systems. Search providers include Internet search companies, such as Baidu, Tencent (Soso), Yahoo! Inc. (“Yahoo!”)/Alibaba, Sohu (Sogou), Microsoft (Bing), Netease (Youdao) and Google, Inc. (“Google”), as well as vertical search companies, such as Youku (video search), Tudou (video search), Gougou (video search), Qunar (travel search) and Kuxun.cn (travel search). Companies that offer desktop applications, such as instant messaging (IM), pinyin, web browsing and application downloading, and mobile applications, such as Walkie Talkie application and mobile browsing, include Tencent, Sohu (Sogou), Qihoo, Microsoft Corporation (“Microsoft”), Yahoo!/Alibaba (Yahoo Messenger) and UC Mobile Ltd. (UC Browser). Smart phone operating system providers such as Apple Inc. (iOS), Google (Android) and Microsoft (Windows) are also becoming a threat as mobile Internet users are increasingly using the application stores as an initial entry point to various Internet products and services. Online companies who can aggregate significant traffic may have the ability to direct traffic to their other Internet offerings and provide advertising services.

 

We expect that as Internet usage in Greater China increases and the Greater China market becomes more attractive to advertisers and for conducting fee-based services, large global competitors, such as Facebook, Twitter, LinkedIn, MySpace, Microsoft (MSN

 

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Messenger), Yahoo!, eBay Inc. (“eBay”), Google and America Online Inc. (“AOL”), may increasingly focus their resources on the Greater China market. Some of these global Internet companies may partner with domestic organizations to penetrate the PRC market.

 

Many of our competitors have a longer history of providing these online services, a larger and more active user base and currently offer a greater breadth of products that may be more popular than our online offerings. Many of these companies are focused solely on one area of our business and are able to devote all of their resources to that business line and can more quickly adapt to changing technology and market conditions. These companies may therefore have a competitive advantage over us with respect to these business areas. A number of our current and potential future competitors may have greater financial and other resources than we have, may be able to more quickly react to changing consumer requirements and demands, may deliver competitive services at lower prices or with more desirable features and functionalities, may continue to compete even when loss-making and may market more effectively to certain user audiences. Increased competition could result in reduced traffic, loss of market share and revenues and lower profit margins.

 

Our business is highly sensitive to the strength of our brands in the marketplace, and we may not be able to maintain current or attract new users, customers and strategic partners for our products and offerings if we do not continue to increase the strength of our brands and develop new brands successfully in the marketplace.

 

Our operational and financial performance is highly dependent on our strong brands in the marketplace. Such dependency will increase further as the number of Internet and mobile users as well as the number of market entrants in China grows. In order to retain existing and attract new Internet users, advertisers, mobile customers and strategic partners, we may need to substantially increase our expenditures for creating and maintaining brand awareness and brand loyalty. Consequently, we will need to grow our revenues at least in the same proportion as any increase in brand spending to maintain our current levels of profitability.

 

There has in the past been various negative press coverage about our company based on untrue or unsubstantiated rumors and, as a result, the price of our ordinary shares has at times been negatively affected. We have in some cases taken affirmative steps to address such coverage. However, we cannot assure you that we will be able to diffuse negative press coverage about our company to the satisfaction of our investors, users, advertisers, customers and strategic partners. If we are unable to diffuse negative press coverage about our company, our brands may suffer in the marketplace, our operational and financial performance may be negatively impacted and the price of our ordinary shares may decline.

 

Our financial results could be adversely affected by E-House, Tudou and other equity investments.

 

We reported our ownership in CRIC using the equity method of accounting starting from October 1, 2009 and, as such, our net income was impacted by CRIC’s performance. For 2011, we recorded $2.6 million in income from equity investment in CRIC. CRIC merged into and became a 100% subsidiary of E-House on April 20, 2012 and, as a result, each ordinary share of CRIC held by us was converted into 0.6 ordinary share of E-House, together with the right to receive cash consideration of $1.75. Our earnings from equity investments may decline as a result of the merger of CRIC with E-House, which incurred an operating loss in 2011 from its operations (excluding CRIC’s results). We are currently evaluating the accounting treatment related to the privatization of CRIC.

 

Our future financial results may be adversely affected by the performance of E-House. If E-House’s financial results decline, it will negatively impact our financial results. Furthermore, we will not be able to report our quarter and annual results until we have obtained E-House’s results. A delay in E-House’s reporting could adversely affect our reporting schedule and cause the market to react negatively to our share price. E-House’s business (including CRIC’s business) is subject to risks that may be different than those that affect our business. Potential risks and uncertainties include, but are not limited to:

 

·                                          E-House may not be able to successfully execute its strategy of expanding into new geographical markets in China;

 

·                                          E-House may not be able to successfully execute its growth strategy to maintain and enhance its brands and image;

 

·                                          E-House’s business is susceptible to fluctuations in the real estate market of China;

 

·                                          E-House’s business may be materially and adversely affected by government measures aimed at China’s real estate industry; and

 

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·                                          a severe or prolonged downturn in the global or Chinese economy could materially and adversely affect E-House’s business and its financial condition.

 

Further information regarding these and other risks can be found in E-House’s filings with the Securities and Exchange Commission (the “SEC”). SINA assumes no obligation to update E-House’s risks factors.

 

We periodically review our equity investments in publicly traded companies, privately held companies and limited partnerships for impairment. If we conclude that any of these investments are impaired and that such impairment is other-than-temporary, we will write down the asset to its fair value and take a corresponding charge to our consolidated statement of operations. As of December 31, 2011, our equity investments included $155.7 million in privately held companies and limited partnerships, which may not have the resources nor level of controls in place like public companies to timely and accurately provide updates about their company to us. Furthermore, many of our investments are at an early, pre-revenue stage of development, and their impairment may be difficult to assess as market information on Internet-related startups is not readily available. Determination of estimated fair value of these investments require complex and subjective judgments due to their limited financial and operating history, unique business risks and limited public information. Consequently, we may not receive information about our investments on a timely basis to properly account for them. We are unable to control these factors and an impairment charge recognized by us, especially untimely recorded, may adversely impact our financial results and share price. In 2011, we recognized impairment charges of $230.3 million and $50.9 million on our investments in CRIC and MCOX, respectively. In 2010, we recognized an impairment charge of $128.6 million on our investment in CRIC.

 

Subsequent to the announcement of a third-party offer to merge with Tudou, the ADSs of Tudou have increased from $15.39 on the last trading day before the announcement of the proposed merger to $34.91 as of April 13, 2012. The merger is subject to customary closing conditions and is expected to close by the third quarter of 2012. Should the merger not close, our investment in Tudou may be impaired. On the other hand, should the merger of Tudou close and we do not dispose of the ordinary shares of Tudou held by us prior to the closing, our investments in Tudou will be converted into the purchaser’s shares. Under the terms of the definitive agreement for Tudou to combine with Youku in a 100% stock-for-stock transaction, each Class A ordinary share and Class B ordinary share of Tudou issued and outstanding will be cancelled in exchange for the right to receive 7.177 Class A ordinary shares of Youku, and each ADS of Tudou will be cancelled in exchange for the right to receive 1.595 ADSs of Youku.

 

If we are unable to keep up with the rapid technological changes of the Internet industry, our business may suffer.

 

The Internet industry is experiencing rapid technological changes. For example, with the advances of search engines, Internet users may choose to access information through search engines instead of our web portal and other web properties. With the advent of Web 2.0, the interests and preferences of Internet users may shift to user-generated content, such as microblogging services, social networking services and other online communities. As broadband becomes more accessible, Internet users may demand content in pictorial, audio-rich and video-rich formats. With the development of 2.5G, the issuance of 3G licenses in China and the growing availability of Wi-Fi connections, mobile users may shift from the current predominant text messaging services to newer applications, such as location-based services (“LBS”), Walkie Talkie application, mobile commerce, music, photo and video download sites, applications and sharing platforms, and mobile games. In addition, with the proportion of Internet usage shifting from personal computers to mobile phones and handheld computers in China, mobile operating systems, browsers and application-based platforms may redefine the way Internet companies operate, impacting our competitiveness and hindering our ability to shift our personal-computer-based offerings into the mobile environment. Our future success will depend on our ability to anticipate, adapt and support new technologies and industry standards. If we fail to anticipate and adapt to these and other technological changes, our market share, profitability and share price could suffer.

 

If we fail to successfully develop and introduce new products and services, our competitive position and ability to generate revenues could be harmed.

 

We are developing new products and services. The planned timing or introduction of new products and services is subject to risks and uncertainties. Actual timing may differ materially from original plans. Unexpected technical, operational, distribution or other problems could delay or prevent the introduction of one or more of our new products or services. Moreover, we cannot be sure that any of our new products and services will achieve widespread market acceptance or generate incremental revenue. If our efforts to develop, market and sell new products and services to the market are not successful, our financial position, results of operations and cash flows could be materially adversely affected, the price of our ordinary shares could decline and you could lose part or all of your investment.

 

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Our investment in Web 2.0 services, such as social media, online video and WAP portal may not be successful.

 

Web 2.0 services, such as microblogging services and social networking services, light blog, LBS, Walkie Talkie application and other online communities, online video, and WAP portal are currently some of the fastest growing online services in China. We have invested and intend to expand in these areas. For example, we have invested heavily in Web 2.0 services, such as microblogging services with social networking features, online video, light blog, Walkie Talkie application and social game platform. Some of our competitors have entered these markets ahead of us and have achieved significant market positions. Our main competitors in Web 2.0 services and WAP portal include Tencent, Netease, Sohu, Youku, iFeng.com (light blog), Renren.com, China Mobile (Monternet and 139.com), Tudou, Baidu (iQiyi.com), Shanda (Ku6, Shanda Literature and Tuita.com) and Giant Interactive (51.com), and private companies such as PPLive, PPStream, Dianping.com, Meilishuo.com, Immomo.com, Kaixin001.com, Tianya.cn, Bokee, Blogbus, Poco, Blogcn, Hexun and Diandian.com. We have also invested and plan to continue to invest in other technological products and tools, such as building online game and video sharing platforms to complement our existing Internet service offerings.

 

Our competitors in these areas tend to be more specialized in their specific markets and may have access to greater resources, which may give them a competitive advantage over us. In addition, some of our competitors have significantly larger user bases and more established brand names and may be able to effectively leverage their user bases and brand names to provide integrated Internet communication, online games, social networking and other products and services, and therefore increase their respective market shares. We cannot assure you that we will succeed in these markets despite our investment of time and funds to address these markets. If we fail to achieve a significant position in these markets, we could fail to realize our intended returns in these investments. Moreover, our competitors may enjoy increased revenues and profits from an increase in market share in any of these markets, and our results and share price could suffer as a result.

 

More individuals are using devices other than personal computers to access the Internet. If users of these devices do not widely adopt versions of our web technology, products or operating systems developed for these devices, our business could be adversely affected.

 

The number of individuals who access the Internet through devices other than personal computers, including mobile phones, handheld computers, such as the iPad and other tablets, television and other devices, has increased significantly and the trend is expected to continue. We expect mobile traffic to be a significant contributor to our overall traffic growth. The operating systems, software, resolution, functionality, and memory associated with some alternative devices make the use of our products and services through such devices more difficult and less compelling to users, manufacturers, or distributors of alternative devices. Each manufacturer may have unique technical standards for its devices, and our products and services may not work or be viewable on these devices as a result. We have limited experience to date in operating versions of our products and services developed or optimized for users of alternative devices, such as iOS and Android devices, or in designing alternative devices. As new devices and new platforms continue to be released, it is difficult to predict the problems we may encounter in developing versions of our products and services for use on these alternative devices and we may need to devote significant resources to create, support, and maintain our offerings on such devices. If we are unable to attract and retain a substantial number of alternative device manufacturers, distributors, and users to our products and services, or if we are slow to develop products and technologies that are more compatible with alternative devices, we will fail to capture a significant share of an increasingly important portion of the market for online services, which could adversely affect our business and our share price.

 

New technologies could block our advertisements, desktop and mobile applications, such as Weibo, and may set up technical measures that could limit our traffic growth and new monetization opportunities.

 

Technologies have been developed that can disable the display of our advertisements and that provide tools to users to opt out of our advertising products. Most of our revenues are derived from fees paid to us by advertisers in connection with the display of advertisements on webpages to our users. In addition, our traffic growth is significantly dependent on content viewing via mobile devices, such as smart phones and tablets. Technologies and tools for mobile devices, such as mobile operating systems, mobile Internet browsers and application download stores could set up technical measures to direct Internet traffic or require payment collection on fee-based revenues, which could adversely affect our overall traffic, ability to monetize our services and our share price.

 

Our business and growth could suffer if we are unable to hire and retain key personnel who are in high demand.

 

We depend on the continued contributions of our senior management and other key employees, many of whom are difficult to replace. The loss of the services of any of our executive officers or other key employees could harm our business. Competition for qualified talent in China is intense. Our future success is dependent on our ability to attract a significant number of qualified

 

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employees at a fast pace and retain existing key employees. If we are unable to do so, our business and growth, including that of Weibo, may be materially and adversely affected and our share price could suffer. Our need to significantly increase the number of our qualified employees and retain key employees may cause us to materially increase compensation-related costs, including stock-based compensation.

 

We may not be able to manage our expanding operations effectively, which could harm our business.

 

We have expanded rapidly by acquiring companies, entering into joint ventures and forming strategic partnerships. These new businesses, joint ventures and strategic partnerships provide various services, such as MVAS, instant messaging and application development. We anticipate continuous expansion in our business, both through further acquisitions and internal growth. In addition, the geographic dispersion of our operations as a result of acquisitions and internal growth requires significant management resources that our locally based competitors do not need to devote to their operations. In order to manage the planned growth of our operations and personnel, we will be required to improve and implement operational and financial systems, procedures and controls, and expand, train and manage our growing employee base. Further, our management will be required to maintain and expand our relationships with various other websites, Internet and other online service providers and other third parties necessary to our business. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. If we are not successful in establishing, maintaining and managing our personnel, systems, procedures and controls, our business will be materially and adversely affected.

 

Our strategy of acquiring complementary assets, technologies and businesses may fail and may result in equity or earnings dilution.

 

As part of our business strategy, we have acquired and intend to continue to identify and acquire assets, technologies and businesses that are complementary to our existing business. Acquired businesses or assets may not yield the results we expect. In addition, acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, significant amortization expenses related to intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the cost of identifying and consummating acquisitions, and integrating the acquired businesses into ours, may be significant, and the integration of acquired businesses may be disruptive to our existing business operations. In addition, we may have to obtain approval from the relevant PRC governmental authorities for the acquisitions and comply with any applicable PRC rules and regulations, which may be costly. The PRC government recently established additional procedures and requirements that could make merger and acquisition activities by us more time-consuming and complex. For instance, as of September 1, 2011, the PRC Ministry of Commerce (“MOFCOM”) adopted a national security review rule which requires acquisitions by foreign investors of PRC companies engaged in military-related or certain other industries that are crucial to national security to be subject to security review before consummation of any such acquisition. In the event that our acquisitions are not successful, our financial condition and results of operations may be materially and adversely affected.

 

The PRC Labor Contract Law and its implementing rules may adversely affect our business and results of operations.

 

The PRC Labor Contract Law became effective and was implemented on January 1, 2008. The PRC Labor Contract Law has reinforced the protection for employees who, under the PRC Labor Contract Law, have the right, among others, to have written labor contracts, to enter into labor contracts with no fixed terms under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts. Furthermore, the PRC Labor Contract Law establishes additional restrictions and increases the costs involved with dismissing employees. As the PRC Labor Contract Law is relatively new, there remains significant uncertainty as to its interpretation and application by the PRC Government. In the event that we decide to significantly reduce our workforce, the PRC Labor Contract Law could adversely affect our ability to do so in a timely and cost effective manner, and our results of operations could be adversely affected. In addition, for employees whose contracts include non-competition terms, the Labor Contract Law requires us to pay monthly compensation after such employment is terminated, which will increase our operating expenses.

 

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of Internet business and companies, including limitations on our ability to own key assets, such as our website.

 

The PRC government heavily regulates the Internet sector, including the legality of foreign investment in this sector, the existence and enforcement of content restrictions on the Internet and the licensing and permit requirements for companies in the Internet industry. Because some of the laws, regulations and legal requirements with regard to the Internet sector are relatively new and evolving, their interpretation and enforcement involve significant uncertainties. In addition, the PRC legal system is based on written statutes and prior court decisions have limited precedential value. As a result, in many cases it is difficult to determine what actions or

 

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omissions may result in liability. Issues, risks and uncertainties relating to the PRC government’s regulation of the Chinese Internet sector include the following:

 

·                                          We only have contractual control over our website in China. We do not own it due to the restriction of foreign investment in businesses providing value-added telecommunication services, including computer information services, MVAS or electronic mailbox services.

 

·                                          Uncertainties relating to the regulation of the Internet industry in China, including evolving licensing practices, give rise to the risk that permits, licenses or operations at some of our companies may be subject to challenge, which may be disruptive to our business, or subject us to sanctions, requirements to increase capital or other conditions or enforcement, compromise enforceability of related contractual arrangements, or have other harmful effects on us. For example, on July 13, 2006, MII issued The Circular of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunication Services (the “MII Circular 2006”). The MII Circular 2006 provides that (i) any domain name used by a value-added telecom carrier shall be legally owned by such carrier or its shareholder(s); (ii) any trademark used by a value-added telecom carrier shall be legally owned by the carrier or its shareholder(s); (iii) the operation site and facilities of a value-added telecom carrier shall be installed within the scope as prescribed by operating licenses obtained by the carrier and shall correspond to the value-added telecom services that the carrier has been approved to provide; and (iv) a value-added telecom carrier shall establish or improve the measures of ensuring safety of network information. The trademark “SINA” and domain name “www.sina.com.cn” were transferred from Beijing SINA Information Technology Co., Ltd. (formerly known as Beijing Stone Rich Sight Information Technology Co., Ltd.), one of our wholly owned subsidiaries (“BSIT”) to Beijing SINA Internet Information Service Co., Ltd., a PRC company controlled by us through contractual arrangements (the “ICP Company”).

 

·                                          The numerous and often vague restrictions on acceptable content in China subject us to potential civil and criminal liabilities, temporary blockage of our website or complete cessation of our website. For example, the State Secrecy Bureau, which is directly responsible for the protection of state secrets of all Chinese government and Chinese Communist Party organizations, is authorized to block any website it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of state secrets in the distribution of online information. In addition, the newly amended Law on Preservation of State Secrets which became effective on October 1, 2010 provides that whenever an Internet service provider detects any leakage of state secrets in the distribution of online information, it should stop the distribution of such information and report to the authorities of state security and public security. Internet service providers are required to delete any content on its website that may lead to disclosure of state secrets. Failure to do so on a timely and adequate basis may subject us to liabilities and penalties.

 

·                                          Because the definition and interpretation of prohibited content are in many cases vague and subjective, it is not always possible to determine or predict what content might be prohibited under existing restrictions or restrictions that might be imposed in the future or how such restrictions will apply. For example, the State Administration of Radio, Film and Television (“SARFT”), which regulates radio and television stations in China, prohibits the sale of fortune-telling related SMS, which could have a material adverse effect on our financial position, results of operations, or cash flows. SARFT or other Chinese governmental authorities may prohibit the marketing of other MVAS via a channel we depend on to generate revenues, which could also have a material adverse effect on our financial position, results of operations and cash flows.

 

·                                          Certain Chinese governmental authorities have stated publicly that they are in the process of preparing new laws and regulations that will govern Internet activities. The areas of regulation currently include, without limitation, online advertising, online news reporting, online publishing, online education, online gaming, online transmission of audio-visual programs, online health diagnosis and treatment, and the provision of industry-specific information over the Internet. Other aspects of our online operations, such as video podcasting or blog services may be subject to regulations in the future. Our operations may not be consistent with these new regulations when they are put into effect. As a result, we could be subject to severe penalties, which could have a material adverse effect on our financial position, results of operations and cash flows. For example, effective as of January 31, 2008, the Administrative Provisions on Internet Audio-visual Program Service, jointly promulgated by SARFT and MII (the “Audio-visual Program Provisions”) require any entity engaged in providing Internet audio-visual program services to obtain a license or register with SARFT; an applicant for engaging in Internet audio-visual program service must be a state-owned entity or a state-controlled entity with full corporate capacity; and the business to be carried out by the applicant must satisfy the overall planning and

 

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guidance catalogue issued by SARFT. SARFT and MII jointly held a press conference and clarified that websites that existed before the promulgation of the Audio-visual Program Provisions may, once they are registered with SARFT, continue operating audio-visual services so long as those websites have not been in violation of the laws and regulations. It is unclear based on the Audio-visual Program Provisions whether such requirements apply to entities that had already obtained the licenses before the Audio-visual Program Provisions became effective.

 

·                                          Our VIEs in China are not state-owned or state-controlled companies and without the clarification of SARFT and MII made in the above-mentioned press conference, they may not be qualified applicants for carrying out Internet audio-visual program services under the Audio-visual Program Provisions. The ICP Company currently holds a License for Online Transmission of Audio-visual Programs issued by SARFT valid through April 16, 2012. The ICP Company submitted the renewal application to SARFT on September 23, 2011, which has been received and is being reviewed by SARFT. However, considering the requirements set out in the Audio-visual Program Provisions, it is uncertain whether the ICP Company will be able to successfully procure the renewal of the License for Online Transmission of Audio-visual Programs. Should any official explanations or implementation rules of the Audio-visual Program Provisions be promulgated by SARFT or MII forbidding any non-state-controlled entities from engaging in Internet audio-visual program service, such that SARFT rejects our current renewal application, we may be disqualified from operating online transmission of audio-visual programs.

 

·                                          The governing bodies of China’s mobile industry from time to time issue policies that regulate the business practices relating to MVAS. We cannot predict the timing or substance of such new regulations, which may have a negative impact on our business.

 

·                                          On June 4, 2009, the Ministry of Culture and the MOFCOM jointly published a notice requiring any enterprise engaging in the business of “issuance of online game virtual currency” or “online game virtual currency trading services” to obtain approval from the Ministry of Culture.

 

·                                          On September 28, 2009, the General Administration of Press and Publication (“GAPP,” formerly the State Press and Publications Administration (“SPPA”)), the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications jointly published a notice prohibiting foreign investors from participating in the operation of online games via wholly owned, equity joint venture or cooperative joint venture investments in China, and from controlling and participating in such businesses directly or indirectly through contractual or technical support arrangements (“Circular 13”). It is not clear yet as to whether other PRC government authorities, such as the MOFCOM and MII, will support GAPP to enforce the prohibition of the VIE model that Circular 13 contemplates.

 

·                                          On June 3, 2010, the Ministry of Culture (“MCPRC”) promulgated the Interim Measures for Administration of Online Games, or the “Online Games Measures,” which became effective on August 1, 2010. The Online Games Measures reiterate that any online games operator should obtain an Online Culture Operating Permit to engage in online game services. In addition, the content of any imported online games should be examined and approved by MCPRC before they are operated within China, and any domestic online games should be registered with MCPRC.

 

·                                          On December 16, 2011, the Beijing Municipal Government issued the Rules on the Administration of Microblog Development, or the “Microblog Rules,” which became effective on the same day. The Microblog Rules, among other things, require users of microblogging services to register their identities with microblogging service providers. Microblogging service providers are required to verify the identities of their users. The Microblog Rules identify eleven categories of content that are restricted from being disseminated. Microblogging service providers are required to implement systems and procedures to ensure the security of user information and that the information disseminated by microblogging users is in compliance with the content restriction policy.

 

The interpretation and application of existing Chinese laws, regulations and policies, the stated positions of relevant PRC authorities and possible new laws, regulations or policies have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, Internet businesses in China, including our business. See “Government Regulation and Legal Uncertainties” below for more details.

 

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In order to comply with PRC regulatory requirements, we operate our main businesses through companies with which we have contractual relationships but in which we do not have controlling ownership. If the PRC government determines that our agreements with these companies are not in compliance with applicable regulations, our business in the PRC could be adversely affected.

 

The Chinese government restricts foreign investment in Internet-related and MVAS businesses, including Internet access, distribution of content over the Internet and MVAS. Accordingly, we operate our Internet-related and MVAS businesses in China through several VIEs that are PRC domestic companies owned principally or completely by certain of our PRC employees or PRC employees of our directly-owned subsidiaries. We control these companies and operate these businesses through contractual arrangements with the respective companies and their individual owners, but we have no equity control over these companies. Such restrictions and arrangements also apply to some of the China-based companies we have acquired or in which we have invested. See “Item 4.C. Organizational Structure.”

 

We cannot be sure that the PRC government would view our operating arrangements to be in compliance with PRC licensing, registration or other regulatory requirements, including the requirements under the MII Circular 2006, with existing policies or with requirements or policies that may be adopted in the future. If we are determined not to be in compliance, the PRC government could levy fines, revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our ability to collect payments, block our website, require us to restructure our business, corporate structure or operations, impose restrictions on our business operations or on our customers, impose additional conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our business. We may also encounter difficulties in obtaining performance under or enforcement of related contracts. For example, as part of the contractual arrangements described above, our relevant subsidiaries and the employee shareholders of the VIEs entered into equity pledge agreements pursuant to which the employee shareholders of the VIEs pledged their respective equity interests in the VIEs to our respective subsidiaries. According to the PRC Property Rights Law, such pledges will only be effective upon registration with the relevant local office for the administration for industry and commerce. Before a successful registration of the equity pledges, we cannot assure you that the effectiveness of such pledges can be recognized in PRC courts if disputes arise regarding the pledged equity interests or that our subsidiaries’ interests as pledgee will prevail over those of third parties. We are in the process of obtaining the relevant registrations.

 

We rely on contractual arrangements with our VIEs for our China operations, which may not be as effective in providing control over these entities as direct ownership.

 

Because PRC regulations restrict our ability to provide Internet content and MVAS directly in China, we are dependent on our VIEs, in which we have little or no equity ownership interest, and must rely on contractual arrangements to control and operate these businesses. These contractual arrangements may not be as effective in providing control over these entities as direct ownership. For example, the VIEs could fail to take actions required for our business or fail to maintain our website despite their contractual obligation to do so. Our VIEs are able to transact business with parties not affiliated with us. If these companies fail to perform under their agreements with us, we may have to rely on legal remedies under PRC law, which we cannot be sure would be available. In addition, we cannot be certain that the individual equity owners of the VIEs will always act in the best interests of our company, especially if they leave our company.

 

Substantially all profits generated from our VIEs are paid to our subsidiaries in China through related party transactions under contractual agreements. We believe that the terms of these contractual agreements are in compliance with the laws in China. Due to the uncertainties surrounding the interpretation of the transfer pricing rules relating to related party transactions in China, it is possible that in the future tax authorities in China may challenge the prices that we have used for related party transactions among our entities in China. In the event the tax authorities challenge our VIE structure, we may be forced to restructure our business operation, which could have a material adverse effect on our business.

 

If the chops of our subsidiaries in China and VIEs are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of those entities could be severely and adversely compromised.

 

In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China is required to have a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory chop, companies may have several other chops which can be used for specific purposes. The chops of our subsidiaries in China and VIEs are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the holders of such chops at our VIEs failed to employ them in accordance with the terms of the various VIE-related agreements or removed them from the premises, the operation of the VIEs could be significantly and adversely impacted.

 

We are required to, but have not, verified the identities of all of our users who post on Weibo, and our noncompliance exposes us to potentially severe punishment by the Chinese government.

 

On December 16, 2011, the Beijing Municipal Government issued the Microblog Rules. Among other things, the Microblog Rules require users who post publicly on microblogs to submit their real identities to the microblogging service provider, which is required to verify the identities of its users. Under the Microblog Rules, users are required to disclose their real identity information only to the microblogging service provider and may still use a pen name to reflect their account name on the front end. In addition, microblogging service providers based in Beijing are required to verify the identities of all of their users, including existing users who post publicly on their websites by March 16, 2012. Although we have made significant efforts to comply with the verification requirements, for reasons including existing user behavior, the nature of the microblogging product and the lack of clarity on specific implementation procedures, we have not been able to verify the identifies of all of the users who post content publicly on Weibo. We

 

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believe successful implementation of user identity verification needs to be done over a long period of time to ensure a positive user experience. However, we may not be able to control the timing of such action, and, if the Chinese government enforces compliance in the near term, such action may severely reduce Weibo user traffic. The implementation of user identity verification has deterred new users from completing their registration on Weibo and a significant portion of those who have provided identity information to us was rejected by the Chinese government database, which means that these users will have limited posting ability in the future and may cause the level of activity of Weibo users to decrease over time. Furthermore, while the Microblog Rules are not clear regarding the type and extent of punishment that will be imposed on non-compliant microblogging service providers, we are potentially liable for noncompliance of the Microblog Rules or related government requirements, which may result in future punishment, including the deactivation of certain features on Weibo, termination of Weibo operations or other punishments determined by the Chinese government. Any of the above actions may have a material and adverse impact on our share price.

 

Even if we are in compliance with Chinese governmental regulations relating to licensing and foreign investment prohibitions, the Chinese government may prevent us from advertising or distributing content that it believes is inappropriate and we may be liable for such content or we may have to stop profiting from such content.

 

The Chinese government has enacted regulations governing Internet access and the distribution of news and other information. In the past, the Chinese government has stopped the distribution of information over the Internet or through MVAS that it believes to violate Chinese law, including content that it believes is obscene, incites violence, endangers national security, is contrary to the national interest or is defamatory. In addition, we may not publish certain news items, such as news relating to national security, without permission from the Chinese government. Furthermore, the Ministry of Public Security has the authority to cause any local Internet service provider to block any websites maintained outside China at its sole discretion. Even if we comply with Chinese governmental regulations relating to licensing and foreign investment prohibitions, if the Chinese government were to take any action to limit or prohibit the distribution of information through our network, via our MVAS or over the other platforms we use, or to limit or regulate any current or future content or services available to users on our network, our business could be significantly harmed.

 

Because the definition and interpretation of prohibited content is in many cases vague and subjective, it is not always possible to determine or predict what content might be prohibited under existing restrictions or restrictions that might be imposed in the future or how such restrictions will apply. In July 2004, our IVR service was temporarily terminated by China Mobile, citing that we had provided inappropriate content to our mobile subscribers through our IVR service. In January 2005, SARFT, which regulates radio and television stations in China, issued a notice prohibiting commercials for MVAS related to “fortune-telling” from airing on radio and television stations. SARFT and other Chinese government authorities may prohibit the marketing of other MVAS via a channel we depend on to generate revenues, which could have a material adverse effect on our financial position, results of operations or cash flows. We are not sure whether operators, including China Mobile and China Unicom, or the Chinese government will find our other mobile content inappropriate and therefore prevent us from operating the MVAS relating to such content in the future. If they prevent us from offering such services, our profit from MVAS will suffer.

 

We are also subject to potential liability for content on our websites that is deemed inappropriate and for any unlawful actions of our subscribers and other users of our systems. Although we attempt to monitor the user generated content on our online properties including Weibo, we may not always be able to effectively control or restrict the content generated or placed by our users. On March 31, 2012, we had to disable the comment feature of Weibo for three days to clean up postings related to certain rumors that were posted on our website. The Chinese government may choose to tighten its Internet censorship. If the Chinese government decides to restrict the dissemination of information via microblogging services or online postings in general, Weibo and our other online products could be impaired or even ordered to shut down, which may adversely impact our website traffic, our ability to monetize our services and our brand equity.

 

Furthermore, we may be required to delete content that violates the laws of China and report content that we suspect may violate Chinese law. It is difficult to determine the type of content that may result in liability for us, and if we are wrong, we may be prevented from operating our websites, which may adversely impact our website traffic, brand equity and financial condition and results of operations.

 

We may not be able to adequately protect our intellectual property, which could cause us to be less competitive.

 

We rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our intellectual property. Monitoring unauthorized use of our products is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect

 

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our proprietary rights as fully as in the United States. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources.

 

We may be subject to intellectual property infringement claims or other allegations by third parties for services we provide or for information or content displayed on, retrieved from or linked to our websites, or distributed to our users, which may materially and adversely affect our business, financial condition and prospects.

 

Companies in the Internet, technology, and media industries are frequently involved in litigation based on allegations of infringement of intellectual property rights, unfair competition, invasion of privacy, defamation and other violations of other parties’ rights. The validity, enforceability and scope of protection of intellectual property rights in Internet-related industries, particularly in China, are uncertain and still evolving. As we face increasing competition and as litigation becomes more common in China in resolving commercial disputes, we face a higher risk of being the subject of intellectual property infringement claims.

 

We allow users to upload written materials, images, pictures and other content on our platform and download, share, link to and otherwise access games and applications (some of which are developed by third parties) as well as audio, video and other content either on our platform or from other websites through our platform. We have procedures designed to reduce the likelihood that content might be used without proper licenses or third-party consents. However, these procedures may not be effective in preventing the unauthorized posting of copyrighted content.

 

With respect to games and applications developed by third parties displayed on our platform, we have procedures designed to reduce the likelihood of infringement. However, such procedures might not be effective in preventing third-party games and applications from infringing other parties’ rights. We may face liability for copyright or trademark infringement, defamation, unfair competition, libel, negligence, and other claims based on the nature and content of the materials that are delivered, shared or otherwise accessed through our services or published on our websites.

 

Defending patent and other intellectual property litigation is costly and can impose a significant burden on management and employees, and there can be no assurances that favorable final outcomes will be obtained in all cases. Such claims, even if they do not result in liability, may harm our reputation. Any resulting liability or expenses, or changes required to our websites to reduce the risk of future liability, may have a material adverse effect on our business, financial condition and prospects.

 

Our operations depend on the performance of the Internet infrastructure and fixed telecommunications networks in China.

 

Almost all access to the Internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the MII. Moreover, we primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and Internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s Internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. The web traffic in China has experienced significant growth during the past few years. Effective bandwidth and server storage at Internet data centers in large cities such as Beijing are scarce. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our websites. We cannot assure you that the Internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in Internet usage. If we were unable to increase our online content and service delivering capacity accordingly, we may not be able to continuously grow our website traffic and the adoption of our products may be hindered, which could adversely impact our business and our share price.

 

In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and Internet services rise significantly, our results of operations may be materially and adversely affected. Furthermore, if Internet access fees or other charges to Internet users increase, some users may be prevented from accessing the Internet and thus cause the growth of Internet users to decelerate. Such deceleration may adversely affect our ability to continue to expand our user base and increase our attractiveness to online advertisers.

 

Our operations could be disrupted by unexpected network interruptions caused by system failures, natural disasters or unauthorized tampering with our systems.

 

The continual accessibility of websites and the performance and reliability of our network infrastructure are critical to our

 

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reputation and our ability to attract and retain users, advertisers and merchants. Any system failure or performance inadequacy that causes interruptions in the availability of our services or increases the response time of our services could reduce our appeal to advertisers and consumers. Factors that could significantly disrupt our operations include system failures and outages caused by fire, floods, earthquakes, power loss, telecommunications failures and similar events; software errors; computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems; and security breaches related to the storage and transmission of proprietary information, such as credit card numbers or other personal information.

 

We have limited backup systems and redundancy. In the past, we experienced an unauthorized tampering of the mail server of our China websites which briefly disrupted our operations. Future disruptions or any of the foregoing factors could damage our reputation, require us to expend significant capital and other resources and expose us to a risk of loss or litigation and possible liability. We do not carry sufficient business interruption insurance to compensate for losses that may occur as a result of any of these events. Accordingly, our revenues and results of operations may be adversely affected if any of the above disruptions should occur.

 

We have contracted with third parties to provide content and services for our portal network and MVAS and we may lose users and revenues if these arrangements are terminated.

 

We have arrangements with a number of third parties to provide content and services to our websites. In the area of content, we have relied and will continue to rely on third parties for the majority of the content that we publish under the SINA brand. Although no single third-party content provider is critical to our operations, if these parties fail to develop and maintain high-quality and successful media properties, or if a large number of our existing relationships are terminated, we could lose users and advertisers and our brand could be harmed.

 

In addition, the PRC government has the ability to restrict or prevent state-owned media from cooperating with us in providing certain content to us, which will result in a significant decrease of the amount of content we can publish on our websites. We may lose users if the PRC government chooses to restrict or prevent state-owned media from cooperating with us, in which case our revenues will be impacted negatively. Certain state-owned media companies, from whom we currently procure content, have built their own portal websites and may decide to not cooperate with us in the future.

 

In the area of web-based services, we have contracted with various third-party providers for our principal Internet connections. If we experience significant interruptions or delays in service, or if these agreements terminate or expire, we may incur additional costs to develop or secure replacement services and our relationship with our users could be harmed.

 

A substantial part of our non-advertising revenues is generated through MVAS where we depend on mobile network operators for services delivery and payment collection. If we are unable to continue these arrangements, our MVAS could be severely disrupted or discontinued. Furthermore, we are highly dependent on these mobile service providers for our profitability in that they can choose to increase their service fees at will.

 

We depend on a third party’s proprietary and licensed advertising serving technology to deliver advertisements to our network. If the third party fails to continue to support its technology or if its services fail to meet the advertising needs of our customers and we cannot find an alternative solution on a timely basis, our advertising revenues could decline.

 

Increases in competition and market prices for professionally produced content may have an adverse impact on our financial condition and results of operations.

 

We have recently experienced significant fee increases from some of our content providers in the areas of video content and other premium content. Competition for quality content for online advertising is intense in China. Our competitors include well-capitalized companies, both private and newly listed companies, many of whom operate on a net-loss basis, as well as well-established companies that have user traffic greater than ours. If we are unable to secure a large portfolio of quality content due to prohibitive cost, or if we are unable to manage our content acquisition costs effectively and generate sufficient revenues to outpace the increase in content spending, our website traffic, financial condition and results of operations may be adversely affected.

 

Concerns about the security of e-commerce transactions and confidentiality of user information on the Internet may reduce use of our network and impede our growth.

 

A significant barrier to e-commerce and communications over the Internet in general has been a public concern over security and

 

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privacy, especially the transmission of confidential information. If these concerns are not adequately addressed, they may inhibit the growth of the Internet and other online services generally, especially as a means of conducting commercial transactions. If a well-publicized Internet breach of security were to occur, general Internet usage could decline, which could erode our brand equity, reduce traffic to our destination sites and adversely impact our financial condition and results of operations.

 

Security breaches or computer virus attacks could have a material adverse effect on our business prospects and results of operations.

 

Any significant breach of security of our website could significantly harm our business, reputation and results of operations and could expose us to lawsuits brought by our users and partners and to sanctions by governmental authorities in the jurisdictions in which we operate. To date, we have not experienced any material breach of our security systems. However, we cannot assure you that our IT systems are completely secure from security breaches or computer virus attacks. Anyone who is able to circumvent our security measures could misappropriate proprietary information, including the personal information of our users, obtaining users’ names and passwords and enabling the hackers to access users’ other online accounts, if those users use identical user names and passwords. They could also misappropriate information uploaded by our users in a secure environment, such as Weibo, SINA email, WeiDisk and other applications requiring user log-in that were internally developed or developed by third parties for use on Weibo’s open application platform. Functions that facilitate interactivity with other websites, such as our Weibo Connect that allows users to log onto partner websites using their Weibo identity, could increase the scope of access of hackers to other user accounts. These circumventions may cause interruptions in our operations or damage our brand image and reputation. Our servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could cause system interruptions, website slowdown or unavailability, delays in communication or transactions, or loss of data. We may be required to incur significant additional costs to protect against security breaches or to alleviate problems caused by such breaches.

 

The law of the Internet remains largely unsettled, which subjects our business to legal uncertainties that could harm our business.

 

Due to the increasing popularity and use of the Internet and other online services, it is possible that a number of laws and regulations may be adopted with respect to the Internet or other online services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. Furthermore, the growth and development of the market for e-commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies conducting business online. The adoption of additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for our products and services and increase our cost of doing business.

 

Moreover, the applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. For example, new tax regulations may subject us or our customers to additional sales and income taxes. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could significantly disrupt our operations or subject us to penalties.

 

We may be subject to claims based on the content we provide over our network and the products and services sold on our network, which, if successful, could cause us to pay significant damage awards.

 

As a publisher and distributor of content and a provider of services over the Internet, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials that we publish or distribute; the selection of listings that are accessible through our branded products and media properties, or through content and materials that may be posted by users in our classifieds, message boards, chat room services, social media, light blog, blog, online video and other areas on our websites; losses incurred in reliance on any erroneous information published by us, such as stock quotes, analyst estimates or other trading information; unsolicited emails, lost or misdirected messages, illegal or fraudulent use of email or interruptions or delays in email service; and product liability, warranty and similar claims to be asserted against us by end users who purchase goods and services through SINA Mall and any future e-commerce services we may offer.

 

We may incur significant costs in investigating and defending any potential claims, even if they do not result in liability. Although we carry general liability insurance, our insurance may not cover potential claims of this type and may not be adequate to indemnify us against all potential liabilities.

 

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We may be subject to litigation for user-generated content provided on our websites, which may be time-consuming to defend.

 

User-generated content, or UGC, has become an important source of content to draw traffic to our website. Our UGC platforms, including social media, light blog, blog, online video, audio streaming and photo gallery, are open to the public for posting. Although we have required our users to post only decent and unobtrusive materials and have set up screening procedures, our screening procedures may fail to screen out all potentially offensive or non-compliant UGC and, even if properly screened, a third party may still find UGC postings on our website offensive and take action against us in connection with the posting of such information. As with other companies who provide UGC on their websites, we have had to deal with such claims in the past and anticipate that such claims will increase as UGC becomes more popular in China. Any such claim, with or without merit, could be time-consuming and costly to defend, and may result in litigation and divert management’s attention and resources.

 

We may have to register our encryption software with Chinese regulatory authorities, and if they request that we change our encryption software, our business operations could be disrupted as we develop or license replacement software.

 

Pursuant to the Regulations for the Administration of Commercial Encryption promulgated at the end of 1999, foreign and domestic companies operating in China are required to seek approval from the Office of the State for Cipher Code Administration (“OSCCA”), the Chinese encryption regulatory authority, for the commercial encryption products they use. Companies operating in China are allowed to use only commercial cipher code products approved by OSCCA and are prohibited to use self-developed or imported cipher code products without approval. In addition, all cipher code products shall be produced by those producers appointed and approved by OSCCA. In December 2005, OSCCA further released a series of rules, effective January 1, 2006, regulating many aspects of commercial cipher code products in detail, including development, production and sales.

 

Because these regulations do not specify what constitutes a cipher code product, we are unsure as to whether or how they apply to us and the encryption software we utilize. We may be required to register, or apply for permits with OSCCA for, our current or future encryption software. If PRC regulatory authorities request that we register our encryption software or change our current encryption software to an approved cipher code product produced by an appointed producer, it could disrupt our business operations.

 

Privacy concerns may prevent us from selling demographically targeted advertising in the future and make us less attractive to advertisers.

 

We collect personal data from our user base in order to better understand our users and their needs and to help our advertisers target specific demographic groups. If privacy concerns or regulatory restrictions prevent us from selling demographically targeted advertising, we may become less attractive to advertisers. For example, as part of our future advertisement delivery system, we may integrate user information such as advertisement response rate, name, address, age or email address, with third-party databases to generate comprehensive demographic profiles for individual users. In Hong Kong, however, the Hong Kong Personal Data Ordinance provides that an Internet company may not collect information about its users, analyze the information for a profile of the user’s interests and sell or transmit the profiles to third parties for direct marketing purposes without the user’s consent. If we are unable to construct demographic profiles of Internet users because they refuse to give consent, we will be less attractive to advertisers and our business could suffer.

 

Political and economic conditions in Greater China and the rest of Asia are unpredictable and may disrupt our operations if these conditions become unfavorable to our business.

 

We expect to continue to derive a substantial percentage of our revenues from the Greater China market. Changes in political or economic conditions in the region are difficult to predict and could adversely affect our operations or cause the Greater China market to become less attractive to advertisers, which could reduce our revenues. We maintain a strong local identity and presence in each of the regions in the Greater China market and we cannot be sure that we will be able to effectively maintain this local identity if political conditions were to change. The growth rate of the Chinese economy, and neighboring economies, slowed significantly in the wake of the global financial crisis.

 

Economic reforms in the region could also affect our business in ways that are difficult to predict. For example, since the late 1970s, the PRC government has been reforming the Chinese economic system to emphasize enterprise autonomy and the utilization of market mechanisms. Although we believe that these reform measures have had a positive effect on the economic development in China, we cannot be sure that they will be effective or that they will benefit our business.

 

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Future outbreaks of Severe Acute Respiratory Syndrome (“SARS”), H1N1 flu (“Swine flu”), Avian flu or other widespread public health problems could adversely affect our business.

 

Future outbreaks of SARS, Swine flu, Avian flu or other widespread public health problems in China and surrounding areas, where most of our employees work, could negatively impact our business in ways that are hard to predict. Prior experience with the SARS virus suggests that a future outbreak of SARS, Swine flu, Avian flu or other widespread public health problems may lead public health authorities to enforce quarantines, which could result in closures of some of our offices and other disruptions of our operations. A future outbreak of SARS, Swine flu, Avian flu or other widespread public health problems could result in the reduction of our advertising and fee-based revenues.

 

We have limited business insurance coverage.

 

The insurance industry in China is still young and the business insurance products offered in China are limited. We do not have any business liability or disruption insurance coverage for our operations. Any business disruption, litigation or natural disaster may cause us to incur substantial costs and divert our resources.

 

Our significant amount of deposits in certain banks in China may be at risk if these banks go bankrupt or otherwise do not have the liquidity to pay us during our deposit period.

 

As of December 31, 2011, we had approximately $405.2 million in cash and bank deposits, such as time deposits (with terms generally up to twelve months) with large domestic banks in China. The remaining cash, cash equivalents and short-term investments were held by financial institutions in Hong Kong, Taiwan and the United States. The terms of these deposits are, in general, up to twelve months. Historically, deposits in Chinese banks are secure due to the state policy on protecting depositors’ interests. However, China promulgated a new Bankruptcy Law in August 2006, which came into effect on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese banks based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank may go bankrupt. In addition, since China’s accession to the World Trade Organization (“WTO”), foreign banks have been gradually permitted to operate in China and have been strong competitors against Chinese banks in many aspects, especially since the opening of RMB business to foreign banks in late 2006. Therefore, the risk of bankruptcy or illiquidity of those Chinese banks in which we have deposits has increased. In the event of bankruptcy or illiquidity of any one of the banks which holds our deposits, we are unlikely to claim our deposits back in full since we are unlikely to be classified as a secured creditor based on PRC laws.

 

If tax benefits available to us in China are reduced or repealed, our results of operations could suffer significantly and your investment in our ordinary shares may be adversely affected.

 

We are incorporated in the Cayman Islands where no income taxes are imposed for businesses operated outside of the Cayman Islands. We have operations in four tax jurisdictions including China, the U.S., Hong Kong and Taiwan. For our operations in the U.S., Hong Kong and Taiwan, we have incurred net accumulated operating losses for income tax purposes. We believe that it is more likely than not that these net accumulated operating losses will not be utilized to offset taxable income in the future and hence we have not recognized income tax benefits for these locations. We do not expect that we will record any taxable income for our operations in the U.S., Hong Kong and Taiwan in the foreseeable future.

 

We generated substantially all our net income from our China operations. Our China operations are conducted through various subsidiaries and VIEs.

 

Due to our operation and tax structures in the PRC, we have entered into technical and other service agreements between our directly owned subsidiaries and our VIEs in the PRC. We incur a business tax of up to 5% when our directly owned subsidiaries receive the fees from the VIEs pursuant to such service agreements, which we include in our operating expenses as the cost of transferring economic benefit generated from these VIEs. Due to the uncertainties surrounding the interpretation of the tax transfer pricing rules relating to related party transactions in the PRC, it is possible that tax authorities in the PRC might in the future challenge the transfer prices that we used for the related party transactions among our entities in the PRC.

 

Beginning January 1, 2008, the new Enterprise Income Tax Law (the “EIT Law”) and the Implementing Rules of the EIT Law (the “Implementing Rules”) approved by the State Council became effective in China, which require, among other things, enterprises in China to submit their annual enterprise income tax returns together with a report on transactions with their affiliates to the relevant tax authorities. The EIT Law and the Implementing Rules emphasize the arm’s length basis for transactions between related entities. If PRC tax authorities were to determine that our transfer pricing structure was not on an arm’s length basis and therefore constitutes a favorable transfer pricing, they could request that our VIEs adjust their taxable income upward for PRC tax purposes. Such a pricing

 

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adjustment could adversely affect us by increasing our VIEs’ tax expenses, which could subject our VIEs to late payment fees and other penalties for underpayment of taxes, and/or could result in the loss of tax benefits available to our subsidiaries in China.

 

The EIT Law supplemented by the Implementing Rules supersedes the previous Income Tax Law for Foreign-Invested Enterprises and Foreign Enterprises (the “Previous IT Law”) and unifies the enterprise income tax rate for foreign-invested enterprises (“FIEs”) and domestic enterprises at 25%. High and new technology enterprises continue to enjoy a preferential tax rate of 15%, but must meet the criteria defined under the EIT Law and related regulations. The EIT Law provides for a five-year transitional period for certain entities that enjoyed a favorable income tax rate of less than 25% and/or a preferential tax holiday under the Previous IT Law and were established before March 16, 2007, during which period the applicable enterprise income tax rate shall gradually increase to 25%. In addition, the EIT Law provides grandfather treatment for high and new technology enterprises that received special tax holidays under the Previous IT Law, which allows them to continue to enjoy their tax holidays until expiration provided that specific conditions are met. In December 2011, three of our subsidiaries in China were qualified as high and new technology enterprises under the EIT Law. In addition, certain VIEs in China enjoy a favorable income tax rate of less than 25%. According to the EIT Law and the Administration Measures for Recognition of High and New Technology Enterprises, which were jointly promulgated by the Ministry of Science & Technology, the Ministry of Finance, and the State Administration of Taxation on April 14, 2008, the high and new technology enterprise status of our three subsidiaries is subject to an annual review and may be overturned by the Municipal Science & Technology Commission in the future. The EIT Law is relatively new and implementation practices are still being defined. If tax benefits available to us as high and new technology enterprises in China are reduced or repealed, our net effective tax rate may increase to as high as 25%.

 

The EIT Law also provides that an enterprise established under the laws of a foreign country or region but whose “de facto management body” is located in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its global income. The Implementing Rules merely define the location of the “de facto management body” as “the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.” Based on a review of surrounding facts and circumstances, we do not believe that it is likely that our operations outside the PRC should be considered a resident enterprise for PRC tax purposes. However, due to limited guidance and implementation history of the EIT Law, if we are treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on worldwide income at a uniform tax rate of 25% retroactive to January 1, 2008.

 

Dividends payable to us by our PRC subsidiaries may be subject to PRC withholding taxes and dividends distributed to our non-PRC investors and gains realized by our non-PRC shareholders from the transfer of our shares may be subject to PRC withholding taxes under the EIT Law.

 

The EIT Law imposes a 10% withholding income tax on dividends generated on or after January 1, 2008 and distributed by a resident enterprise to its foreign investors, if such foreign investors are considered as non-resident enterprises without any establishment or place within China or if the received dividends have no connection with such foreign investors’ establishment or place within China, unless such foreign investors’ jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the Previous IT Law. The Cayman Islands, where we are incorporated, does not have such tax treaty with China. According to the arrangement between Mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006, dividends paid by an FIE to its foreign investors in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the FIE). The State Administration of Taxation further promulgated a circular, or Circular 601, on October 27, 2009, which provides that tax treaty benefits will be denied to “conduit” or shell companies without business substance and that a beneficial ownership analysis will be used based on a “substance-over-form” principle to determine whether or not to grant the tax treaty benefits. A majority of our subsidiaries in China are directly invested in and held by Hong Kong registered entities. If we are regarded as a non-resident enterprise and our Hong Kong entities are regarded as resident enterprises, then our Hong Kong entities may be required to pay a 10% withholding tax on any dividends payable to us. If our Hong Kong entities are regarded as non-resident enterprises, then our subsidiaries in China will be required to pay a 5% withholding tax for any dividends payable to our Hong Kong entities provided that specific conditions are met. However, it is still unclear at this stage whether Circular 601 applies to dividends from our PRC subsidiaries paid to our Hong Kong subsidiaries and if our Hong Kong subsidiaries were not considered as “beneficial owners” of any dividends from their PRC subsidiaries, the dividends payable to our Hong Kong subsidiaries would be subject to withholding tax at a rate of 10%. In either case, the amount of funds available to us, including the payment of dividends to our shareholders, could be materially reduced. In addition, because there remains uncertainty regarding the concept of “the place of de facto management body,” if we are regarded as a PRC resident enterprise, under the EIT Law, any dividends to be distributed by us to our non-PRC shareholders will be subject to PRC withholding tax. We also cannot guarantee that any gains realized by such non-PRC

 

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shareholders from the transfer of our shares will not be subject to PRC withholding tax. If we are required under the EIT Law to withhold PRC income tax on our dividends payable to our non-PRC shareholders or any gains realized by our non-PRC shareholders from transfer of the shares, their investment in our shares may be materially and adversely affected. The current policy approved by our Board allows us to distribute PRC earnings offshore only if we do not have to pay a dividend tax. Such policy may require us to reinvest all earnings made since 2008 onshore indefinitely or be subject to a significant withholding tax should our policy change to allow for earnings distribution offshore.

 

We may be subject to a significant withholding tax should equity transfers by our non-China tax resident enterprises be determined to have been done without a reasonable business purpose.

 

In December 2009, the State Administration of Tax in China issued a circular on strengthening the management of proceeds from equity transfers by non-China tax resident enterprises and requires foreign entities to report indirect sales of China tax resident enterprises. If the existence of the overseas intermediary holding company is disregarded due to lack of reasonable business purpose or substance, gains on such sale are subject to PRC withholding tax.

 

We believe that there was a reasonable business purpose for the merger of COHT with CRIC, which was to realize the business synergy created by the merger to form a real estate information services platform both online and offline with diversified revenue streams, serving both real estate businesses and consumers. The merger of COHT with CRIC was made with the intent to vertically integrate the selling of real estate data and consulting services (B2B) with online advertising (B2C) and to leverage the strength of CRIC’s offline resources with our online strengths. Together, COHT and CRIC became a real estate information, consulting and advertising space in China. The simultaneous initial public offering allowed the combined company to raise additional capital to fund its future growth. Due to limited guidance and implementation history of the then new circular, significant judgment was required in the determination of a reasonable business purpose for an equity transfer by our non-China tax resident entity by considering factors, including but not limited to, the form and substance of the arrangement, time of establishment of the foreign entity, relationship between each step of the arrangement, relationship between each component of the arrangement, implementation of the arrangement and the changes in the financial position of all parties involved in the transaction. Although we believe that it is more likely than not the said transaction would be determined as one with a reasonable business purpose, should this not be the case, we would be subject to a significant withholding tax that could materially and adversely impact our financial position, results of operations and cash flows.

 

Restrictions on paying dividends or making other payments to us bind our subsidiaries and VIEs in China.

 

We are a holding company and do not have any assets or conduct any business operations in China other than our investments in our entities in China, including SINA.com Technology (China) Co., Ltd. (“STC”), SINA Technology (China) Co., Ltd. (“SNTC”), Beijing New Media Information Technology Co. Ltd., Beijing SINA Advertising Co. Ltd., SINA (Shanghai) Management Co. Ltd., Shanghai SINA Advertising Co. Ltd., Fayco Network Technology Development (Shenzhen) Co. Ltd., and our VIEs. As a result, if our non-China operations require cash from China, we would depend on dividend payments from our subsidiaries in China for our revenues after they receive payments from our VIEs in China under various services and other arrangements. We cannot make any assurance that our subsidiaries in China can continue to receive the payments as arranged under our contracts with those VIEs. To the extent that these VIEs have undistributed after-tax net income, we will have to pay tax on behalf of the employees when we try to distribute the dividends from these local entities in the future. Such withholding individual income tax rate is 20%. In addition, under Chinese law, our subsidiaries are only allowed to pay dividends to us out of their distributable earnings, if any, as determined in accordance with Chinese accounting standards and regulations. Moreover, our Chinese subsidiaries are required to set aside at least 10% of their respective after-tax profit each year, if any, to fund certain mandated reserve funds, unless these reserves have reached 50% of their registered capital. These reserve funds are not payable or distributable as cash dividends. For Chinese subsidiaries with after-tax profits for the periods presented, the difference between after-tax profits as calculated under PRC accounting standards and U.S. GAAP relates primarily to share-based compensation expenses and intangible assets amortization expenses, which are not pushed down to our subsidiaries and VIEs under PRC accounting standards.

 

The Chinese government also imposes controls on the convertibility of RMB into foreign currencies and the remittance of currency out of China in certain cases. We have experienced and may continue to experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. See “— Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Chinese renminbi into foreign currencies and, if Chinese renminbi were to decline in value, reducing our revenues and profits in U.S. dollar terms.” If we or any of our subsidiaries are unable to receive all of the revenues from our operations through these contractual or dividend arrangements, we may be unable to effectively finance our operations or pay dividends on our ordinary shares.

 

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Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Renminbi into foreign currencies and, if Renminbi were to decline in value, reducing our revenues and profits in U.S. dollar terms.

 

Our reporting currency is the U.S. dollar and our operations in China, Hong Kong, Taiwan use their respective local currencies as their functional currencies. The majority of our revenues derived and expenses incurred are in Chinese RMB with a relatively small amount in New Taiwan dollars, Hong Kong dollars and U.S. dollars. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the RMB depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Starting July 2005, the Chinese government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB has fluctuated within a narrow and managed band against a basket of certain foreign currencies. As a result of this policy change, the RMB appreciated approximately 6.4%, less than 1.0%, 3.0% and 4.9% against the U.S. dollar in 2008, 2009, 2010 and 2011, respectively. It is possible that the Chinese government will adopt a more flexible currency policy, which could result in more significant fluctuations of the RMB against the U.S. dollar. We can offer no assurance that the RMB or any other foreign currency will be stable against the U.S. dollar.

 

The income statements of our China, Hong Kong and Taiwan operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions results in reduced revenues, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of RMB, Hong Kong dollar and New Taiwan dollar-denominated transactions results in increased revenues, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.

 

Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for most of the capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange, or SAFE. These approvals, however, do not guarantee the availability of foreign currency. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory authorities will not impose greater restrictions on the convertibility of RMB in the future. Because a significant amount of our future revenues may be in the form of RMB, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in RMB to fund our business activities outside China, or to repay non-RMB-denominated obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations.

 

The audit report included in this annual report is prepared by an auditor that is not inspected by the Public Company Accounting Oversight Board (the “PCAOB”), and if investors lose confidence in our reported financial information, our share price may suffer.

 

Auditors of companies that are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the PCAOB and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. Because our auditors are located in the China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.

 

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The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors in countries that have received PCAOB inspections. If investors lose confidence in our reported financial information and procedures and the quality of our financial statements, our share price may suffer.

 

Changes to accounting pronouncements or taxation rules or practices may adversely affect our reported results of operations or how we conduct our business.

 

A change in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. For example, we adopted accounting guidance on stock-based compensation starting January 1, 2006. This guidance requires us to measure compensation costs for all stock-based compensation at fair value and take compensation charges equal to that value. The method that we use to determine the fair value of share options is based upon, among other things, the volatility of our ordinary shares. The method that we use to determine the fair value of restricted share units is based upon the market price of our ordinary shares on the date of the grant. The price of our ordinary shares has historically been volatile. Therefore, the requirement to measure compensation costs for all stock-based compensation under this guidance could negatively affect our profitability and the trading price of our ordinary shares. This guidance and the impact of expensing on our reported results could also limit our ability to continue to use stock options or other stock-based instruments as an incentive and retention tool, which could, in turn, hurt our ability to recruit employees and retain existing employees. Other new accounting pronouncements or taxation rules, such as accounting guidance on uncertain tax positions, the EIT Law in China which was effective January 1, 2008, and various interpretations of accounting pronouncement or taxation practice have been adopted and may be adopted in the future. These accounting standard and tax regulation changes, future changes and the uncertainties surrounding current practices and implementation procedures may adversely affect our reported financial results or the way we conduct our business.

 

We may be required to record a significant charge to earnings if we are required to reassess our goodwill or other amortizable intangible assets arising from acquisitions.

 

We are required under GAAP to review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment annually, or more frequently, if facts and circumstances warrant a review. Factors that may be considered a change in circumstances indicating that the carrying value of our amortizable intangible assets may not be recoverable include a decline in share price and market capitalization and slower or declining growth rates in our industry. In 2011, we recorded a goodwill impairment charge of $68.9 million related to our MVAS business. We may be required to record a significant charge to earnings in our financial statements during the period in which any additional impairment of our goodwill or amortizable intangible assets is determined.

 

While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

 

Under the supervision and with the participation of our management, we have evaluated our internal controls systems in order to allow management to report on, and our registered independent public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We have performed the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404. As a result, we have incurred additional expenses and a diversion of management’s time. If we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NASDAQ. Any such action could adversely affect our financial results and the market price of our ordinary shares.

 

Our share price has been historically volatile and may continue to be volatile, which may make it more difficult for you to resell shares when you want at prices you find attractive.

 

The trading price of our ordinary shares has been and may continue to be subject to considerable daily fluctuations. During the year ended December 31, 2011, the closing sale prices of our ordinary shares on the NASDAQ Global Select Market ranged from $52.00 to $142.83 per share. Our share price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, our ability to meet expectations on the progress of our key business initiatives, such as Weibo development, growth in traffic and monetization, announcements of technological innovations or new products and services by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable, new governmental restrictions, regulations or practice, news reports relating to trends

 

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in our markets and market rumors regarding our company. In addition, the stock market in general, and the market prices for China-related and Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our ordinary shares, regardless of our operating performance.

 

The Chinese legal system has inherent uncertainties that could limit the legal protections available to you.

 

Our contractual arrangements with our VIEs in China are governed by the laws of the PRC. China’s legal system is based upon written statutes. Prior court decisions may be cited for reference but are not binding on subsequent cases and have limited value as precedents. Since 1979, the PRC legislative bodies have promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involve uncertainties, and therefore you may not have legal protections for certain matters in China.

 

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us.

 

We conduct our operations in China and a significant portion of our assets is located in China. In addition, some of our directors and executive officers reside within China, and substantially all of the assets of these persons are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon those directors or executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our PRC counsel has advised us that Chinese courts recognize and enforce judgments of foreign courts based on treaties on recognizing and enforcing each other’s judgments or the reciprocal principle with foreign countries. China does not have treaties with the U.S. and some other countries that provide for the reciprocal recognition and enforcement of judgments of courts. As a result, recognition and enforcement in China of judgments of a court in these jurisdictions may be difficult or impossible.

 

We may be classified as a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.

 

As explained below, we may be classified as a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes for the current or a future taxable year. In the event we are determined to be a PFIC, our shares may become less attractive to U.S. investors, thus negatively impacting the price of our shares.

 

Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the value of our assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that are held for the production of, or produce, passive income, we would be characterized as a PFIC for U.S. federal income tax purposes. To determine if at least 50% of our assets are held for the production of, or produce, passive income, we may use the market capitalization method of determining the value of our assets. Under the market capitalization method, the total asset value of a company is considered to equal the fair market value of its outstanding shares plus its outstanding indebtedness on a relevant testing date. Because the market price of our ordinary shares is likely to fluctuate and may be volatile, and the market price may affect the determination of whether we will be considered a PFIC, there can be no assurance that we will not be considered a PFIC for any taxable year. If we are characterized as a PFIC for any year, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to any dividends received on our ordinary shares by non-corporate investors who are U.S. Holders, as defined under “Item 10E Taxation — United States Federal Taxation,” and having potential interest charges apply to any dividends or the proceeds of share sales.

 

Our executive officers have substantial influence over us and could delay or prevent a change in corporate control.

 

Our executive officers, together with their affiliates, beneficially control, in the aggregate, approximately 8.8% of our outstanding ordinary shares as of April 13, 2012. As a result, these shareholders, acting together, would have the ability to influence the outcome of matters submitted to our shareholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these shareholders, acting together, would have the ability to influence the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our ordinary shares by:

 

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·                                          delaying, deferring or preventing a change in corporate control;

 

·                                          impeding a merger, consolidation, takeover or other business combination involving us; or

 

·                                          discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

 

Anti-takeover provisions in our charter documents and our shareholder rights plan may discourage our acquisition by a third party, which could limit our shareholders’ opportunity to sell their shares at a premium.

 

Our Amended and Restated Memorandum and Articles of Association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change in control transactions. These provisions could have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or from otherwise engaging in a merger or similar transaction with us.

 

For example, our Board of Directors has the authority, without further action by our shareholders, to issue up to 3,750,000 preference shares in one or more series and to fix the powers and rights of these shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares. Preference shares could thus be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if the Board of Directors issues preference shares, the market price of our ordinary shares may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected. Similarly, the Board of Directors may approve the issuance of debentures convertible into voting shares, which may limit the ability of others to acquire control of us.

 

In addition, we have adopted a shareholder rights plan pursuant to which our existing shareholders would have the right to purchase ordinary shares from us at half the market price then prevailing in the event a person or group acquires more than 10% of our outstanding ordinary shares on terms our Board of Directors does not approve. As a result, such rights could cause substantial dilution to the holdings of the person or group which acquires more than 10%. Accordingly, the shareholder rights plan may inhibit a change in control or acquisition and could adversely affect a shareholder’s ability to realize a premium over the then prevailing market price for our ordinary shares in connection with such a transaction.

 

Item 4.         Information on the Company

 

A.      History and Development of the Company

 

SINA Corporation was founded in March 1999 through the merger of Beijing SINA Information Technology Co. Ltd. and California-based SINANET.com. In April 2000, our company completed the initial public offering and was listed on the NASDAQ market. Our company was incorporated under the law of the Cayman Islands and is headquartered in Shanghai, China. With offices throughout mainland China, Hong Kong, Taiwan and the U.S., our principal place of operations is located at 20/F Beijing Ideal International Plaza, No. 58 Northwest 4th Ring Road, Haidian District, Beijing, 100080, People’s Republic of China. The telephone number of SINA at this address is +8610 8262 8888.

 

The primary focus of SINA’s operations is in China, where the majority of the Company’s revenues is derived. SINA’s business operations in China are conducted primarily through wholly owned subsidiaries, including SINA.com Technology (China) Co. Ltd., SINA Technology (China) Co. Ltd., Beijing New Media Information Technology Co. Ltd., Beijing SINA Advertising Co. Ltd., SINA (Shanghai) Management Co. Ltd., Shanghai SINA Advertising Co. Ltd., Fayco Network Technology Development (Shenzhen) Co. Ltd., T.CN Corporation, and significant VIEs, including Beijing SINA Internet Information Service Co., Ltd., Guangzhou Media Message Technologies, Inc., Beijing Star-Village Online Cultural Development Co., Ltd., Shenzhen Wang Xing Technology Co., Ltd., Beijing SINA Infinity Advertising Co., Ltd. and Beijing Weimeng Technology Co., Ltd.

 

From 1999 to 2001, SINA’s growth was mainly driven by the online advertising business, which generated the majority of the Company’s revenues. In late 2001, SINA began offering MVAS under arrangements with third-party mobile operators in the PRC and had experienced significant growth in MVAS revenues up until 2004. Starting in 2005, the MVAS business has been repeatedly disrupted by changes in operator policies. On the advertising side, the Company has experienced growth in recent years, except for 2009, when China was impacted by the global financial crisis. The Company has grown organically and through acquisitions, partnerships and investments in recent years. For example, SINA acquired Memestar Limited, an MVAS company, in 2003, Crillion Corporation, an MVAS company, in 2004 and Davidhill Capital Inc., an instant messaging company, in 2004. In 2008, SINA spun off

 

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its real estate and home decoration channels into its subsidiary COHT and sold a 34% interest to E-House. In October 2009, SINA injected its online real estate advertising business into a majority-owned subsidiary and exchanged its interest in COHT for a 33% interest in CRIC upon CRIC’s listing on the NASDAQ Global Select Market. CRIC merged into and became a 100% subsidiary of E-House on April 20, 2012 and, as a result, each ordinary share of CRIC held by us was converted into 0.6 ordinary share of E-House, together with the right to receive cash consideration of $1.75. In March 2011, SINA purchased 19% of the issued and outstanding shares of MCOX, an online apparel and accessories company with offline presence. In August 2011, SINA purchased 9% of the issued and outstanding shares of Tudou, an online video company in China.

 

B.     Business Overview

 

Overview

 

We are an online media company serving China and the global Chinese communities. Our digital media network of SINA.com (portal), SINA.cn (mobile portal) and Weibo.com (social media), enable Internet users to access professional media and user generated content (UGC) in multi-media formats from the web and mobile devices and share their interests to friends and acquaintances.

 

SINA.com offers distinct and targeted professional content on each of its region specific websites and a range of complementary offerings. SINA.cn provides information and entertainment content from SINA portal customized for WAP users. Based on an open platform architecture to host organically developed and third-party applications, Weibo.com is a form of social media, featuring microblogging services and social networking services that allow users to connect and share information anywhere, anytime and with anyone on our platform.

 

Through these businesses and properties and other business lines, we offer an array of services including mobile value added services (“MVAS”), online video, music streaming, online games, photo sharing, blog, email, classified listings, fee-based services, e-commerce and enterprise services. We generate the majority of our revenues from online brand advertising, MVAS and fee-based services.

 

Market Opportunities

 

Our primary focus is on the Chinese market. The success of our business is tied to the size and vitality of China’s economy. In a study published by the Chinese National Bureau of Statistics, China’s gross domestic product (GDP) in 2011 grew 9.2% year over year to RMB47.2 trillion ($7.3 trillion), making it the second largest economy in the world. The same study showed that China’s annual disposable income per capita for urban households climbed from RMB11,759 ($1,475) in 2006 to RMB21,810 ($3,377) in 2011, representing a compound annual growth rate (“CAGR”) of 13%. During the same period, China’s retail sales of consumer goods grew from RMB7.9 trillion ($1.0 trillion) to RMB18.4 trillion ($2.8 trillion), representing a CAGR of 18%. According to the survey by China Internet Network Information Center (“CNNIC”), the number of Internet users in China grew 12% year over year to 513 million at the end of 2011. The large user base makes China an attractive market for our company to expand our product offerings and to grow our revenue streams. According to the latest survey by CNNIC, 99% of the web users in China have access to broadband. The large broadband coverage creates opportunities for the online industry, particularly in the areas of audio, photo and video, such as music and video streaming and rich media advertising.

 

In February 2012, the MII reported that the number of mobile phone users in China increased 15% year over year to 987 million at the end of 2011 and mobile users with 3G capabilities grew 174% year over year to 129 million at the end of 2011. Many web users in China today do not have 24/7 access to the Internet, as their access is limited to computers at work and Internet cafés. The increasing adoption of smart phones and tablets with 3G and Wi-Fi capabilities in China could further shift media consumption onto the Internet.

 

Properties and Product Offerings

 

SINA provides advertising, non-advertising and free services through SINA.com, SINA.cn, Weibo.com, MVAS, other businesses and SINA products. Advertising revenues relate to online advertising revenues mostly derived from SINA.com. Non-advertising revenues include revenues from MVAS, online games, eReading and enterprise services, as well as license fees from CRIC. The following table presents an overview of SINA’s businesses, service offerings and revenue categories:

 

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Properties and Services

 

SINA.com

 

SINA.cn

 

Weibo.com

 

MVAS

 

Other Businesses

 

Other Products

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

Advertising

 

 

 

Non-Advertising

 

Non-Advertising

 

 

· Sports

 

· News

 

· Microblog

 

· SMS

 

· Online Games

 

· Email

· Auto

 

· Sports

 

· Messaging

 

· KJAVA

 

· eReading

 

· Blog

· Finance

 

· Finance

 

· Social networking

 

· MMS

 

· Enterprise services

 

· Classified Ads

· Entertainment

 

· eReading

 

· Open platform

 

· IVR

 

 

 

 

· News

 

 

 

· Wei Credit

 

· Caller Ring Back

 

 

 

 

· Technology

 

 

 

 

 

   Tones (“CRBT”)

 

 

 

 

· Digital

· eLadies

· Luxury

· Collectibles

· Video

 

SINA.com

 

SINA portal is an online brand advertising property. Our advertising product offerings consist of banner, button, text-link and in-stream video advertisements that appear on pages within the SINA network, channel and promotional sponsorships, and advertising campaign design and management services. Our primary advertising and sponsorship client base for advertising and sponsorships includes Fortune 1000 companies that employ a global approach to their branding, marketing and communications programs, regional companies of medium to large scale that focus on specific geographic and demographic markets and smaller companies whose markets are within a local territory.

 

SINA’s portal network consists of four destination websites dedicated to the Chinese communities across the globe: Mainland China (www.sina.com.cn), Taiwan (www.sina.com.tw), Hong Kong (www.sina.com.hk), and overseas Chinese in North America (www.sina.com). Each destination site consists of Chinese-language news and content organized into interest-based channels. The sites offer extensive community and communication services and sophisticated web navigation capability through website search and directory services.

 

SINA.com offers a variety of free interest-based channels that provide region-focused format and content. The most popular channels include:

 

SINA Sports. SINA Sports offers multimedia news and information on a wide range of sporting events from home and abroad. SINA Sports features domestic and international soccer matches, National Basketball Association (“NBA”) games, general sports as well as coverage of world-famous sports stars and teams.

 

SINA Auto. SINA Auto offers the latest automobile-related news and service information to provide car buyers and automobile enthusiasts with current information on automotive pricing, reviews and featured guides.

 

SINA Finance. SINA Finance provides business news coverage and personal finance columns. SINA Finance also offers stock quotes from the major exchanges around the world, including U.S., Shanghai, Shenzhen and Hong Kong stock exchanges, as well as breaking news from individual listed companies and market trend analysis.

 

SINA Entertainment. SINA Entertainment contains extensive coverage of local and international entertainment news and events, including dining, movies, television programs, plays, operas, as well as popular and classical music.

 

SINA News. SINA News aggregates feeds from news providers, bringing together content from media companies, such as CCTV, China Beijing TV Station (“BTV”), China News, Agence France-Presse (“AFP”), Associated Press, Reuters, Getty Images, China Daily, Nanfang Daily Group, Beijing News, Xinhua Net and Xinhua News Agency. Through SINA News, users have an easy access to breaking news coverage from multiple sources and points of view.

 

SINA Technology. SINA Technology provides updates on recent activities of high-tech corporations as well as industry trends in China and worldwide.

 

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SINA Digital. SINA Digital offers in-depth reviews of digital products, including mobile phones, desktops, notebook computers, tablets, digital cameras, MP3 players and televisions. Product search and software download services are also provided on this channel.

 

SINA eLadies. SINA eLadies serves as an interactive platform for fashion-conscious users to share comments and ideas on a range of topics, such as health, cosmetics and beauty. SINA eLadies also provides real-time coverage of major world fashion events, bringing users the latest on styles and trends.

 

SINA Luxury. SINA Luxury caters to the increasing demand for luxury goods and high-end services in China. SINA Luxury covers a variety of luxurious topics including wines, cigars, top-brand apparels and accessories as well as services aimed at high net worth individuals. In August 2011, SINA launched an online shopping channel that offers top-brand designer products, including fine leather bags, accessories, watches and jewelry at a discounted price.

 

SINA Collectibles. Launched in November 2010, SINA Collectibles provides information and updates on antiques and other collectibles such as arts, coins and stamps. It also offers information on investment ideas, exhibitions and auctions and features interviews with antique connoisseurs and famous art critics.

 

SINA Video. SINA Video is an online video vertical portal that provides high-quality, easy-to-use interactive video products. SINA Video is divided into various vertical categories, including News, Entertainment, Music, Sports, Financial, Life, VIP Chat, Movie Premieres and SINA TV. The latter includes streaming of a broad range of television programs both in real time and on an on-demand basis. SINA Video also allows users to upload, publish and manage user generated videos.

 

SINA.cn

 

SINA.cn delivers the latest information and entertainment content from SINA portal to mobile users via WAP. Key channels on SINA.cn includes news, sports, finance and eReading.

 

Weibo.com

 

Launched in August 2009, Weibo.com began as a microblogging service that enabled users to follow celebrities and share UGC online. Weibo.com has since expanded its user base to include commercial entities, such as small and medium enterprises, Fortune 1000 companies, media firms and government organizations. In September 2011, Weibo.com was upgraded with social networking features and improved open-platform architecture to host internally developed and third-party applications.

 

Weibo.com allows users to connect from anywhere, anytime and with anyone on our platform. Designed for easy, frequent interactions and to expedite the spread of information, Weibo may be accessed from Weibo.com, Weibo.cn (WAP) and partner websites, as well as desktop and mobile applications on iPhone, iPad, Android, Blackberry and Symbian S60 devices.

 

Key offerings of Weibo.com include the following:

 

Microblog. Weibo.com allows users to send feeds in the form of text (up to 140 Chinese characters), photo, video and music to their opted-in followers, interest groups or selected individuals privately. Weibo.com users may view UGC feeds from their personalized homepage, in interest group settings, via search results and by topical content listings. An interesting feed that is redistributed several times enables the original author to virally reach and influence users beyond the author’s first degree of followers, leveraging on the network of the followers of author’s followers several degrees away.

 

Messaging. Users can send private messages in the form of text, voice, picture and emotions. Privacy settings are available to allow users to receive messages from all users or only selected friends. Weibo Messaging can also be accessed from Weiyou (Wei friends), a mobile application on Android or iOS devices or via a desktop application downloadable from the application download site of Weibo.com.

 

Social networking services. Weibo.com also helps users stay connected, share interests and engage in activities privately with their friends, colleagues and other acquaintances through a variety of social networking offerings that can be accessed on the navigation bar:

 

Wei Album. Wei Album is a personal photo gallery for users to upload and edit pictures and interact with viewers through

 

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commentary postings. Users can limit the view setting for each album to all users, only their followers or selected users by setting a password.

 

Wei Music. Wei Music is a free on-demand music streaming service with licensed, CD-quality songs, music videos, information and updates from large global and domestic music labels, including Time Warner, Sony Music, EMI and Rock Music. Users can search for songs, customize playlists and share favorite artists, songs or playlists with their followers, interest groups or selected friends.

 

Wei Event. Wei Event allows users to organize and participate in various types of events, such as parties, outings, exhibitions, sports games, shows and movies. Event planners can post the invitations to the event page and send them to their followers, interest groups and selected friends or list them on a city event page. Weibo enterprise accounts can use this feature to organize and announce special events tied to their online promotional campaigns.

 

Wei Questions. Users can conduct online polls to understand current thinking on important and controversial topics or simply for fun. Participants can follow the polling progress and interact through commentary postings.

 

Wei Groups. Wei Groups allow users to connect in communities with similar interests, access to which may be limited by group hosts.

 

Open Platform. Weibo.com offers an open application programming interface (API) platform that allows Weibo users to access a rich collection of applications internally developed and those offered by third-party application developers. To support the open platform environment, SINA offers a cloud computing service that allows third-party application developers to develop and host applications utilizing SINA’s infrastructure and bandwidth, known as SINA Application Engine (SAE).

 

Below are examples of Weibo applications, which can be accessed from user home page or through recommended feeds:

 

Social Games. Weibo.com currently offers over two dozen third-party developed social games, from role playing to card games and from strategy games to real life simulations. Weibo social games allow players to interact while playing and send feeds about their playing to their followers.

 

Kandian. Kandian (meaning “viewing site”) is an internally developed social video platform that allows users to share video content from SINA’s own video channel as well as third-party video websites, such as Tudou, iQiyi and Ku6, UGC videos and certain television programs. Based on user-defined interests, users can receive video recommendations that are most popularly ranked by the users’ social network.

 

Wei Radio. Wei Radio allows users to tune into radio stations in China and enjoy music, news, sports and talk show programs while engaging in other Weibo or non-Weibo activities. Users can interact with the station’s DJs and other listeners through commentary posting on the station’s program page.

 

Qing (Light Blog). Qing is a blogging service that allows users to maintain a personal page of diaries, editorials, and other essays as well as picture portfolios. Users can send feeds of their postings to their Weibo followers to direct traffic back to their Qing website.

 

Wei Disk. This application allows Weibo users to upload and manage their files in a secure environment. Initial two gigabites of storage space is free; additional storage space may be earned from promotional activities. Users can share documents stored on Wei Disk by providing document address link or through a Weibo feed.

 

Wei Credit. Wei Credit is an online virtual currency offered to users to purchase in-game virtual goods or other types of fee-based services on Weibo.com. Users can purchase Wei Credit with debit and credit cards, Alipay or mobile phone payments.

 

MVAS

 

SINA’s MVAS allows users to receive news and information, download ring tones, mobile games and pictures, and participate in dating and friendship communities. MVAS is sold on a monthly subscription or pay-per-message basis and can be ordered via SINA.com or through mobile phones. MVAS is promoted on SINA’s portal and traditional media, including television and radio, as

 

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well as joint promotions through provincial operators. SINA relies on mobile operator systems, such as China Mobile’s Monternet platform and China Unicom’s UNI-Info platform, to deliver its MVAS and bill end users.

 

SINA’s MVAS can be categorized into three main categories: news and information, community, and multimedia download:

 

News and Information

 

Community

 

Multimedia Download

 

 

 

 

 

· Headline news

 

· Games and quizzes

 

· Ring tones

· Financial news

 

· Educational products

 

· Logos and pictures

· Technology news

 

 

 

· Screen savers

· Sports news

 

 

 

 

· Weather forecast

 

 

 

 

· Jokes

 

 

 

 

 

SINA provides its MVAS mainly through the following product lines:

 

SMS. As many mobile phones are able to display and send text in Chinese, SINA developed a suite of short messaging services that includes user-customized information subscription, personal greetings, customized mobile phone screen decoration, personalized ring tones and mobile games.

 

KJAVA. KJAVA includes a full range of services, including mobile games, animation and videos, portable tools and news updates, offered on China Mobile’s K-Java mobile platform.

 

MMS. Using general packet radio service (“GPRS”) technology, MMS enables users to download color pictures and sophisticated ring tones, as well as transmit more data per message.

 

IVR. Interactive Voice Response (“IVR”) refers to voice-activated information retrieval services. Users can obtain information via their mobile phones by dialing a list of fixed numbers and following a set of pre-recorded messages. Sample services include weather forecasting and data searching. IVR offers applications in the areas of interactive games and professional products.

 

CRBT. CRBT services gives mobile phone users the option to customize their ring back tone, the ring tone heard by callers, based on popular songs and special sound effects.

 

WAP. WAP services use GPRS technology to provide users with news and other topical information, multimedia downloads, dating and community services and mobile search services.

 

Other Businesses

 

Online Games. SINA game channel provides users with downloads and gateway access to popular online games, information and updates on popular online and PC games and value-added application tools, all aimed at enhancing the overall multimedia community experiences of China’s online game players.

 

eReading. eReading is a one-stop shop for book reviews as well as complimentary and fee-based online book reading. It also features information and updates on hot social and cultural topics and interviews with writers and famous opinion leaders.

 

Enterprise services. SINA offers enterprise services to assist small businesses and government organizations to more effectively engage, communicate and transact with their target audiences via the Internet.

 

Other Products

 

Email. SINA’s Email services include Free Email, VIP Mail and Corporate Email for enterprise users. SINA Email supports both POP3 and SMTP access and provides users with year-round anti-spam and anti-virus protection.

 

Blog. SINA Blog is a popular website in China for bloggers to publish and read original writings.

 

Classified Ads. Classified ads allow free posting of advertisements for individual and enterprise users.

 

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Strategic Relationships

 

SINA has developed strategic relationships with a range of content, service, application and distribution partners in order to serve users more effectively and to extend its brand and services to a broader audience.

 

Content Partnerships. The goal of SINA’s content partnerships is to provide its users with an extensive offering of Chinese-language content. SINA contracts with content partners to display their content on one or more of its websites free of charge or in exchange for a share of revenue, a licensing fee, and access to SINA-generated content or a combination of these arrangements. Some of SINA’s leading content providers include the International Olympic Committee, NBA, English Premier League, UEFA Champions League, La Liga, Chinese Football Association Super League, China Open, National Football League, PGA Tour, Women’s Tennis Association, CCTV, BTV, Xinhua News Agency, China News, People’s Daily Online, AFP, Associated Press, Reuters, Getty Images, China Daily, Nanfang Daily Group, Xinhua Net and Beijing News. For its mobile content, SINA has established content partnerships with certain international record companies to provide image and music downloads.

 

Application and Service Partnerships. The goal of SINA’s application and service partnerships is to ensure that its users have access to user-friendly, reliable and scalable communication and search tools. Because many of SINA’s prospective partners have traditionally focused on non-Chinese speaking markets, SINA’s internal engineering and development teams often work closely with them to localize their solutions for the Chinese-language market.

 

Technology Infrastructure

 

SINA’s infrastructure allows users to access its products and services, regardless of their geographical location. SINA’s infrastructure is also designed to provide high-speed access by forwarding queries to its web hosting sites with greater resources or lower loads. The Company’s web pages are generated, served and cached by servers hosted at various co-location web hosting sites in mainland China, the U.S., Taiwan and Hong Kong. SINA’s servers run on Linux, FreeBSD, Solaris and Windows platforms using Apache, Squid, Nginx, and Lighttpd servers. These servers are primarily maintained at China Telecom and China Unicom branches in cities across China, including Beijing, Shanghai, Guangzhou and Tianjin, TNN in Taipei, Taiwan, AT&T in San Jose, California, as well as NTT in Hong Kong.

 

The Company believes that these hosting partners provide operating advantages, including an enhanced ability to protect their systems from power loss, break-ins and other potential external causes of service interruption. They provide continuous customer service, multiple connections to the Internet and a continuous power supply to their systems. In addition, SINA conducts online monitoring of its systems for accessibility, load, system resources, traffic, network-server intrusion and timeliness of content. SINA’s mobile applications in China leverage the aforementioned web operation resources by utilizing the wireless infrastructure of China Mobile and China Unicom to provide MVAS to SINA’s users. Nevertheless, the Company has experienced slower response time and suffered outages in the past due to equipment and software downtime as well as bandwidth issues with operators. Although these instances have not had a material adverse effect on the Company’s business, similar instances may have a material impact on its business in the future.

 

Seasonality

 

SINA has experienced seasonality in its online advertising business. Historically, the first calendar quarter has been the worst season for its advertising business due to the Chinese New Year holidays, and the fourth calendar quarter has been the best. Past performance may not be indicative of future trends, as the mix of advertising industry sectors, which may have different seasonality factors, may shift from quarter to quarter. Seasonality in our MVAS and other businesses is less apparent.

 

Competition

 

SINA operates in the market of online content and services for the global Chinese community. The industry can be classified as highly competitive and rapidly changing due to the fast growing market. As SINA expands its product offerings into areas such as social media and social networking services, online video, WAP (mobile portal), blog, light blog and Walkie Talkie application, it faces increasing competition from companies that are focused in the same space. In the social media and social networking services space, SINA competes with large, established portals, including Tencent, Sohu, iFeng.com and Netease, as well as vertically focused players such as Renren.com, Kaixin001.com, Giant Interactive (51.com), Tianya.cn, Dianping.com, Meilishuo.com, Immomo.com and 139.com. In online video, SINA’s competitors include Youku, Tudou, Baidu (iQiyi), Renren.com (56.com), Shanda (Ku6), PPLive and PPStream, as well as the video offerings of large portals. In the WAP space, key competitors include Tencent as well as WAP

 

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portals operated by mobile operators, such as China Mobile’s Monternet. In blog and light blog, SINA competes with public companies, such as Baidu, Tencent, Netease, Sohu and Shanda (Shanda Literature and Tuita.com), iFeng.com (light blog), as well as vertically focused websites, such as Bokee, Blogbus, Poco, Blogcn, Hexun and Diandian.com. In Walkie Talkie application and messaging, SINA faces competition from Tencent (QQ and Weixin), Microsoft (MSN Messenger), Yahoo!/Alibaba (Yahoo Messenger).

 

SINA also faces competition from vertical websites, who may have better focus and more resources dedicated to a topical area, such as Hexun, East Money, China Finance Online, PCAuto, Auto Home, Bitauto, XCar.com, ZOL.com, PCpop.com and PConline. On MVAS, the Company competes with other service providers such as Kongzhong, TOM Online, Linktone and Hurray that specialize in MVAS as well as the large portals. As SINA continues to broaden its range of product offerings, it expects increasing competition from established players and possibly less well-known players in the coming years. Many of these competitors have greater financial resources and better brand recognition in their respective areas. In addition, certain companies, especially venture-backed start-ups, may be willing to compete for market share at the expense of significant operating losses.

 

In addition, we compete with companies who are sponsor or maintain high-traffic websites or provide an initial point of entry for Internet users, including but not limited to, providers of search services, desktop clients and applications and mobile applications and operating systems. Internet portals include Tencent, Sohu, Netease, iFeng.com and TOM Online. Search providers include Internet search companies, such as Baidu, Tencent (Soso), Yahoo!/Alibaba, Sohu (Sogou), Microsoft (Bing), Netease (Youdao) and Google, as well as vertical search companies, such as Youku (video search), Tudou (video search), Gougou (video search), Qunar (travel search) and Kuxun.cn (travel search). Companies that offer desktop clients/applications, such as instant messaging (IM), pinyin, web browser and application download, and mobile applications, such as Walkie Talkie application and mobile browsers, include Tencent, Sohu (Sogou), Qihoo, Microsoft, Yahoo!/Alibaba (Yahoo Messenger) and UC Mobile Ltd (UC Browser). Smart phone operating system providers such as Apple Inc. (iOS), Google (Android) and Microsoft (Windows) are also becoming a threat as mobile Internet users are increasingly using the application stores as an initial entry point to various Internet products and services. Online companies who can aggregate significant traffic may have the ability to direct traffic to their other Internet offerings and provide advertising services.

 

SINA’s ability to compete successfully depends on many factors, including the quality of its content, the breadth, depth and ease of use of its services, its sales and marketing efforts, the size and activeness of its user base, the coverage of desired user profile, and the performance of its technology. See also “The markets for Internet and MVAS services are highly competitive, and we may be unable to compete successfully against new entrants and established industry competitors, which could reduce our market share and adversely affect our financial performance” under the Risk Factors section.

 

Intellectual Property and Proprietary Rights

 

We rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring unauthorized use of our products is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources.

 

In addition, third parties may initiate litigation against us alleging infringement of their proprietary rights. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. In addition, even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations. See “We may not be able to adequately protect our intellectual property, which could cause us to be less competitive” and “We may be subject to intellectual property infringement claims or other allegations by third parties for services we provide or for information or content displayed on, retrieved from or linked to our websites, or distributed to our users, which may materially and adversely affect our business, financial condition and prospects” under the Risk Factors section.

 

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Government Regulation and Legal Uncertainties

 

The following description of PRC laws and regulations is based upon the opinion of Jun He Law Offices, our PRC counsel. For a description of legal risks relating to our ownership structure and business, see “Risk Factors.

 

Overview

 

The PRC government has enacted an extensive regulatory scheme governing the operation of business with respect to the Internet, such as telecommunications, Internet information services, international connections to computer information networks, information security and censorship and administrative protection of copyright. Besides MII and SARFT, the various services of the PRC Internet industry are also regulated by various other governmental authorities, such as SAIC, the State Council Information Office (“SCIO”), the GAPP, the Ministry of Education (“MOE”), the MCPRC, the Ministry of Health (“MOH”), and the Ministry of Public Security.

 

Among all the regulations, the Telecommunications Regulations of the People’s Republic of China, or the Telecom Regulations, promulgated on September 25, 2000, is the primary governing law. The Telecom Regulations set out the general framework under which domestic Chinese companies such as SINA’s subsidiaries and VIEs may engage in various types of telecommunications services in the PRC. They reiterate the long-standing principle that telecommunications service providers need to obtain operating licenses as a mandatory precondition to begin operation. The Telecom Regulations categorize telecommunications services into basic telecommunications services and value-added telecommunications services. Value-added telecommunications services are defined as telecommunications and information services provided through public networks. The “Catalogue of Telecommunications Business,” an attachment to the Telecom Regulations and updated by MII’s Notice on Adjusting the Catalogue of Telecommunications Business of April 1, 2003, categorizes various types of telecommunications and telecommunications-related activities into basic or value-added services.

 

On December 20, 2001, after China’s formal entry into the WTO, the State Council promulgated the Regulations for the Administration of Foreign-Invested Telecommunications Enterprises, or the FITE Regulations, which became effective on January 1, 2002 and were amended by the State Council on September 10, 2008. The FITE Regulations stipulate that foreign-invested telecommunications enterprises, or FITEs, may undertake operations in basic telecom services and value-added telecom services. Currently, the foreign party to a value-added FITE may hold up to 50% of the equity, with no geographic restrictions on its operations. Before that, foreign investors were prohibited from investing in Internet content services. The PRC government has not made any further commitment to loosen the regulation on FITEs, except for qualified Hong Kong Service Providers under the Mainland and Hong Kong Closer Economic Partnership Arrangement.

 

According to the Measures for the Administration of Internet Information Services described below, an enterprise must obtain a license for operating value-added telecommunication services to conduct Internet content service businesses. When the Internet content involves areas of news, education, medicine, health, pharmaceuticals and medical equipment, which are regulated by MCPRC, MOE, MOH and other governmental authorities, respectively, the enterprise must also obtain permission from responsible national authorities.

 

PRC Corporate Structure

 

The PRC government restricts foreign investment in Internet-related and MVAS businesses. Accordingly, we operate our Internet-related and MVAS businesses in China through our VIEs that are PRC domestic companies owned principally or completely by certain of our PRC employees or PRC employees of our directly-owned subsidiaries. For a list of our material directly owned subsidiaries and VIEs in China, please see “C. Organizational Structure” below.

 

Classified Regulations

 

Foreign Investment in Value-added Telecom Services

 

The MII Circular 2006 was promulgated by MII on July 13, 2006. According to the MII Circular 2006, since the FITE Regulation went into effect, some foreign investors have, by means of delegation of domain names and license of trademarks, conspired with domestic value-added telecom enterprises to circumvent the requirements of FITE Regulations and have been engaged in value-added telecom services illegally.

 

In order to further intensify the administration of FITEs, the MII Circular 2006 provides that (i) any domain name used by a value-added telecom carrier shall be legally owned by such carrier or its shareholder(s); (ii) any trademark used by a value-added telecom carrier shall be legally owned by the carrier or its shareholder(s); (iii) the operation site and facilities of a value-added telecom carrier shall be installed within the scope as prescribed by operating licenses obtained by the carrier and shall correspond to the value-added telecom services that the carrier has been approved to provide; and (iv) a value-added telecom carrier shall establish or improve the measures of ensuring safety of network information. As to the companies which have obtained the operating licenses for value-added

 

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telecom services, they are required to conduct self-examination and self-correction according to the said requirements and report the result of such self-examination and self-correction to MII.

 

Accordingly, the ICP Company submitted the self-correction scheme to MII on November 17, 2006. Under the self-correction scheme, (i) the domain name “www.sina.com.cn” mainly used by the ICP Company shall be transferred from BSIT to the ICP Company, and (ii) the trademark “SINA” (“新浪”) used by the ICP Company shall be transferred from BSIT to the ICP Company. According to the Certificate for Approval of Trademark Transfer issued by the Trademark Office of State Administration for Industry and Commerce (“SAIC”) on September 28, 2008, the trademark “SINA” has already been transferred to the ICP Company. The domain name “www.sina.com.cn” has been transferred to the ICP Company as well.

 

Internet Information Services

 

The Measures for the Administration of Internet Information Services, or the ICP Measures, went into effect on September 25, 2000. Under the ICP Measures, any entity providing information to online Internet users must obtain an operating license from MII or its local branch at the provincial level in accordance with the Telecom Regulations described above. The ICP Measures further stipulate that entities providing online information services in areas of news, publishing, education, medicine, health, pharmaceuticals and medical equipment must obtain permission from responsible national and local authorities prior to applying for an operating license from MII or its local branch at the provincial or municipal level. Moreover, ICPs must display their operating license numbers in a conspicuous location on their websites. ICPs must police their websites to remove categories of harmful content that are broadly defined. This obligation reiterates Internet content restrictions set by other ministries over the past few years. In addition, the ICP Measures require ICP operators to obtain specific approvals before providing BBS services, which include electronic bulletin boards, electronic forums, message boards and chat rooms. On July 4, 2010, the approval requirement for providing BBS services was terminated by a decision issued by the PRC State Council. However, in practice, the government authorities in Beijing still require the relevant ICP operators to obtain such approvals for providing of BBS services.

 

The ICP Company currently holds a Telecommunication and Information Services Operating License, which was issued on October 29, 2010 by MII with a validity term up to December 4, 2015 subject to annual inspection, authorizing the Company to operate bulletin board system or BBS.

 

Beijing Star-Village Online Cultural Development Co., Ltd. (“StarVI”) currently holds a Telecommunication and Information Services Operating License, which was issued on October 29, 2010 by MII with a validity term up to December 4, 2015 subject to annual inspection, authorizing the provision of business of information services excluding in areas of news, publishing, education, medicine, health, pharmaceuticals, medical equipment and BBS.

 

Shenzhen Wang Xing Technology Co., Ltd. (“Wangxing”) currently holds a Value-Added Telecommunication Services Operating License, which was issued in November 2011 by MII with a validity term up to September 16, 2014 subject to annual inspection, authorizing the provision of nationwide information services of the second category of the value-added telecommunication services (excluding fixed line phone call information services and Internet information services).

 

Beijing Weimeng Technology Co., Ltd (“Weimeng”) currently holds a Telecommunication and Information Services Operating License, which was issued on August 10, 2010 by Beijing branch of MII with a validity term up to August 10, 2015, subject to annual inspection, authorizing the provision of business of Internet information services excluding in areas of news, publishing, education, medicine, health, pharmaceuticals and medical equipment.

 

Microblogging Services

 

On December 16, 2011, the Beijing Municipal Government issued the Microblog Rules, which became effective on the same day. The Microblog Rules, among other things, require users of microblogging services to register their identities with microblogging service providers. The Microblog Rules identify eleven categories of content that are restricted from being disseminated. Microblogging service providers are required to implement systems and procedures to verify user identity and ensure that the information disseminated by users is in compliance with the Microblog Rules.

 

Online News Publishing

 

On November 6, 2000 and September 25, 2005, the Provisional Regulations for the Administration of Website Operation of News Publication Services and the Provisions for the Administration of Internet News Information Services, respectively, were jointly

 

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promulgated by SCIO and MII. The regulations stipulate that general websites set up by non-news organizations may list news released by certain governmental news agencies, if they satisfy the requirements set forth in the foregoing two regulations, but may not publish news items produced by themselves or news sources from elsewhere.

 

Before commencing news-publishing services, the above regulations also require the general websites of non-news organizations to be approved by SCIO after securing permission from SCIO at the provincial level. In addition, the general websites intending to publish the news released by the aforementioned news agencies must enter into agreements with the respective organizations, and file copies of such agreements with the relevant administration department.

 

On December 27, 2000, the Information Office of Beijing People’s Government approved the ICP Company to develop online news publishing services. On June 6, 2006, SCIO issued to the ICP Company the Internet News Information Service License, which is subject to annual inspection. The ICP Company passed the inspection made in 2011.

 

Online Transmission of Audio-Visual Programs

 

On July 6, 2004, SARFT promulgated the Measures for the Administration of Publication of Audio-visual Programs through Internet or Other Information Network, which apply to the opening, broadcasting, integration, transmission or download of audio-visual programs via Internet. An applicant who is engaged in the business of transmitting audio-visual programs shall apply for a license, which is to be issued by SARFT in accordance with the categories of business, receiving terminals, transmission networks, and other items. Validity term of the license is two years and can be renewed upon its expiration. Foreign-invested enterprises are not allowed to engage in the above business. Moreover, the audio-visual programs of the news category published to the public through information network shall be limited to the programs produced and broadcasted by radio stations, television stations, radio television stations and approved news websites within the territory of China.

 

According to the Reply on Approvals for Beijing SINA Internet Information Service Co., Ltd. Engaging in the Business of Information Services Relating to Online Transmission of Audio-visual Programs issued by SARFT on October 17, 2004, the ICP Company has been approved to carry out the online transmission of audio-visual programs. The ICP Company currently holds a License for Online Transmission of Audio-visual Programs issued by SARFT on April 16, 2009, with a validity term up to April 16, 2012. The ICP Company submitted the renewal application to SARFT on September 23, 2011, which has been received and is being reviewed by SARFT.

 

On December 20, 2007, SARFT and MII jointly promulgated the Administrative Provisions on Internet Audio-visual Program Service, or the Audio-visual Program Provisions, which went effective on January 31, 2008. The Audio-visual Program Provisions stipulates, among others, that any entity engaged in Internet audio-visual program service must obtain a License for Online Transmission of Audio-visual Programs issued by SARFT or register with SARFT. An applicant for engaging in Internet audio-visual program service must be a state-owned entity or a state-controlled entity with full corporate capacity, and the business to be carried out by the applicant must satisfy the overall planning and guidance catalogue for Internet audio-visual program service determined by SARFT. It is unclear based on the implement rules of the Audio-visual Program Provisions whether such requirements only apply to the new market entrants for operating Internet audio-visual program services or such requirements apply to both new applicants and entities that have already obtained the License for Online Transmission of Audio-visual Programs.

 

SARFT and MII later jointly held a press conference in February 2008 to answer questions with respect to the Audio-visual Program Provisions. In that press conference, SARFT and MII clarified that the websites that existed before the promulgation of the Audio-visual Program Provisions may, once they are registered with SARFT, continue operating the audio-visual services so long as those websites have not been in violation of the laws and regulations.

 

On March 31, 2009, SARFT promulgated the Notice on Strengthening the Administration of the Content of Internet Audio Visual Program, which reiterated the prohibition of certain types of Internet audio visual programs containing violence, pornography, gambling, terrorism or superstitious factors.

 

Production of Radio and Television Programs

 

On July 19, 2004, SARFT promulgated the Regulations for Administration on Production of Radio and Television Programs, or the “Radio and TV Programs Regulations,” which went into effect as of August 20, 2004. Under the Radio and TV Programs Regulations, any entities engaged in the production of radio and television programs are required to apply for a license from SARFT or its provincial branches.

 

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In October 2011, the ICP Company obtained a license for production of radio and television programs issued by Beijing Radio and Television Bureau and the validity term of such license is up to October 13, 2013 subject to annual inspection.

 

MVAS

 

On March 1, 2009, MII promulgated the Administrative Measures for the Licensing of Telecommunication Business Operations (“New Administrative Measures”), which superseded the Administrative Measures for Telecommunication Business Operating Licenses published in 2001 (“Old Administrative Measures”) on April 10, 2009. The New Administrative Measures, like the Old Administrative Measures, require an entity to obtain a business permit, which is divided into two categories — license for basic telecom services and license for value-added telecom services, in order to operate a telecommunication business. Furthermore, a distinction is made as to whether a license for conducting value-added telecommunication services is granted for “intra-provincial” or “trans-regional” (inter-provincial) activities. An appendix to the license will detail the permitted activities to be conducted by the enterprise. An approved telecom service operator must conduct its business (basic or value-added) in accordance with the specifications recorded on its Telecom Service Operating License. However, there are still ambiguities regarding the interpretation and application of the FITE Regulations.

 

The ICP Company currently holds a Value-Added Telecommunication Services Operating License issued on July 7, 2009 by MII subject to annual inspection, authorizing nationwide provision of information service in value-added telecommunications services (excluding fixed line phone call information services and Internet information services). The validity term of this license is up to July 7, 2014. The ICP Company also holds a Value-Added Telecommunication Services Operating License issued by Beijing Communication Administration Bureau on March 10, 2008, with a validity term up to June 1, 2013, authorizing the ICP Company to provide MVAS in Beijing.

 

Guangzhou Media Message Technologies, Inc. (“Xunlong”) currently holds a Value-Added Telecommunication Services Operating License issued on December 9, 2010 by MII with a validity term up to September 16, 2014 subject to annual inspection, authorizing the provision of nationwide business of information services (excluding fixed line phone call information services and Internet information services).

 

StarVI currently holds a Value-Added Telecommunications Services Operating License issued on September 16, 2009 by MII with a validity term up to September 16, 2014 subject to annual inspection, authorizing the provision of nationwide business of information services (excluding fixed line phone call information services and Internet information services).

 

Wangxing currently holds a Value-Added Telecommunication Services Operating License issued on November 11, 2011 by MII with a validity term up to September 16, 2014 subject to annual inspection, authorizing the provision of nationwide business of the second category of the value-added telecommunication services (excluding fixed line phone call information services and Internet information services).

 

Beijing Western-net Network Technology Co., Ltd. currently holds a Value-Added Telecommunication Services Operating License issued on March 1, 2010 by MII with a validity term up to March 1, 2015 subject to annual inspection, authorizing the provision of nationwide business of information services (excluding fixed line phone call information services and Internet information services). According to the Confirmation Letter issued by Beijing Communication Administration Bureau, Beijing Western-net Network Technology Co., Ltd. has been approved to provide MVAS in Beijing.

 

Short Messaging Services

 

On April 29, 2004, MII issued the Notice on Certain Issues Regarding the Regulation of Short Messaging Services, or the SMS Notice. The SMS Notice confirms that all mobile communication companies shall provide SMS in cooperation with information service providers who have obtained relevant operating license for SMS. In addition, all mobile communication companies and information service providers shall highlight the fee standards, payment methods and ways of withdrawal in their advertisements for SMS services. For services based on monthly payment and subscription services, providers shall confirm with the users in advance. Without such confirmation, it should be assumed that the user has withdrawn such requirement for services. The mobile communication companies and information service providers shall strictly comply with the service items as agreed upon with the users. The information service providers shall examine the content of short messages, and no short message may contain content forbidden by law.

 

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Internet Publishing

 

On June 27, 2002, SPPA and MII jointly released the Provisional Rules for the Administration of Internet Publishing, or the Internet Publishing Rules, which define “Internet publications” as works that are either selected or edited to be published on the Internet or transmitted to end-users through the Internet for the purposes of browsing, reading, using or downloading by the general public. Such works mainly include content or articles formally published by press media such as: (i) books, newspapers, periodicals, audio-visual products and electronic publications; and (ii) literature, art and articles on natural science, social science, engineering and other topics that have been edited.

 

According to the Internet Publishing Rules, web portals like SINA are required to apply to and register with GAPP before distributing Internet publications.

 

In accordance with these rules, the ICP Company currently holds an Internet Publication License issued by GAPP on December 21, 2010, with a validity term up to December 31, 2014.

 

Online Games

 

On May 10, 2003, the Provisional Regulations for the Administration of Online Culture were issued by MCPRC and went into effect on July 1, 2003 (these regulations were revised by MCPRC on July 1, 2004 and further revised and repromulgated on February 17, 2011). According to these regulations, commercial entities are required to apply to the relevant local branch of MCPRC for an Online Culture Operating Permit to engage in online games services.

 

On July 27, 2004, GAPP and the State Copyright Bureau jointly promulgated the Notice on Carrying out the Decision from the State Council Regarding the Approval of Electronic and Online Games Publications, or the Games Notice. According to the Games Notice, an Internet Publication License is required for publishing online games.

 

According to the Circular of the Ministry of Culture on Strengthening the Examination of Content of Online Games Products issued by MCPRC on May 14, 2004, the content of any foreign online game products should be examined and approved by MCPRC before they are operated within China; and entities engaged in developing and operating domestic online games products should register with the MCPRC.

 

On November 13, 2009, MCPRC issued the Circular of the Ministry of Culture on Improving and Strengthening the Examination of Content of Online Games. According to this circular, offensive promotion and advertisement of online games, games propagating eroticism, gambling and violence, and other online games without the approval from MCPRC, are strictly prohibited.

 

On September 28, 2009, GAPP, the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications jointly published the Notice Regarding the Consistent Implementation of the “Stipulations on ‘Three Provisions’ of the State Council and the Relevant Interpretations of the State Commission Office for Public Sector Reform and the Further Strengthening of the Administration of Pre-examination and Approval of Internet Games and the Examination and Approval of Imported Internet Games” or Circular 13. Circular 13 expressly prohibits foreign investors from participating in the operation of Internet games via wholly owned, equity joint venture or cooperative joint venture investments in China, and from controlling and participating in such businesses directly or indirectly through contractual or technical support arrangements. In addition, according to circular 13, GAPP’s approval is required for publishing any specific imported online games and any imported online game which is not examined and approved by GAPP is not allowed to be published online. It is not clear yet as to whether other PRC government authorities, such as the MOFCOM or MII will support GAPP to enforce the prohibition of the VIE model that Circular 13 contemplates.

 

On June 3, 2010, the MCPRC promulgated the “Interim Measures for Administration of Online Games, or the “Online Games Measures,” which became effective on August 1, 2010. The Online Games Measures reiterate that any online games operator should obtain an Online Culture Operating Permit to engage in online game services. In addition, the content of any imported online games should be examined and approved by MCPRC before they are operated within China, and any domestic online games should be registered with MCPRC.

 

The ICP Company currently holds an Internet Publication License issued by GAPP in December 2010 with a validity term up to December 31, 2014, and an Online Culture Operating Permit issued by MCPRC in July 2011 with a validity term up to December 31, 2014.

 

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Internet Medical, Health and Drug Information Services

 

On May 1, 2009, MOH promulgated Administrative Measures for Internet Medical and Health Information Services, which require an entity that provides Internet medical-and-health-related information services to obtain an approval letter from the health administrative departments at the provincial level and strictly prohibit the website from releasing any superstitious, pornographic or false information or publish any medical advertisements without examination and approval or provide on-line diagnosis or treatment services.

 

On August 18, 2010, Beijing Health Bureau issued an approval letter to the ICP Company to approve the ICP Company to provide medical-and-health-related information services. The validity term of this approval letter is up to August 16, 2012.

 

According to the Measures for the Administration of Internet Drug Information Services, issued by the State Drug Administration (“SDA”), on July 8, 2004, websites publishing drug-related information must obtain a license from SDA or its provincial departments.

 

The ICP Company obtained the approval for website publishing of drug-related information from Beijing Drug Administration (“BDA”) and SDA in December 2001 and January 2002, respectively, and has obtained a Qualification Certificate for Internet Drug Information Services issued by the BDA in December 2009 with a validity term up to December 6, 2014.

 

Online Cultural Products

 

The Provisional Regulations for the Administration of Online Culture described above and the Notice on Implementing the revised Provisional Regulations for the Administration of Online Culture issued by MCPRC in March 2011 apply to entities engaged in activities related to “online cultural products.” Online cultural products are classified as: (i) online cultural products particularly developed for publishing via Internet, which include online music and video files (including video on demand and digital video broadcasting etc.), network games, online performing arts, online artworks, and online animation features and cartoons (including Flash animation); and (ii) online cultural products converted from audio and visual products, games, performing arts, artworks and animation features and cartoons, and published via Internet. Pursuant to these legislations, commercial entities are required to apply to MCPRC for an Online Culture Operating Permit if they intend to engage in any of the following types of activities for the purpose of making profits:

 

·             production, duplication, import, wholesale, retail, leasing or broadcasting of online cultural products;

 

·             publishing of online cultural products on the Internet or transmission thereof to computers, fixed-line or mobile phones, radios, television sets or gaming consoles for the purpose of browsing, reading, using or downloading such products; or

 

·             exhibitions or contests related to online cultural products.

 

On July 30, 2010, MCPRC released a notice regarding the devolution of power on the administration of online culture operation, according to which the provincial counterparts of MCPRC should now be the competent authorities for issuing the Online Culture Operating Permits.

 

The ICP Company currently holds an Online Culture Operating Permit issued by MCPRC in July 2011 with a validity term up to December 31, 2014. StarVI currently holds an Online Culture Operating Permit issued by MCPRC in January 2011 with a validity term up to December 31, 2014. Wangxing currently holds an Online Culture Operating Permit issued by MCPRC in March 2011 with a validity term up to March 30, 2014. Xunlong currently holds an Online Culture Operating Permit issued by MCPRC in March 2011 with a validity term up to March 7, 2014. Weimeng currently holds an Online Culture Operating Permit issued by MCPRC in July 2011 with a validity term up to July 25, 2014.

 

Online Advertising

 

Regulations governing online advertising include:

 

·             Advertisement Law of the People’s Republic of China promulgated by the PRC State Congress on October 27, 1994 and effective on February 1, 1995;

 

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·             Administrative Regulations for Advertising promulgated by the State Council on October 26, 1987 and effective on December 1, 1987;

 

·             Implementation Rules for the Administrative Regulations for Advertising promulgated by the State Council on January 9, 1988 and amended on December 3, 1998, December 1, 2000 and November 30, 2004; and

 

·             Provisions on the Administration of Foreign-funded Advertising Enterprises promulgated by SAIC and MOFCOM on March 2, 2004 and amended on August 22, 2008.

 

According to the above regulations, an enterprise engaging in advertising business as specified in its business scope does not need to apply for an Advertising Operation License, provided that such enterprise is not a radio station, television station, newspaper or magazine publisher or any other entity as specified in laws or administrative regulations. As to placing advertisements on the Internet, such enterprise shall apply for a business scope of placing online advertisements on particular websites and does not need to apply for the Advertising Operation License.

 

Each of Beijing SINA Infinity Advertising Co., Ltd., Beijing SINA Advertising Co., Ltd., Shanghai SINA Advertising Co., Ltd., Fujian SINA Information Services Co., Ltd, and Henan Bolang Information Services Co., Ltd, has an approved business scope to carry out the design, production, issuance and agency of advertisements.

 

The ICP Company has an approved business scope to issue Internet advertisements and carry out the business of placing advertisements on the website “www.sina.com.cn”.

 

International Connections for Computer Information Networks

 

Regulations governing international connections for PRC computer networks include:

 

·             Measures for the Administration of International Connections to China’s Public Computer Interconnected Networks (1996);

 

·             Provisional Regulations of the People’s Republic of China for the Administration of International Connections to Computer Information Networks (1997) and their Implementing Measures (1998);

 

·             Reply Concerning the Verification and Issuance of Operating Permits for Business Relating to International Connections for Computer Information Networks and for Public Multimedia Telecommunications Business (1998); and

 

·             Administrative Measures for International Communications Gateways (2002).

 

According to the above regulations, any entity wishing to access international network connections for its computer information networks in the PRC must comply with the following requirements:

 

·             be a PRC legal person;

 

·    have the appropriate equipment, facilities and technical and administrative personnel;

 

·             have implemented and registered a system of information security and censorship; and

 

·             effect all international connections through an international communications gateway established with the approval of MII.

 

The companies described in “C. Organizational Structure” below are in proper compliance with these requirements.

 

Internet Mapping Services

 

On December 2, 1992, the National People’s Congress approved and promulgated the Surveying and Mapping Law, which went into effect on July 1993. The Surveying and Mapping Law was amended on August 29, 2002 and the amendment became effective on December 1, 2002. According to the Surveying and Mapping Law, any entities engaged in surveying and mapping services should obtain a surveying and mapping qualification certificate and comply with the state’s surveying and mapping criteria. On May 10, 2010, the State Bureau of Surveying and Mapping promulgated the Professional Criteria of Internet Mapping Services, specifying the professional criteria for providing Internet mapping services. The ICP Company has obtained a surveying and mapping qualification

 

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certificate on July 27, 2010.

 

Information Security and Censorship

 

Laws and regulations governing information security and censorship include:

 

·             The Law of the People’s Republic of China on the Preservation of State Secrets (1988) which was amended on April 30, 2010 and the amendment became effective from October 1, 2010;

 

·             The Law of the People’s Republic of China Regarding State Security (1993) and its Implementing Rules (1994);

 

·             Rules of the People’s Republic of China for Protecting the Security of Computer Information Systems (1994);

 

·             Notice Concerning Work Relating to the Filing of Computer Information Systems with International Connections (1996);

 

·             Administrative Regulations for the Protection of Secrecy on Computer Information Systems Connected to International Networks (1997);

 

·             Regulations for the Protection of State Secrets for Computer Information Systems on the Internet (2000);

 

·             Notice issued by the Ministry of Public Security of the People’s Republic of China Regarding Issues Relating to the Implementation of the Administrative Measure for the Security Protection of International Connections to Computer Information Networks (2000);

 

·             Decision of the Standing Committee of the National People’s Congress Regarding the Safeguarding of Internet Security (2000);

 

·             Measures for the Administration of Commercial Website Filings for the Record (2002) their Implementing Rules (2002);

 

·             Measures for the Administration of IP Address Archiving (2005);

 

·             Provision on Technical Measures for Internet Security Protection (2005);

 

·             Administrative Measures for the Graded Protection of Information Security (2007); and

 

·             Several Provisions on Regulating the Market Order of Internet Information Services (2012).

 

These laws and regulations specifically prohibit the use of Internet infrastructure where it may breach public security, provide content harmful to the stability of society or disclose state secrets. According to these laws and regulations, it is mandatory for Internet companies in the PRC to complete security-filing procedures and regularly update information security and censorship systems for their websites with the local public security bureau. In addition, the newly amended Law on Preservation of State Secrets which became effective on October 1, 2010, provides that whenever an Internet service provider detects any leakage of state secrets in the distribution of online information, it should stop the distribution of such information and report to the authorities of state security and public security. As per request of the authorities of state security, public security or state secrecy, the Internet service provider should delete any content on its website that may lead to disclosure of state secrets. Failure to do so on a timely and adequate basis may subject us to liability and certain penalties given by the State Security Bureau, Ministry of Public Security and/or MII or their respective local counterparts.

 

According to the Detailed Implementing Rules for the Measures for the Administration of Commercial Website Filings for the Record, promulgated by Beijing Administration for Industry and Commerce (“BAIC”) in July 2002, websites must comply with the following requirements:

 

·             file with BAIC and obtain electronic registration marks;

 

·             place the registration marks on their websites’ homepages; and

 

·             register their website names with BAIC.

 

The ICP Company successfully registered its websites with BAIC on December 23, 2002. Afterwards, SINA’s electronic

 

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registration mark is prominently placed on its homepage.

 

In addition, the State Security Bureau (“SSB”) has issued regulations authorizing the blocking of access to any site it deems to be leaking state secrets or failing to comply with the relevant legislation regarding the protection of state secrets during online information distribution. Specifically, even though the requirement to obtain specific approvals before providing BBS services, which include electronic bulletin boards, electronic forums, message boards and chat rooms, has been terminated according to a decision issued by the PRC State Council on July 4, 2010, in practice, the government authorities in Beijing still require the relevant ICP operators to obtain such approvals for providing BBS services. Internet companies in China with bulletin boards, chat rooms or similar services must apply for the approval of the SSB prior to operating such services. The ICP Company has established an internal security committee, adopted security maintenance measures, employed full-time BBS supervisors and has been exchanging information on a regular basis with the local public security bureau with regard to sensitive or censored information and websites. Thus, it is in full compliance with the governing legislation.

 

Encryption Software

 

On October 7, 1999, the State Encryption Administration Commission published the Regulations for the Administration of Commercial Encryption, followed by the first Notice of the General Office of the State Encryption Administration Commission on November 8, 1999. Both of these regulations address the use of software in China with encryption functions. According to these regulations, purchase of encryption products must be reported. Violation of the encryption regulations may result in a warning, penalty, confiscation of the encryption product, or criminal liabilities.

 

On March 18, 2000, the Office of the State Commission for the Administration of Cryptography issued a public announcement regarding the implementation of those regulations. The announcement clarifies the encryption regulations as below:

 

·             Only specialized hardware and software, the core functions of which are encryption and decoding, fall within the administrative scope of the regulations as “encryption products and equipment containing encryption technology.” Other products such as wireless telephones, Windows software and browsers do not fall within the scope of this regulation.

 

·             The PRC government has already begun to study the laws in question in accordance with WTO rules and China’s external commitments, and will make revisions wherever necessary. The Administrative Regulations on Commercial Encryption will also be subject to such scrutiny and revision.

 

In late 2005, the Administration Bureau of Cryptography further issued a series of regulations to regulate the development, production and sales of commercial encryption products, which all came into effect on January 1, 2006.

 

We believe that the companies described in “C. Organizational Structure” below are in proper compliance with these requirements. For the legal uncertainties associated with encryption software, please see “We may have to register our encryption software with Chinese regulatory authorities, and if they request that we change our encryption software, our business operations could be disrupted as we develop or license replacement software” in the Risk Factors section.

 

Online Education

 

According to the Measures for the Administration of Educational websites and Online Education School released on July 5, 2000, to open educational websites and online education schools, application must be made to the administrative department overseeing education. Operation may begin only when it is inspected and approved by the administrative department. Educational websites and online education schools shall not operate without the approval of the administrative department overseeing education.

 

In compliance with the above regulation, the ICP Company obtained the aforementioned approvals from the Beijing Education Committee on March 21, 2002.

 

Administrative Protection of Internet Copyright

 

According to the Measures for the Administrative Protection of Internet Copyright implemented on May 30, 2005, the direct provision of Internet content in the course of Internet information service activities shall be governed by the Copyrights Law, which includes the uploading, storing, linking, search and other functions of such content automatically provided over the Internet without any editing, amending or selecting the stored or transmitted content. A copyright administration department shall, when imposing administrative penalties upon the act infringing upon the right of communication through information network, apply the Measures for

 

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Imposing Copyright Administrative Penalties.

 

Where a copyright holder (individual or entity) finds any content communicated through the Internet infringes upon its copyright and sends a notice of claim to the Internet information service provider, the Internet information service provider shall immediately take measures to remove the relevant content, and preserve the copyright holder’s notice of claim for six months. An Internet information service provider shall, after receipt of the copyright holder’s notice, record the content of the provided information, the publishing time, and the Internet address or domain name. Where an Internet information service provider removes relevant content of an Internet content provider according to the notice of a copyright holder, the Internet content provider may deliver a counter-notice to both the Internet information service provider and the copyright holder, stating that the removed content does not infringe upon the copyright. After the delivery of such counter-notice, the Internet information service provider may immediately reinstate the removed content and shall not bear legal liability for such reinstatement.

 

Where an Internet information service provider clearly knows an Internet content provider infringes other’s copyright through the Internet, or, although it does not clearly know such activity but fails to take measures to remove relevant content upon receipt of the copyright owner’s notice, as a result, it damages public interests, the copyright administration department may, in accordance with the Copyright Law, order it to stop the tortious act, and impose administrative penalties. Where there is no evidence to indicate that an Internet information service provider clearly knows the facts of tort, or the Internet information service provider has taken measures to remove relevant content upon receipt of the copyright owner’s notice, the Internet information service provider shall not bear the relevant liabilities.

 

The companies described in “C. Organizational Structure” below have taken measures to protect Internet copyright in pursuance of the specified procedures and in compliance with relevant laws and regulations mentioned above.

 

Tort Liability Law

 

The PRC Tort Liability Law became effective on July 1, 2010. According to the Tort Liability Law, Internet users and Internet service providers bear tortious liabilities in the event that they infringe other persons’ rights and interests through the Internet. Where an Internet user conducts tortious acts through Internet services, the infringed person has the right to require the Internet service provider to take necessary actions such as deleting content, screening and de-linking. A failure to take necessary actions after being informed will subject the Internet service provider to joint and several liability with the Internet user with regard to the additional damages incurred. Where an Internet service provider knows an Internet user is infringing other persons’ rights and interests through its Internet service but fails to take necessary actions, it is jointly and severally liable with the Internet user.

 

Foreign Exchange

 

Foreign exchange regulation in China is primarily governed by the following regulations:

 

·             Foreign Exchange Administration Rules, or the Exchange Rules, promulgated by the State Council on January 29, 1996, which was amended on January 14, 1997 and on August 5, 2008 respectively; and

 

·    Administration Rules of the Settlement, Sale and Payment of Foreign Exchange, or the Administration Rules, promulgated by the People’s Bank of China on June 20, 1996.

 

Under the Exchange Rules, RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. As for capital account items, such as direct investments, loans, security investments and the repatriation of investment returns, however, the reservation or conversion of foreign currency income is still subject to the approval of SAFE or its competent local branches; while for the foreign currency payments for capital account items, the SAFE approval is not necessary for the conversion of RMB except as otherwise explicitly provided by laws and regulations.

 

Under the Administration Rules, enterprises may only buy, sell or remit foreign currencies at banks that are authorized to conduct foreign exchange business after the enterprise provides valid commercial documents and relevant supporting documents and, in the case of certain capital account transactions, after obtaining approval from SAFE or its competent local branches. Capital investments by enterprises outside of China are also subject to limitations, which include approvals by the MOC, SAFE and the National Development and Reform Commission, or their respective competent local branches.

 

On October 21, 2005, SAFE issued the Circular on Several Issues concerning Foreign Exchange Administration for Domestic

 

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Residents to Engage in Financing and in Return Investments via Overseas Special Purpose Companies, or Circular No. 75, which went into effect on November 1, 2005. Circular No. 75 provides that if PRC residents use assets or equity interests in their PRC entities to establish offshore companies or inject assets or equity interests of their PRC entities into offshore companies for the purpose of overseas capital financing, they must register with local SAFE branches with respect to their investments in offshore companies. Circular No. 75 also requires PRC residents to file changes to their registration if their special purpose companies undergo material events, such as capital increase or decrease, share transfer or exchange, merger or division, long-term equity or debt investments, or provision of guaranty to a foreign party. Since May 2007, SAFE has issued a series of guidance to its local branches with respect to the operational process with regard to Circular No. 75, including without limitation the Notice of SAFE on Printing and Distributing the Implementing Rules for the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Circular No. 19, which came into effect as of July 1, 2011.

 

On August 29, 2008, the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-funded Enterprises, or Circular 142, was promulgated by SAFE. Pursuant to Circular 142, the foreign currency capital of FIEs, after being converted to RMB, can only be used for doing business within the business scope approved by relevant governmental authorities, and shall not be used for domestic equity investment except as otherwise explicitly provided by laws and regulations. In addition, FIEs may not change how they use such capital without SAFE’s approval, and may not in any case use such capital to repay RMB loans if they have not used the proceeds of such loans.

 

On November 19, 2010 SAFE promulgated a circular, or Circular 59 which requires the authenticity of settlement of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled in the manner described in the offering documents. Circular 142 and Circular 59 may significantly limit our ability to transfer the net proceeds from this offering to our PRC subsidiaries and convert the net proceeds into RMB, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

 

Income Tax

 

On March 16, 2007, the National People’s Congress approved and promulgated the EIT Law. On December 6, 2007, the State Council approved the Implementing Rules. Both the EIT Law and its Implementing Rules became effective on January 1, 2008. Under the EIT Law and the Implementing Rules, which superseded the Previous IT Law, the enterprise income tax rate for both domestic companies and FIEs is unified at 25%. On December 26, 2007, the State Council promulgated the Circular on Implementation of Enterprise Tax Transition Preferential Policy, or the Preferential Policy Circular. The EIT Law, its Implementing Rules and the Preferential Policy Circular provide a five-year transitional period for certain entities that had enjoyed a favorable income tax rate of less than 25% under the Previous IT Law and were established before March 16, 2007, during which period the applicable enterprises income tax rate shall gradually increase to 25%.

 

On April 14, 2008, the Administration Measures for Recognition of High and New Technology Enterprises, or the Recognition Measures, were jointly promulgated by the Ministry of Science and Technology, the Ministry of Finance, and the State Administration of Taxation, which sets out the standards and process for granting the high and new technology enterprises status. According to the EIT Law and its Implementing Rules as well as the Recognition Measures, enterprises which have been granted the high and new technology enterprises status shall enjoy a favorable income tax rate of 15%. As of December 2011, three of our subsidiaries have obtained the Certificate for High and New Technology Enterprises, evidencing their high and new technology enterprises status. Therefore, the said companies are entitled to enjoy a favorable tax rate under the EIT Law.

 

The EIT Law also provides that an enterprise established under the laws of a foreign country or region but whose “de facto management body” is located in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its global income. The Implementing Rules merely defines the location of the “de facto management body” as “the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.” The State Tax Administration issued the Circular regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. The State Administration of Taxation issued the Bulletin regarding the Administrative Measures on the Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Interim) on July 27, 2011, which became effective on September 1, 2011, providing more guidance on the implementation of Circular 82. This bulletin clarifies matters including resident status determination,

 

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post-determination administration and competent tax authorities. Although both Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises, not companies like us, the determining criteria set forth in Circular 82 and the bulletin may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Based on a review of surrounding facts and circumstances, the Company does not believe that it is likely that its operations outside of the PRC should be considered a resident enterprise for PRC tax purposes. However, due to limited guidance and implementation history of the EIT Law, should the Company be treated as a resident enterprise for PRC tax purposes, the Company will be subject to PRC tax on worldwide income at a uniform tax rate of 25% retroactive to January 1, 2008.

 

The EIT Law also imposes a withholding income tax of 10% on dividends distributed by an FIE to its immediate holding company outside of China if such immediate holding company is considered a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the Previous IT Law. The Cayman Islands, where the Company is incorporated, does not have such tax treaty with China. According to the Arrangement between Mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the FIE). The State Administration of Taxation further promulgated a circular, or Circular 601, on October 27, 2009, which provides that tax treaty benefits will be denied to “conduit” or shell companies without business substance and that a beneficial ownership analysis will be used based on a “substance-over-form” principle to determine whether or not to grant the tax treaty benefits. A majority of our subsidiaries in China are directly held by our Hong Kong subsidiaries. If we are regarded as a non-resident enterprise and our Hong Kong subsidiaries are regarded as resident enterprises, then our Hong Kong subsidiaries may be required to pay a 10% withholding tax on any dividends payable to us. If our Hong Kong entities are regarded as non-resident enterprises, then our PRC subsidiaries may be required to pay a 5% withholding tax for any dividends payable to our Hong Kong subsidiaries, however, it is still unclear at this stage whether Circular 601 applies to dividends from our PRC subsidiaries paid to our Hong Kong subsidiaries and if our Hong Kong subsidiaries were not considered as “beneficial owners” of any dividends from their PRC subsidiaries, the dividends payable to our Hong Kong subsidiaries would be subject to withholding tax at a rate of 10%.

 

The EIT Law and its Implementation Rules have made an effort to scrutinize transactions between related parties. Pursuant to the EIT Law and its Implementation Rules, the tax authorities may impose mandatory adjustment on tax due to the extent a related party transaction is not in line with arm’s-length principle or was entered into with a purpose to reduce, exempt or delay the payment of tax. On January 8, 2009, the State Administration of Taxation issued the Implementation Measures for Special Tax Adjustments (Trial), which sets forth tax-filing disclosure and documentation requirements, clarify the definition of “related party,” guide the selection and application of transfer pricing methods, and outline the due process procedures for transfer pricing investigation and assessment.

 

On December 10, 2009, the State Administration of Taxation issued a circular on Strengthening the Administration of Enterprise Income Tax Collection on Income Derived from Equity Transfer by Non-resident Enterprise, or Circular 698. Pursuant to Circular 698, non-resident enterprises should declare any direct transfer of equity interest of PRC resident enterprises and pay taxes in accordance with the EIT Law and relevant laws and regulations. For an indirect transfer, if the effective tax rate for the transferor (a non-PRC-resident enterprise) is lower than 12.5% under the law of the jurisdiction of the direct transferred target, the transferor is required to submit relevant transaction materials to PRC tax authorities for review. If such indirect transfer is determined by PRC tax authorities to be a transaction without any reasonable business purpose other than for the purpose of tax avoidance, the gains derived from such transfer will be subject to PRC income tax.

 

In addition to the above, after the EIT Law and its Implementing Rules were promulgated, the State Administration of Taxation released several regulations to stipulate more details for carrying out the EIT Law and its Implementing Rules. These regulations include:

 

·             Notice of the State Administration of Taxation on the Issues Concerning the Administration of Enterprise Income Tax Deduction and Exemption (2008);

 

·             Notice of the State Administration of Taxation on Intensifying the Withholding of Enterprise Income Tax on Non-resident Enterprises’ Interest Income Sourcing from China (2008);

 

·             Notice of the State Administration of Taxation on Several Issues Concerning the Recognition of Incomes Subject to the Enterprise Income Tax (2008);

 

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·             Opinion of the State Administration of Taxation on Strengthening the Administration of Enterprise Income Tax (2008);

 

·             Notice of the Ministry of Finance and State Administration of Taxation on Several Preferential Policies in Respect of Enterprise Income Tax (2008);

 

·             Interim Measures for the Administration of Collection of Enterprise Income Tax on the Basis of Consolidation of Trans-regional Business Operations (2008); and

 

·             Several Issues Concerning the Enterprise Income Tax Treatment on Enterprise Reorganization (2009).

 

Labor and Work Safety

 

The Labor Law of the PRC, or the Labor Law, which was effective on January 1, 1995, provides basic protections for employees, e.g. employment contracts shall be concluded if labor relationships are to be established between employers and employees; employers cannot compel employees to work beyond the time limit and shall provide wages which are not lower than local standards on minimum wages to the employees punctually; employers shall establish and improve their systems for labor safety and sanitation and strictly abide by applicable PRC rules and standards on labor safety and sanitation; and female employees and juvenile employees are given special protection.

 

On June 29, 2007, the National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008. On September 18, 2008, the State Council further promulgated the Regulations on Implementation of the Labor Contract Law. Compared to the Labor Law, the Labor Contract Law and its implementing regulations impose more restrictions on employers and have been deemed to potentially increase labor costs for employers to terminate employment relationship with employees. Such restrictions include specific provisions related to fixed term employment contracts, temporary employment, probation, consultation with the labor union and employee assembly, employment without a contract, dismissal of employees, compensation upon termination and overtime work, and collective bargaining. According to the Labor Contract Law and its implementing regulations, an employer is obliged to sign an unlimited term employment contract with an employee if the employer intends to renew employment relationship with such employee after two consecutive fixed term employment contracts. The employer also has to pay a compensation fee to the employee if the employer terminates the unlimited term labor contract, unless an employee refuses to extend an expired employment contract under terms which are the same or more favorable than those in the expired contract. Compensation is also required when the labor contract expires. Further, under the Regulations on Paid Annual Leave for Employees, which became effective on January 1, 2008, employees who have worked more than one year for an employer are entitled to a paid vacation ranging from 5 to 15 days, depending on their length of service. Employees who waive such vacation time at the request of employers shall be compensated for three times their normal salaries for each waived vacation day.

 

The laws and regulations governing the labor relations and work safety also include:

 

·             the Work Safety Law of the PRC (2002);

 

·             the Regulation on Occupational Injury Insurance (2004);

 

·             the Interim Measures Concerning the Maternity Insurance (1995);

 

·             the Interim Regulations on the Collection and Payment of Social Insurance Premiums (1999) and its interim measures (1999);

 

·             the PRC Social Insurance Law (2011); and

 

·             the Regulation on the Administration of Housing Fund (2002).

 

Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors

 

The General Office of the State Council promulgated the Notice on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors or the Security Review Notice, on February 3, 2011, providing that a security review system for mergers and acquisitions of domestic enterprises by foreign investors shall be established. The Security Review Notice apply to the mergers and acquisitions of domestic enterprises by foreign investors involving the military industrial enterprises and supportive military industrial enterprises, enterprises surrounding major and sensitive military facilities, and other entities relating to the national defense security, enterprises relating to important agricultural products, important energies and

 

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resources, important infrastructural facilities, important transportation services, key technologies, manufacturing of major equipment, etc., which relate to the national security, and whose actual controlling power may be obtained by foreign investors. The joint ministerial meeting is appointed as the authority in carrying out the security review.

 

To specify the implementations and procedural matters, the MOFCOM enacted the Interim Measures on Related Matters on the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors which had been effective from March 5, 2011 to August 31, 2011 and the Provisions of on the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the Security Review Provisions, which became effective on September 1, 2011. The Security Review Provisions provide that, among other things, whether a merger or acquisition of a domestic enterprise by a foreign investor falls within the scope of merger and acquisition security review shall be determined from the substance and actual impact of the transaction, and foreign investors shall not substantially evade the merger and acquisition security review in any form, including but not limited to holding shares on behalf of others, trust, multi-level reinvestment, leasing, loans, agreement-based control and overseas transactions. The Security Review Provisions further provide that, where a merger or acquisition of a domestic enterprise by a foreign investor is not submitted to the joint ministerial meeting for review or the joint ministerial meeting deems after review that the transaction will not have an impact on the national security, if any change thereafter such as adjustment of the merger or acquisition transaction, amendment of the relevant agreements or change of business operations (including change of the overseas actual controller) makes the merger or acquisition transaction fall within the scope of merger and acquisition review as specified in the Security Review Notice, the parties concerned shall suspend the transaction and related activities, and the foreign investor shall apply for merger and acquisition security review to the MOFCOM according to these provisions.

 

For a description of how the unsettled nature of Chinese regulations may affect our business, please see “Even if we are in compliance with PRC governmental regulations relating to licensing and foreign investment prohibitions, the PRC government may prevent us from advertising or distributing content that it believes is inappropriate and we may be liable for such content or we may have to stop profiting from such content.” in the Risk Factors section.

 

C.       Organizational Structure

 

SINA is the parent company of our group and conducts business operations in China through wholly owned and partially owned subsidiaries and VIEs. Below are the significant wholly owned subsidiaries held by SINA:

 

Subsidiary

 

Jurisdiction
of Organization

 

Ownership

 

Beijing New Media Information Technology Co. Ltd.

 

People’s Republic of China

 

100

%

SINA.com Technology (China) Co. Ltd.

 

People’s Republic of China

 

100

%

SINA Technology (China) Co. Ltd.

 

People’s Republic of China

 

100

%

SINA (Shanghai) Management Co. Ltd.

 

People’s Republic of China

 

100

%

Beijing SINA Advertising Co. Ltd.

 

People’s Republic of China

 

100

%

Shanghai SINA Advertising Co. Ltd.

 

People’s Republic of China

 

100

%

Fayco Network Technology Development (Shenzhen) Co. Ltd.

 

People’s Republic of China

 

100

%

Weibo Internet Technology (China) Co., Ltd.

 

People’s Republic of China

 

100

%

T.CN Corporation

 

Cayman Island

 

100

%

SINA.com Online

 

United States of America

 

100

%

Rich Sight Investment Limited

 

Hong Kong

 

100

%

SINA Hong Kong Limited

 

Hong Kong

 

100

%

T.CN Hong Kong Limited

 

Hong Kong

 

100

%

 

In compliance with the PRC’s foreign investment restrictions on Internet information services and other laws and regulations, we conduct all our Internet information services, advertising and MVAS in China via the following significant domestic VIEs:

 

·             The ICP Company is a China company controlled by us through a series of contractual arrangements and is responsible for operating www.sina.com.cn in connection with its Internet content company license, selling the advertisements to advertisers and providing MVAS with its Value-Added Telecommunication Services Operating License in China via third-party operators to the users. It is 0.2% owned by Yan Wang, the Company’s Chairman of the Board, 22.8% owned by the Company’s executive officer Tong Chen, 27.1% owned by the Company’s executive officer Hong Du, and 49.9% owned by two other non-executive PRC employees of the Company. The registered capital of the ICP Company is $19.0 million.

 

·             Xunlong is a China company controlled by us through a series of contractual arrangements and is responsible for providing

 

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MVAS in China via third-party operators to users under its Value-Added Telecommunication Services Operating License. It is owned by two non-executive PRC employees of the Company. The registered capital of Xunlong is $1.2 million.

 

·             StarVI is a China company controlled by us through a series of contractual arrangements and is responsible for providing MVAS in China via third-party operators to users under its Value-Added Telecommunication Services Operating License. It is owned by three non-executive PRC employees of the Company. The registered capital of StarVI is $1.2 million.

 

·             Wangxing is a China company controlled by us through a series of contractual arrangements and is responsible for providing MVAS in China via third-party operators to users under its Value-Added Telecommunication Services Operating License. It is owned by three non-executive PRC employees of the Company. The registered capital of Wangxing is $1.2 million.

 

·             Beijing SINA Infinity Advertising Co., Ltd. (the “IAD Company”), a China company controlled by us through a series of contractual arrangements, is an advertising agency. It is owned by two non-executive PRC employees of the Company. This entity has an approved business scope including design, production, agency and issuance of advertisements. The registered capital of the IAD Company is $7.3 million.

 

·             Weimeng, a China company controlled through a series of contractual arrangements, is responsible for operating www.weibo.com and www.weibo.cn in connection with its ICP license and Value-Added Telecommunication Services Operating License. It is owned by three non-executive PRC employees of the Company. The registered capital of Weimeng is $1.5 million.

 

The capital investment in these VIEs is funded by SINA through SINA’s wholly and partially owned subsidiaries and recorded as interest-free loans to the employees. As of December 31, 2011, the total amount of interest-free loans to the employee shareholders of the VIEs listed above and the other inactive VIEs was $34.4 million. Under various contractual agreements, employee shareholders of the VIEs are required to transfer their ownership in these entities to our subsidiaries in China when permitted by PRC laws and regulations or to our designees at any time for the amount of outstanding loans, and all voting rights of the VIEs are assigned to our wholly owned subsidiaries in China. Our subsidiaries in China have the power to appoint all directors and senior management personnel of the VIEs. Through our subsidiaries in China, we have also entered into exclusive technical agreements and other service agreements with the VIEs, under which these subsidiaries provide technical services and other services to the VIEs in exchange for substantially all net income of the VIEs. In addition, our employee shareholders of the VIEs have pledged their shares in the VIEs as collateral for non-payment of loans or for fees on technical and other services due to us.

 

The following is a summary of the VIE agreements:

 

Loan Agreements. One of our wholly owned subsidiaries, Sina.com Technology (China) Co. Ltd, or STC, or Weibo Internet Technology (China) Co., Ltd., or WITC, has granted interest-free loans to the shareholders of the VIEs with the sole purpose of providing funds necessary for the capital injection of the VIEs. The term of the loans is 10 years and STC, or WITC in the case of Weimeng, has the right to, at its own discretion, shorten or extend the term of the loans if necessary. These loans are eliminated with the capital of the VIEs during consolidation.

 

Share Transfer Agreements. Each shareholder of the VIEs has granted STC, or WITC in the case of Weimeng, an option to purchase his/her shares in the respective VIEs at a purchase price equal to the amount of capital injection. STC, or WITC in the case of Weimeng, may exercise such option at any time until it has acquired all shares of such VIE, subject to applicable PRC laws. The options will be effective until the earlier of (i) the shareholders of the VIEs and STC, or WITC in the case of Weimeng, have fully performed their obligations under this agreement, and (ii) the respective shareholders of the VIEs and STC, or WITC in the case of Weimeng, agree to terminate the share transfer agreement in writing.

 

Loan Repayment Agreements. Each shareholder of the VIEs and STC, or WITC in the case of Weimeng, have agreed that the interest-free loans under the loan agreements shall only be repaid through share transfer. Once the share transfers are completed, the purchase price for the share transfer will be set off against the loan repayment.

 

Agreements on Authorization to Exercise Shareholder’s Voting Power. Each shareholder of the VIEs has authorized STC, or WITC in the case of Weimeng, to exercise all his/her voting power as a shareholder of the respective VIE. The authorizations are irrevocably and will not expire until the respective VIE dissolves.

 

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Share Pledge Agreements. Each shareholder of the VIEs has pledged all his/her shares in the VIEs and all other rights relevant to the share rights to STC, or WITC in the case of Weimeng, as a collateral security for his/her obligations to pay off all debts to STC, or WITC in the case of Weimeng, under the loan agreement and for the payment obligations of the VIEs under the trademark license agreement and the technical services agreement. In the event of default of any payment obligations, STC, or WITC in the case of Weimeng, will be entitled to certain rights, including transferring the pledged shares to itself and disposing of the pledged shares through sale or auction. During the term of each agreement, STC, or WITC in the case of Weimeng, is entitled to receive all dividends and distributions paid on the pledged shares. The pledges will be effective until the earlier of (i) the VIEs and the shareholders of the VIEs have fully performed their obligations under the above-referred agreements, and (ii) STC or WITC in the case of Weimeng, unilaterally consents to terminate the respective share pledge agreement.

 

Exclusive Technical Services Agreements. Each of the VIEs has entered into an exclusive technical services agreement with STC, or WITC in the case of Weimeng, pursuant to which STC, or WITC in the case of Weimeng, is engaged to provide certain technical services to the VIEs, depending on the licenses obtained and held by the VIE:

 

Xunlong, one of our VIEs, has engaged STC to provide technical services for its Internet information service and MVAS businesses and STC has the sole right to appoint any company or companies at its discretion to perform such technical services. Beijing New Media Information Technology Co., Ltd., or NMIT, our wholly owned subsidiary, was appointed by STC to perform technical services for Xunlong. Xunlong is obligated to pay service fees based on the hourly rate of NMIT’s engineers.

 

Wangxing, one of our VIEs, has also entered into a technical services agreement with STC with terms and rights substantially identical to the technical services agreement entered into between Xunlong and STC for the Internet information service and MVAS businesses described above.

 

ICP Company, one of our VIEs, has engaged STC to provide technical services for its (i) online advertising and other related businesses, and (ii) value added telecommunication and other related businesses. ICP Company is obligated to pay service fees to STC based on the hourly rate of STC’s engineers.

 

IAD Company, one of our VIEs, has also entered into a technical services agreement with STC with terms substantially identical to the technical services agreement entered into between ICP Company and STC for the online advertising and other related businesses described above. As foreign-invested entities have been permitted to engage directly in advertising businesses starting from October 2008 pursuant to changes in applicable PRC laws, SINA established two wholly owned subsidiaries to engage directly in advertising businesses, including online advertising and other related businesses. As a result, SINA has gradually reduced its reliance on IAD Company.

 

StarVI, one of our VIEs, has also entered into a technical services agreement with STC, with terms substantially identical to the technical services agreement entered into between Xunlong and STC for the value added telecommunication and other related businesses described above.

 

Weimeng, one of our VIEs, has engaged WITC to provide technical services for its online advertising, MVAS and other related businesses.

 

These exclusive technical services agreements will not expire until the respective VIEs dissolve, with the services fee being adjusted annually through written agreements.

 

Exclusive Sales Agency Agreements. Each of the VIEs has granted STC, or WITC in case of Weimeng, the exclusive right to distribute, sell and provide agency services for all the products and services provided by the VIEs. These exclusive sale agency agreements will not expire until the respective VIEs dissolve. We have entered into the Exclusive Sales Agency Agreements to allow us to generate revenues from the VIEs in the form of sales agency fees if we decide to enter into sales agency arrangements with the VIEs in the future (when permitted under PRC laws).  We have not yet utilized the Exclusive Sales Agency Agreements nor do we expect to do so in the foreseeable future.

 

Trademark License Agreements. STC, or WITC in case of Weimeng, has granted each of the VIEs trademark licenses to use the trademarks held by STC, or WITC in case of Weimeng, in specific areas, and each of the licensed VIEs is obligated to pay license fees to STC, or WITC in case of Weimeng. The term of these agreements is one year and is automatically renewed provided there is no objection from STC, or WITC in case of Weimeng. We have entered into the Trademark License Agreements to provide other potential revenue-generating channels from the VIEs. We have not yet generated revenue from the Trademark License Agreements nor do we expect to do so in the foreseeable future.

 

Although we have been advised by our PRC counsel, Jun He Law Offices, that our arrangements with the VIEs are valid under

 

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current PRC laws and regulations, we cannot assure you that we will not be required to restructure our organization structure and operations in China to comply with changing and new PRC laws and regulations. Restructuring of our operations may result in disruption of our business. If PRC tax authorities were to determine that our transfer pricing structure was not done on an arm’s length basis and therefore constitutes a favorable transfer pricing, they could request that our VIEs adjust their taxable income upward for PRC tax purposes. Such a pricing adjustment may not reduce the tax expenses of our subsidiaries but could adversely affect us by increasing our VIEs’ tax expenses, which could subject our VIEs to late payment fees and other penalties for underpayment of taxes and/or could result in the loss of tax benefits available to our subsidiaries in China. Any of these measures may result in adverse tax consequences to us and adversely affect our results of operations.

 

D.      Property, Plant and Equipment

 

The majority of our operations are in China, where we have offices in Beijing, Shanghai, Guangzhou and Shenzhen. Our principal sales, marketing and development facilities are located on premises comprising approximately 41,500 square meters in Beijing, China. We also have sales and marketing operations at satellite offices in certain provinces of China. We lease office facilities under non-cancelable operating leases with various expiration dates through 2016. Our servers are primarily maintained at China Telecom and China Unicom branches in cities across China, including in Beijing, Shanghai, Guangzhou and Tianjin. We also have servers located at various Internet data centers in Taipei, Taiwan, San Jose, California and Hong Kong.

 

Item 4A. Unresolved Staff Comments

 

None.

 

Item 5.           Operating and Financial Review and Prospects

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” the negative of such terms or other comparable terminology. All forward-looking statements included in this document are based on information available to us on the date hereof, and we undertake no obligation to update any such forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We caution you that our business and repetitive financial performance are subject to substantial risks and uncertainties, including the factors identified in “Item 3. Key Information — D. Risk Factors,” that could cause actual results to differ materially from those in the forward-looking statements.

 

Overview

 

We are an online media company serving China and the global Chinese communities. Our digital media network of SINA.com (portal), SINA.cn (mobile portal) and Weibo.com (social media) enable Internet users to access professional media and user generated content (UGC) in multi-media formats from the web and mobile devices and share their interests to friends and acquaintances. SINA.com offers distinct and targeted professional content on each of its region-specific websites and a range of complementary offerings. SINA.cn provides information and entertainment content from SINA portal customized for WAP users. Based on an open-platform architecture to host organically developed and third-party applications, Weibo is a form of social media featuring microblogging services and social networking services that allow users to connect and share information anywhere, anytime and with anyone on our platform.

 

Through these businesses and properties and other business lines, we offer an array of services including MVAS, online video, music streaming, online games, photo sharing, blog, email, classified listings, fee-based services, e-commerce and enterprise services. We generate the majority of our revenues from online brand advertising, MVAS and fee-based services.

 

Our online advertising business in China has been robust in recent years due to a strong local economy, growth in Internet users and the shift of advertising budgets from traditional media to online media. Our MVAS revenues and gross margin, on the other hand, have been declining in recent years due to continuous changes in operator policies and market competition. We expect this trend to continue in the near future.

 

Factors affecting the growth of our online advertising business include: (1) our ability to increase awareness of our brand and continue to build user loyalty; (2) our ability to attract a larger audience to our network; and (3) our ability to attract new advertisers and increase the average spending of our existing advertisers. The performance of our online advertising business also depends on our

 

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ability to react to risks and challenges, including:

 

·             our ability to compete with other Internet properties, including microblogging services and social networking services, video sites and category-specific vertical sites, and achieve brand influence and market share;

 

·             increased competition and potential downward pressure on online advertising prices;

 

·             increased competition and upward pressure on content acquisition costs and limitations on web page space;

 

·            the maintenance and enhancement of our brands in a cost-effective manner;

 

·             development and retention of a large base of users possessing demographic characteristics attractive to advertisers;

 

·             expansion of our content portfolio, product offerings and network bandwidth in a cost-effective manner;

 

·             any change in government policy that would curtail or restrict our online advertising services or content offerings; and

 

·             our ability to increase our advertising space at a sufficient rate.

 

The changing operator policies coupled with the fierce competition in the MVAS space have caused our MVAS business to experience declining revenues and gross margins in recent years. We expect this trend to continue. Nevertheless, we believe it is important for the Company to continue operation in the MVAS business, because mobile Internet will be a significant opportunity for us, especially with the increasing adoption of 3G, smartphone handsets and tablets in China. Our relationships with mobile operators and other partners in the MVAS business as well as the expertise that we have gained in China’s mobile environment will be instrumental in developing SINA’s mobile Internet business.

 

In order to support the development of our social media Weibo.com and other initiatives, including expanding online video offerings, growing online user traffic and attracting new advertisers and partners, we significantly increased our investments in product development and partnership expansion, expanded the content and services on our network and procured more bandwidth and network equipment in 2011. These investments, along with increases in our marketing efforts to enhance brand awareness to our users, advertisers and partners, have caused our gross margin, operating margin and net margin to significantly decline in 2011. We expect to increase our investments in Weibo.com and other initiatives in absolute dollar terms in 2012, which may cause our gross margin and profitability to further decline.

 

In October 2009, prior to CRIC’s listing on the NASDAQ, we spun off our online real estate advertising business into our majority-owned subsidiary COHT and merged it with CRIC to form an online and offline real estate information and consulting platform in China. As a result of the spin-off, we stopped consolidating the financial results of COHT on October 1, 2009, and began to account for our interest in CRIC, which was 34% as of December 31, 2011, using the equity method of accounting. Income from equity investment in CRIC, which is recorded one quarter in arrears, totaled $2.6 million for 2011. The PRC government has recently issued real estate policies that have had an adverse impact on CRIC’s operational results and our equity income pick-up from CRIC. In December 2011, CRIC entered into a definitive merger agreement with E-House to privatize CRIC, and CRIC merged into and became a 100% subsidiary of E-House on April 20, 2012. We are currently evaluating the accounting treatment related to the privatization of CRIC. Our earnings from equity investments may decline as a result of the merger of CRIC with E-House, which incurred an operating loss in 2011 from its operations (excluding CRIC’s results).

 

As of December 31, 2011 and 2010, our accumulated earnings were $269.3 million and $571.4 million, respectively. Our total cash, cash equivalents and short-term investments as of December 31, 2011 and 2010 were $673.5 million and $882.8 million, respectively. The decrease in cash, cash equivalents and short-term investments was primarily attributed to the $253.3 million in equity investments we made in 2011. These equity investments included a 19% interest in MCOX for $66.0 million, a 9% interest in Tudou for $66.4 million and a $50.0 million investment in Yunfeng Funds for the sole purpose of investing in the Alibaba Group. Subject to customary closing conditions, including approval by both Youku’s and Tudou’s shareholders, Tudou will merge into Youku in a 100% stock-for-stock transaction.

 

We have funded our operations and capital expenditures primarily using the $97.5 million raised through the sale of preference shares, the $68.8 million raised from the sale of ordinary shares in the initial public offering, the $97.3 million raised from the sale of zero-coupon, convertible, subordinated notes in July 2003 and the $180.0 million raised from a private equity placement of our

 

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ordinary shares in November 2009, as well as cash generated from operations and the exercise of stock options. We repurchased approximately 2.5 million SINA ordinary shares in the open market for total consideration of $50 million during the first quarter of 2009 and we may undertake further share repurchases in the future. We intend to continue our investment in the development and enhancement of our products, content and services, as well as investment in sales and marketing. If we are unable to generate sufficient net income from our operations in the future, we may have to finance our operations from the current funds available or seek equity or debt financing.

 

Critical Accounting Policies, Judgments and Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgment areas, including those related to intangible assets and goodwill, equity investments, revenues, customer programs and incentives, allowance for doubtful accounts, advertising expenses, stock-based compensation, income taxes, foreign currency, nonmonetary transactions, disposal of a business, contingencies and litigation. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from such estimates under different assumptions or conditions. For further information on our critical accounting policies, see the discussion in the section titled “Recent Accounting Pronouncements” below and Note 2 to the consolidated financial statements.

 

We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements:

 

Goodwill and other long-lived assets

 

We test goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis, or more frequently, if facts and circumstances warrant a review. We make judgments about goodwill whenever events or changes in circumstances indicate that an impairment in the carrying value of goodwill may exist. The performance of the goodwill impairment test involves a two-step process. The first step involves comparing the fair value of our reporting units to their carrying values, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. The timing of an impairment test may result in charges to our consolidated statements of operations in the current reporting period that could not have been reasonably foreseen in prior periods. Application of a goodwill impairment test requires judgment including the identification of reporting units, assigning assets and liabilities to the reporting units, assigning goodwill to reporting units and estimating the fair value of each reporting unit. Changes in these estimates and assumptions could materially affect the determination of fair value of each reporting unit which could trigger impairment. More conservative assumptions of the anticipated future benefits from these reporting units could result in impairment charges, which would decrease net income and result in lower asset values on our consolidated balance sheet. Conversely, less conservative assumptions could result in smaller or no impairment charges, higher net income and higher asset values. See Note 4 to the consolidated financial statements for additional information on goodwill.

 

Other long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold or use is based on the amount by which the carrying value exceeds the fair value of the asset. Changes in these estimates and assumptions could materially impact our financial position and results of operations.

 

Property and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally from three to five years. Judgment is required to determine the estimated useful lives of assets, especially for computer equipment, including determining how long existing equipment can function and when new technologies will be introduced at cost-effective price points to replace existing equipment. Changes in these estimates and assumptions could materially impact our financial position and results of operations.

 

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Equity investments

 

Equity investments are comprised of investments in publicly traded companies, privately held companies and limited partnerships. For equity investments over which we do not have significant influence, the cost method of accounting is used. For equity investments in shares that are not common stock or in-substance common stock and that do not have readily determinable fair value, the cost method accounting is used. Investments in limited partnerships over whose operating and financing policies that we have virtually no influence are accounted for using the cost method. We account for common-stock-equivalent equity investments and limited partnership investments in entities over which we have significant influence but do not own a majority equity interest or otherwise control using the equity method. We account for our investment in CRIC using the equity method of accounting. Following the acquisition date, we record our share of the results of CRIC one quarter in arrears within earnings from equity investments.

 

We assess our investments accounted for under the cost method and equity method for other-than-temporary impairment by considering factors including, but not limited to, stock prices of public companies in which we have an equity investment, current economic and market conditions, operating performance of the companies, including current earnings trends and undiscounted cash flows, and other company-specific information, such as recent financing rounds. The fair value determination, particularly for investments in privately held companies whose revenue models are still unclear, requires significant judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investments and the determination of whether an identified impairment is other-than-temporary. If an impairment is considered other-than-temporary, the Company will write down the asset to its fair value and take the corresponding charge to the consolidated statements of operations.

 

Our investments in marketable securities are held as available for sale and are reported at fair value. The treatment of a decline in the fair value of an individual security is based on whether the decline is other-than-temporary. Significant judgment is required to assess whether the impairment is other-than-temporary. Our judgment of whether an impairment is other-than-temporary is based on an assessment of factors including, but not limited to, our ability and intent to hold the individual security, severity of the impairment, expected duration of the impairment and forecasted recovery of fair value. Changes in the estimates and assumptions could affect our judgment of whether an identified impairment should be recorded as an unrealized loss in the equity section of our consolidated balance sheets or as a realized loss in the consolidated statements of operations. See Note 3 to the consolidated financial statements for further discussion.

 

Revenue recognition

 

Advertising

 

Our advertising revenues are derived principally from online advertising and, to a lesser extent, sponsorship arrangements. Online advertising arrangements allow advertisers to place advertisements on particular areas of our websites, in particular formats and over particular periods of time. Sponsorship arrangements allow advertisers to sponsor a particular area on our websites in exchange for a fixed payment over the contract period. While the majority of our revenue transactions contain standard business terms and conditions, there are certain transactions that contain non-standard business terms and conditions. In addition, we have certain sales transactions that involve multiple element arrangements (arrangements with more than one deliverable) that may include placement on specific properties. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting for these transactions including: (1) how the consideration of an arrangement should be allocated among potential multiple elements; (2) when to recognize revenue on the deliverables; and (3) whether all elements of the arrangement have been delivered. Changes in judgments on these assumptions and estimates could materially impact the timing or amount of revenue recognition.

 

MVAS

 

We mainly rely on third-party operators for billing, collection and transmission of our MVAS to our users. We also rely on other service providers to provide content and to distribute MVAS or other services for us. Revenues are recorded on a gross basis when most of the gross indicators are met, such as we are considered the primary obligor in the arrangement, design and develop (in some cases with the assistance of third-parties) the MVAS, have reasonable latitude to establish price, have discretion in selecting the operators to offer our MVAS, provide customer services related to the MVAS and take on the credit risks associated with the transmission fees. Conversely, revenues are recorded on a net basis when most of the gross indicators are not met. The determination of whether we are the primary obligor for a particular type of service is subjective in nature and is based on an evaluation of the terms of the arrangement. If the terms of the arrangement with operators were to change and cause the gross indicators not being met, we would have to record our MVAS revenues on a net basis. In 2011, approximately 91% of our MVAS revenues were recorded on a gross basis. Consequently, recording MVAS revenues on a net basis would cause a significant decline in our total net revenues, but

 

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should not impact our gross profit.

 

Due to the time lag between when the services are rendered and when the operator billing statements are received, MVAS revenues are estimated based on our internal records of billings and transmissions for the month, adjusting for prior periods’ confirmation rates with operators and prior periods’ discrepancies between internally estimated revenues and actual revenues confirmed by operators. The confirmation rate applied to the estimation of revenue is determined at the lower of the latest confirmation rate available and the average of six months of historical rates if such historical average is available. If we have not yet received confirmation rates for six months, revenues would be deferred until billing statements are received from the operators. If subsequent billing statements from the operators differ significantly from management’s estimates, our revenues could be materially impacted.

 

Changes in judgments on assumptions and estimates stated above for MVAS revenues could materially impact the timing and/or amount of revenue recognition.

 

In addition to the above, our revenue recognition policy requires an assessment as to whether collection is reasonably assured, which requires us to evaluate the creditworthiness of our customers.

 

Allowance for doubtful accounts

 

We maintain an allowance for doubtful accounts which reflect our best estimate of amounts that potentially will not be collected. We determine the allowance for doubtful accounts based on factors such as historical experience, credit-worthiness and age of receivable balances. If the financial condition of the customers were to deteriorate and result in an impairment of their ability to make payments, or if the operators decide not to pay us, additional allowances may be required which could materially impact our financial position and results of operations. Allowances for doubtful accounts charged to income were $2.5 million, $1.2 million and $5.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.

 

Advertising expense

 

Advertising expenses consist primarily of costs for promotion of corporate image, product marketing and direct marketing. We expense all advertising costs as incurred and classify these costs under sales and marketing expense. The nature of our direct marketing activities is such that they are intended to acquire subscribers for subscription-based and usage-based MVAS. We expense all such direct marketing expenses.

 

Stock-based compensation

 

Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award and is recognized as an expense on a straight-line basis, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. We use the Black-Scholes option pricing model to determine the estimated fair value of share options. The determination of the estimated fair value of stock-based compensation awards on the grant date using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including our expected share price volatility over the term of the awards, actual and projected employee share option exercise behaviors, risk-free interest rate and expected dividends. Shares of our subsidiaries, which do not have quoted market prices, were valued based on the income approach, if a revenue model had been established, the market approach, if information from comparable companies had been available, the replacement cost method, or a weighted blend of these approaches if more than one is applicable. Determination of estimated fair value of our subsidiaries requires complex and subjective judgments due to their limited financial and operating history, unique business risks and limited public information on companies in China similar to ours. If different assumptions were used for estimating stock-based compensation expense or if a different valuation method were used, the change in our stock-based compensation expense could adversely affect our gross profit, operating income, net income attributable to SINA and net income per share attributable to SINA.

 

Furthermore, we are required to estimate forfeitures at the time of grant and record stock-based compensation expense only for those awards that are expected to vest. If actual forfeitures differ materially from our estimated forfeitures, we may need to revise those estimates used in subsequent periods.

 

See Note 12 to consolidated financial statements for information regarding stock-based compensation.

 

Income taxes

 

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the

 

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amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carryforwards. Management is required to make assumptions, judgments and estimates to determine our current provision for income taxes and our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the income taxes recorded in our Consolidated Statements of Operations. Our assumptions, judgments and estimates related to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates and, thus, materially impact our financial position and results of operations.

 

In order to assess uncertain tax positions, we apply a more likely than not threshold and a two-step approach for the tax position measurement and financial statement recognition. Under the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

 

In accordance with accounting guidance, undistributed earnings of a subsidiary are presumed to be transferred to the parent company and are subject to withholding taxes, unless the parent company has evidence of specific plans for reinvestment of undistributed earnings of a subsidiary that demonstrate that remittance of the earnings will be postponed indefinitely. The current policy allows us to distribute PRC earnings offshore only if we do not have to pay a dividend tax. Based on the EIT Law, which became effective on January 1, 2008, such policy would require us to indefinitely reinvest all earnings made in China since 2008 onshore or be subject up to 10% in withholding tax should we decides to distribute earnings accumulated since 2008 offshore.

 

Foreign currency

 

Our reporting currency and functional currency are the U.S. dollar and our subsidiaries and VIEs in China, Hong Kong and Taiwan use their respective local currencies as their functional currencies. An entity’s functional currency is the currency of the primary economic environment in which the entity operates. Management must use judgment in determining an entity’s functional currency, assessing economic factors including cash flow, sales price, sales market, expense, financing and inter-company transactions and arrangements. Impact from exchange rate changes related to transactions denominated in currencies other than the functional currency is recorded as a gain and loss in our consolidated statements of operations, while impact from exchange rate changes related to translating a foreign entity’s financial statements from its functional currency to our reporting currency, the U.S. dollar, is disclosed and accumulated in a separate component under the equity section of our consolidated balance sheets. Translation gains or losses are not released to net income unless the associated net investment has been sold, liquidated or substantially liquidated. Management uses judgment in determining the timing of recognition of translation gains or losses. Such determination requires assessing whether translation gains or losses were derived from the sale or complete or substantially complete liquidation of an investment in a foreign entity. Different judgments or assumptions resulting in a change of functional currency or timing of recognition of foreign exchange gains or losses may materially impact our financial position and results of operations.

 

Nonmonetary transactions

 

We account for nonmonetary transactions based on ASC 845-10 “Exchanges of Nonmonetary Assets,” which requires the assets exchanged to be based on fair value unless one of the three conditions is met: (1) the fair value of the asset relinquished or received cannot be determined (within reasonable limits), (2) there is an exchange of inventory for inventory that will be sold in the same line of business to facilitate sales to customers, or (3) the transaction lacks commercial substance. The determination of fair value requires significant judgment in estimates and assumptions. Changes in these estimates and assumptions could materially affect the calculation of the fair value.

 

Disposal of a business

 

We account for the disposal of a business by recognizing a gain or loss measured as the difference between the aggregate of (1) the fair value of any consideration received, (2) the fair value of any retained noncontrolling investment in the former business at the date

 

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the business is deconsolidated and (3) the carrying amount of any noncontrolling interest in the former business (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the business is deconsolidated; and (4) the carrying amount of the former business’s assets and liabilities. The determination of fair value requires significant judgment in estimates and assumptions. Changes in these estimates and assumptions could materially affect the calculation of the fair value.

 

Recent accounting pronouncements

 

In May 2011, the Financial Accounting Standard Board (“FASB”) issued revised guidance on Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs. The revised guidance specifies how to measure fair value and improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs, not requiring additional fair value measurements and not intending to establish valuation standards or affect valuation practices outside of financial reporting. The revised guidance is effective to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements during interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. We are currently evaluating the impact on our consolidated financial statements of adopting this guidance.

 

In June 2011, the FASB issued revised guidance on “Presentation of Comprehensive Income.” The revised guidance requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income and eliminates one presentation option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The revised guidance states that an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statements of operations. The statement of other comprehensive income should immediately follow the statements of operations and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. In addition, in December 2011, the FASB issued revised guidance on “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards.” The revised guidance specifies that an entity should defer the changes related to the presentation of reclassification adjustments. The revised guidance is effective for interim or annual periods beginning after December 15, 2011. We will adopt the revised guidance in 2012 and do not expect the adoption will have any impact on our consolidated financial statements.

 

In September 2011, the FASB issued revised guidance on “Testing of Goodwill for Impairment.” The revised guidance specifies that an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. An entity can choose to perform the qualitative assessment on none, some or all of its reporting units. Moreover, an entity can bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then resume performing the qualitative assessment in any subsequent period. The revised guidance is effective to both public and nonpublic entities that have goodwill reported in their financial statements during interim and annual periods beginning after December 15, 2011. We will adopt the revised guidance in 2012 and do not expect the adoption will have a material impact on our consolidated financial statements.

 

In December 2011, the FASB issued revised guidance on “Disclosures About Offsetting Assets and Liabilities.” The revised guidance specifies that an entity should disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The revised guidance affects all entities that have financial instruments and derivative instruments. The revised guidance is effective for interim or annual periods beginning after January 1, 2013. We do not expect the adoption of this standard will have a material impact on our consolidated financial statements.

 

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A.      Operating Results

 

Net revenues

 

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Change

 

 

 

2011

 

2010

 

2009

 

YOY
 2011

 

YOY
 2010

 

 

 

(In thousands, except percentages)

 

Net revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

$

368,805

 

76

%

$

290,814

 

72

%

$

227,895

 

64

%

27

%

28

%

Non-advertising:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MVAS

 

83,457

 

18

%

86,183

 

22

%

119,341

 

33

%

(3

)%

(28

)%

Others

 

30,567

 

6

%

25,620

 

6

%

11,331

 

3

%

19

%

126

%

 

 

114,024

 

24

%

111,803

 

28

%

130,672

 

36

%

2

%

(14

)%

 

 

$

482,829

 

100

%

$

402,617

 

100

%

$

358,567

 

100

%

20

%

12

%

 

Total net revenues increased 20% and 12% year-over-year in 2011 and 2010, respectively. The year-over-year increase in revenues in 2011 was driven by growth in online advertising revenues and, to a lesser extent, increase in other non-advertising revenues. The revenue growth in 2010 was due to an increase in online advertising and other non-advertising revenues, partially offset by a decline in MVAS revenues. As a percentage of total net revenues, advertising revenues were 76%, 72% and 64% in 2011, 2010 and 2009, respectively, while MVAS revenues were 18%, 22% and 33%, respectively.

 

Advertising. Advertising revenues increased 27% and 28% year-over-year in 2011 and 2010, respectively. Substantially all of our advertising revenues are generated from China. Our top ten customers in the aggregate accounted for approximately 15%, 19% and 16% of our advertising revenues in the China in 2011, 2010 and 2009, respectively. Automobile, fast-moving consumer goods, Internet services, financial services, IT and telecommunication were our top advertising sectors in 2011 and 2010, accounting for approximately 86% and 85%, respectively, of our advertising revenues in China. Total number of advertisers in China was approximately 860 in 2011, compared to approximately 840 and 1,300 in 2010 and 2009, respectively. The number of advertisers in 2009 included advertisers associated with our online real estate advertising business, COHT, which was spun off in 2009. Subsequent to the spin off, we stopped consolidating real estate advertising revenues. Real estate advertising revenues constituted approximately 12% of our total advertising revenues in 2009. Average revenue per advertising customer in China was approximately $420,000 in 2011, compared to approximately $340,000 and $170,000 in 2010 and 2009, respectively. COHT had a large number of individually small advertisers with relatively low spending and thus reduced our average advertising revenue per advertisers in 2009.

 

A major driver of the growth of our advertising business is the migration of advertising dollars from offline traditional media to online media. Unlike search and other performance-based advertising models, our brand advertising inventory is priced primarily based on time, similar to those of traditional media companies. Based on our experience, online brand advertising clients in China tend to place more emphasis of their buying decision on factors such as brand strength, market influence and user profile of the offering website. We maintain a variety of traffic metrics for our Internet properties, and the key metrics we focus on differ across product line based on the nature and feature set of the products. For this reason and others, such as a significant portion of our online traffic is currently not being monetized, we do not gauge the growth of our advertising revenues based on any particular traffic metric.

 

Non-advertising. Non-advertising revenues consist of MVAS, amortized deferred revenues and fee-based revenues.

 

MVAS

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YOY

 

YOY

 

 

 

2011

 

2010

 

2009

 

2011

 

2010

 

 

 

(In thousands, except percentages)

 

2.0G products

 

$

57,408

 

69

%

$

64,852

 

75

%

$

84,432

 

71

%

(11

)%

(23

)%

2.5G products

 

26,049

 

31

%

21,331

 

25

%

34,909

 

29

%

22

%

(39

)%

 

 

$

83,457

 

100

%

$

86,183

 

100

%

$

119,341

 

100

%

(3

)%

(28

)%

 

MVAS revenues decreased 3% and 28% year-over-year in 2011 and 2010, respectively. Our MVAS revenues have been declining in recent years due to changes in operator policies, which have significantly reduced our ability to acquire new MVAS subscribers and increased the churn rate of our existing monthly MVAS subscribers. Key policy changes made by operators recently included the following:

 

·                  In January 2011, China Mobile implemented a series of measures, including limiting the service offerings and partnerships allowed for each SMS service code, preventing the television and radio promotion of certain interactive IVR products and requiring additional notices and customer confirmations in the MVAS ordering process. Our SMS, IVR and MMS revenues have been significantly impacted by such measures.

 

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·                  In December 2010, under policy derivatives from MII, China Mobile began requiring a subscription reminder to be sent for monthly MVAS subscriptions after receiving double confirmation of the subscription. Subscribers can cancel MVAS subscriptions by replying to the reminder notice. Such reminder notice has reduced our ability to acquire new monthly MVAS subscribers in a cost-effective manner.

 

·                  In November 2009, China Mobile suspended billing to customers for WAP services. China Mobile has not yet indicated whether WAP billing will resume and, if so, when and under what conditions.

 

Mobile operators, such as China Mobile and China Unicom, and governmental bodies, such as MII and SARFT, may announce additional measures or regulations in the future, which may adversely impact our results of operations, cash flows and financial condition. We are in the process of developing and promoting new products that we believe are not subject to recent policy and regulatory changes made by operators and governmental bodies. However, there is no guarantee that we will be able to develop any such new products, that any such products will achieve market acceptance or that such products will not be affected by future changes in rules and regulations.

 

Revenues from 2.0G products decreased 11% and 23% year-over-year in 2011 and 2010, respectively. Revenues from SMS accounted for 41%, 46% and 45% of MVAS revenues in 2011, 2010 and 2009, respectively, and revenues from IVR accounted for 23%, 25% and 23% of MVAS revenues in 2011, 2010 and 2009, respectively. Revenues from SMS declined 13% and 27% year-over-year, while IVR revenues declined 13% and 19% year-over-year in 2011 and 2010, respectively. The declines in SMS and IVR revenues were primarily due to China Mobile implementing a series of policy changes.

 

Revenues from 2.5G products increased 22% and decreased 39% year-over-year in 2011 and 2010, respectively. Revenues from KJAVA accounted for 23%, 19% and 12% of MVAS revenues in 2011, 2010 and 2009, respectively. KJAVA revenues grew 18% and 10% year-over-year in 2011 and 2010, respectively, mainly due to increased game offerings and sales promotion. MMS revenues declined 19% and 48% in 2011 and 2010, respectively, resulting from operator policy changes and decreased marketing efforts. Revenues from MMS accounted for 5%, 6% and 8% of MVAS revenues in 2011, 2010 and 2009, respectively. Revenues from WAP accounted for 4%, 1% and 9% of MVAS revenues in 2011, 2010 and 2009, respectively.

 

Other non-advertising revenues

 

Other non-advertising revenues include amortized deferred revenues and fee-based services, such as paid email services and casual games. In conjunction with the sale of our online real estate business to CRIC in October 2009, we signed certain license agreements with CRIC. The fair value of these license agreements were measured at $187.4 million, which was recognized as deferred revenue and amortized on a straight-line basis over the contract period of ten years. Amortized deferred revenues were $18.7 million, $18.7 million and $4.7 million for 2011, 2010 and 2009, respectively.

 

Costs of revenues

 

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

% of Change

 

 

 

2011

 

2010

 

2009

 

YOY 2011

 

YOY2010

 

 

 

(In thousands, except percentages)

 

Costs of revenues:

 

 

 

 

 

 

 

 

 

 

 

Advertising

 

$

157,458

 

$

116,295

 

$

99,835

 

35

%

16

%

Non-advertising:

 

 

 

 

 

 

 

 

 

 

 

MVAS

 

53,235

 

49,612

 

56,851

 

7

%

(13

)%

Others

 

4,655

 

2,503

 

1,606

 

86

%

56

%

 

 

57,890

 

52,115

 

58,457

 

11

%

(11

)%

 

 

$

215,348

 

$

168,410

 

$

158,292

 

28

%

6

%

 

Costs of revenues increased 28% and 6% year-over-year in 2011 and 2010, respectively.

 

Advertising. Costs of advertising revenues consist primarily of expenses associated with the production of our websites, including fees paid to third parties for Internet connection, content and services, labor-related costs, stock-based compensation and equipment depreciation expense. Costs of advertising revenues also include the business taxes on advertising sales in the PRC. Business taxes, net of business tax refund received, surcharges and fees levied on advertising sales in China, in aggregate represented approximately

 

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8.5% of our advertising revenues generated in China.

 

Costs of advertising revenues increased 35% year-over-year in 2011 due to increases in content fees and direct labor cost of $23.5 million, bandwidth and advertising serving cost of $12.4 million and business taxes of $4.8 million. Content fees increased primarily due to licensing new video content, including NBA games, as well as price inflation on existing content. Direct labor cost increased due to an increase in headcount and a general increase in salary. Bandwidth and advertising serving cost increased due to the increase in our product offerings. Business taxes and advertising serving costs increased as a function of higher revenues.

 

Costs of advertising revenues increased 16% in 2010 due to increases in content fees of $7.9 million, business taxes of $4.9 million, direct labor cost of $3.3 million and advertising serving cost of $2.4 million, partially offset by a $2.4 million reduction in stock-based compensation. Content fees increased primarily due to the purchase of content of 2010 FIFA World Cup and NBA games. Business taxes and advertising serving costs increased as a function of higher revenues. Direct labor cost increased due to an increase in headcount and a general increase in salary.

 

Non-advertising. Costs of non-advertising revenues mainly consist of the fees paid to mobile operators for the billing, transmission and collection of MVAS revenues, fees or royalties paid to MVAS content and service providers, and business taxes and surcharges levied in the PRC, which are approximately 3.3% for mobile-related revenues and 5.5% for other non-advertising revenues. Costs of non-advertising revenues also include costs for providing fee-based services.

 

Costs of MVAS revenues increased 7% year-over-year in 2011 due to increased fee paid to mobile operators, as a result of the change in our product mix. Costs of MVAS revenues decreased 13% in 2010 as MVAS revenues declined, resulting in a decrease of $6.3 million in fees paid to content and service providers.

 

Gross margins

 

 

 

Years Ended December 31,

 

 

 

2011

 

2010

 

2009

 

Gross margins:

 

 

 

 

 

 

 

Advertising

 

57

%

60

%

56

%

Non-advertising:

 

49

%

53

%

55

%

MVAS

 

36

%

42

%

52

%

Others

 

85

%

90

%

86

%

Overall

 

55

%

58

%

56

%

 

Overall gross margin decreased 3% in 2011 and increased 2% in 2010.

 

Advertising. Advertising gross margin declined 3% in 2011 and increased 4% in 2010. The changes in advertising gross margin in 2011 and 2010 were due to increases in advertising revenues without proportional changes in costs. We expect to increase our investment in absolute dollars terms in web content, Internet connection and production costs to maintain our market position, which may cause our advertising gross margin to further decline.

 

Non-advertising. Non-advertising gross margin decreased over the last two years primarily as a result of declining MVAS gross margin, which decreased 6% in 2011 and 10% in 2010. The year-over-year declines in MVAS gross margin in 2011 and 2010 were due to decreases in MVAS revenues, coupled with a more competitive environment as MVAS providers are willing to accept lower revenue shares to acquire marketing channels and MVAS content and operators are increasing their revenue share for new MVAS offerings.

 

Operating expenses

 

 

 

Years Ended December 31,

 

 

 

2011

 

2010

 

2009

 

% of Change

 

 

 

 

 

% of Net
 Revenues

 

 

 

% of Net
 Revenues

 

 

 

% of Net
 Revenues

 

YOY
 2011

 

YOY
 2010

 

 

 

(In thousands, except percentages)

 

Sales and marketing

 

$

135,867

 

28

%

$

77,996

 

19

%

$

85,133

 

24

%

74

%

(8

)%

Product development

 

65,533

 

14

%

34,048

 

8

%

33,777

 

9

%

92

%

1

%

General and administrative

 

30,121

 

6

%

22,585

 

6

%

40,025

 

11

%

33

%

(44

)%

Goodwill impairment

 

68,891

 

14

%

 

 

 

 

 

 

Amortization of intangible assets

 

731

 

*

 

3,335

 

1

%

4,138

 

1

%

(78

)%

(19

)%

Total

 

$

301,143

 

62

%

$

137,964

 

34

%

$

163,073

 

45

%

118

%

(15

)%

 

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*              Less than 1%

 

Operating expenses increased 118% and decreased 15% year-over-year in 2011 and 2010, respectively.

 

Sales and marketing. Sales and marketing expenses consist of payroll, commissions and other employee-related expenses, advertising and promotional expenditures and business travel expenses. Sales and marketing as a percentage of net revenues was 28%, 19% and 24% in 2011, 2010 and 2009, respectively. Sales and marketing expenses increased 74% year-over-year in 2011 primarily due to an increase in marketing expenditures of $39.8 million in connection with our branding and marketing efforts to promote Weibo.com and the NBA games, an increase in employee-related expenses of $12.2 million associated with an increase in headcount and a general increase in salary and an increase related to stock-based compensation of $0.7 million.

 

Sales and marketing expenses declined 8% year-over-year in 2010 due to lower stock-based compensation costs and lower marketing expenditures overall. Compared to 2009, stock-based compensation decreased $3.6 million. The higher stock-based compensation in 2009 included $1.5 million in expenses related to the private equity financed shares issued to management and costs related to the accelerated vesting of certain restricted share units granted to key managers and employees. Compared to 2009, MVAS’s marketing expenses declined $3.5 million due to operator policy changes and marketing expenditure for the online real estate advertising business falling $1.3 million in 2010 after the its spin-off.

 

We expect sales and marketing expenses to continue to increase in absolute dollars terms in the near future.

 

Product development. Product development expenses consist primarily of payroll and infrastructure-related expenses incurred for the enhancements to and maintenance of our websites, as well as costs associated with new product development and enhancements for products such as social media, blog and online video. Product development as a percentage of net revenues was 14%, 8% and 9% in 2011, 2010 and 2009, respectively. Product development expenses increased 92% year-over-year in 2011, primarily due to increases in payroll-related expenses of $18.7 million, infrastructure-related expenses of $11.3 million and stock-based compensation of $1.3 million. The year-over-year increase in product development was mostly related to the development and support of our social media Weibo.

 

Product development expenses increased 1% in 2010. Compared to 2009, stock-based compensation decreased $2.3 million, partially offset by an increase in payroll-related expenses of $2.2 million, resulting from new hires and salary increases. Similar to sales and marketing, the higher stock-based compensation in product development expenses in 2009 was related to the private equity financed shares of $0.8 million and accelerated vesting of certain employee restricted share units.

 

We expect product development expenses to continue to increase in absolute dollar terms in the near future.

 

General and administrative. General and administrative expenses consist primarily of payroll-related costs, stock-based compensation, professional service fees and provisions for doubtful accounts. Our general and administrative expenses also include expenses relating to the transfer of the economic benefits generated from our VIEs in the PRC to our subsidiaries. General and administrative expenses as a percentage of net revenues were 6%, 6% and 11% in 2011, 2010 and 2009, respectively. General and administrative expenses increased 33% year-over-year in 2011 mainly due to increase in payroll-related expenses of $2.7 million resulting from new hires and salary increases, an increase in professional fees of $2.3 million due to our additional investment transactions and professional advice for additional areas, provision for doubtful accounts and stock-based compensation expenses each of $0.8 million.

 

General and administrative expenses declined 44% in 2010. Compared to 2009, stock-based compensation decreased $11.6 million and provision for doubtful accounts decreased $4.0 million. Similar to sales and marketing, the higher stock-based compensation in general and administrative expenses in 2009 was related to the private equity financed shares of $7.9 million and accelerated vesting of certain employee restricted share units. The lower provision for doubtful accounts was due to our collection efforts, resulting in a lower bad debt rate and the reversal of provision for doubtful accounts arising from the receipt of payments previously written off.

 

We expect general and administrative expenses to increase in absolute dollars in the near future.

 

Goodwill impairment. We recognized an impairment charge of $68.9 million on MVAS goodwill. See Note 4 to the consolidated financial statements for further information.

 

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Amortization of intangible assets. Amortizable intangible assets include purchased technology, database and software. Amortization expenses in each of 2010 and 2009 included a charge of $2.4 million related to the previously acquired instant messaging technology. See Note 4 to the consolidated financial statements for further information, including estimates of amortization expenses for future periods.

 

Interest and other income, net

 

 

 

Year Ended December 31,

 

 

 

2011

 

2010

 

2009

 

 

 

(In thousands)

 

Interest income

 

$

13,739

 

$

7,394

 

$

8,379

 

Other income (expense)

 

2,588

 

1,410

 

(8

)

 

 

$

16,327

 

$

8,804

 

$

8,371

 

 

Compared to 2010, interest income increased as RMB-denominated deposits offered higher interest yields. Interest income may decline in the near future as bank deposits with higher yields are not widely available.

 

Other income consists primarily of net currency transaction gain or loss. We recorded a net currency transaction gain (loss) of $2.3 million, $1.3 million and ($0.1) million in 2011, 2010 and 2009, respectively. Net currency transaction gains were mainly a result of the appreciation of the Renminbi against the U.S. dollar.

 

Earnings from equity investments, net

 

In October 2009, we spun off our online real estate advertising business COHT and merged it with CRIC. Beginning October 1, 2009, we stopped consolidating the financial results of COHT and instead account for our interest in CRIC using the equity method of accounting. Our earnings from equity investment in CRIC, which is reported one quarter in arrears, were $2.6 million and $13.1 million for 2011 and 2010, respectively. Earnings from equity investment in CRIC declined year-over-year due to recent government policy changes on the Chinese real estate sector. Such factor and the merger with E-House, which incurred an operating loss in 2011 (excluding CRIC’s results), may cause our earnings from equity investments to further decline in the near future.

 

Gain on sale of business (impairment in investments)

 

The following summarizes other non-operating income and expenses items:

 

 

 

Years Ended December 31,

 

 

 

2011

 

2010

 

2009

 

 

 

(In thousands, except percentages)

 

COHT

 

 

 

376,564

 

CRIC

 

$

(230,258

)

$

(128,554

)

$

 

MCOX and others

 

(51,290

)

 

(1,509

)

 

 

$

(281,548

)

$

(128,554

)

$

375,055

 

% of total net revenues

 

(58

)%

(32

)%

105

%

 

In 2011, based on our other-than-temporary impairment assessment, we recorded a $230.3 million charge to write down our equity investment in CRIC, based on CRIC’s closing stock price of $4.92 per ADS as of September 30, 2011, and a $50.9 million charge to write down our investments in MCOX, based on its closing stock price of $1.37 per ADS as of September 30, 2011.

 

In 2010, based on our other-than-temporary impairment assessment, we recorded a $128.6 million charge to write down our investment in CRIC, based on a closing stock price of $9.60 per ADS as of December 31, 2010. See Note 3 to the consolidated financial statements for further information on the impairment.

 

In October 2009, we spun off COH