1104188--2/26/2010--SOHU_COM

related topics

{product, market, service}

{regulation, change, law}

{tax, income, asset}

{system, service, information}

{customer, product, revenue}

{operation, international, foreign}

{personnel, key, retain}

{stock, price, operating}

{property, intellectual, protect}

{acquisition, growth, future}

{operation, natural, condition}

{debt, indebtedness, cash}

{stock, price, share}

{interest, director, officer}

{control, financial, internal}

{capital, credit, financial}

{cost, regulation, environmental}

{condition, economic, financial}

{provision, law, control}

{competitive, industry, competition}

{loss, insurance, financial}

Risks Related to Our Business We are a relatively young company subject to the risks associated with operating in a new and evolving market. Our operating results are likely to fluctuate significantly and may differ from market expectations. Changyou s limited operating history makes evaluating our business and prospects difficult. Changyou is not likely to sustain its recent growth rate. We rely on a single MMORPG, TLBB, for a significant portion of our revenues and gross profit and a decrease in its popularity could have a material adverse effect on our operating results. Rapid technological changes may increase our game development costs. We face intense competition which could reduce our market share and adversely affect our financial performance. If we fail to successfully develop and introduce new products and services, our competitive position and ability to generate revenues could be harmed. We may be adversely affected by the slowdown of the Chinese economy caused in part by the global crisis in the financial services and credit markets, and our brand advertising business in particular could be severely affected by such slowdown. Our business depends on a strong brand; thus we will not be able to attract users, customers and clients of our products and offerings if we do not maintain and develop our brands. Our failure to keep up with rapid technology changes may severely affect our future success. Our strategy of acquiring complementary assets, technologies and businesses may fail and result in equity or earnings dilution. 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. Any changes in accounting rules for share-based compensation may adversely affect our operating results, our stock price and our competitiveness in the employee marketplace. Any utilization of U.S. federal net operating losses generated from excess tax deductions related to share-based awards will be recorded in shareholders equity Our failure to manage growth and diversify our business could harm us. If we fail to establish and maintain relationships with content, technology or infrastructure providers, we may not be able to attract and retain users. We depend on key personnel and our business may be severely disrupted if we lose the services of our key executives and employees. Changyou is rapidly expanding its business and need to hire a significant number of new employees. If Changyou is unable to attract a sufficient number of qualified new employees or retain its existing employees, its business prospects may be materially and adversely affected. Rapid growth and a rapidly changing operating environment strain our limited resources. We face risks related to health epidemics and other outbreaks. We do not have business insurance coverage. We depend on online advertising for a significant portion of our revenues, but the online advertisement market includes many uncertainties, which could cause our advertising revenues to decline. We rely on advertising agencies to sell our brand advertising services. If current trends of consolidation of advertising agencies in the Chinese market continue, the bargaining power of the large advertising agencies resulting from such consolidation may permit them to require that we pay higher sales rebates, which would adversely affect our gross margin. The expansion of Internet advertisement blocking software may result in a decrease of advertising revenues. Our failure to retain key distributors or attract additional distributors for our sponsored search customers could have an adverse impact on our business. We rely on our Website Alliance members for a significant portion of our sponsored search revenues. If we fail to retain existing Website Alliance members or attract additional members, our revenues and growth may be adversely affected. Restrictions on online music search may adversely affect our online search business Our online game business may not succeed in a highly competitive market. There are uncertainties regarding the future growth of the online game industry in China. Further strengthened supervision of the online game industry may adversely affect our online game operation We do not hold Internet publishing licenses that are required under PRC regulations for the games we currently operate, due to the temporary suspension, effective since our inception, of the issuance of such licenses by GAPP. If GAPP later challenges the commercial operation of our games, or if we fail to obtain or renew necessary licenses to commercially operate our games, we may be subject to various penalties, including restrictions on our operations. There are currently no laws or regulations in the PRC governing property rights of virtual assets and therefore it is not clear what liabilities, if any, we may have relating to the loss of virtual assets by our game players. We may fail to maintain a stable and efficient physical distribution network for our prepaid online game cards. We could be liable for breaches of security of our and third-parties online payment platforms, and sales made through those channels might have a negative impact on our online game revenues. If we fail to satisfy the changing demands of game players, our online game revenues may be adversely affected. We may fail to launch new games according to our timetable, and our new games may not be commercially successful, or may attract game players away from our existing games. All of our online game revenues are generated under the item-based revenue model, which has a short history of commercial application and presents risks related to consumer preferences and regulatory restrictions. The PRC government has begun to tighten its regulation of Internet caf s, which are currently one of the primary places where our games are played. Stricter government regulation of Internet caf s could restrict our ability to maintain or increase our revenues and our game player base. Our online game business may be materially harmed if we do not feature our games in a sufficient number of Internet caf s in China. Restrictions on Virtual Currency may adversely affect our online game revenue. We rely on data recorded in our online game billing systems for revenue recognition as well as identification of game player consumption patterns of virtual items. If such billing systems fail to operate effectively, it will not only affect the completeness and accuracy of the recognition of our revenues, but also our ability to design and improve virtual items that appeal to game players. We incur additional costs and face significant risks when we license our games outside of China and seek to expand our operations to select markets, such as the United States, Europe and Malaysia. If we fail to manage these risks, our growth and business prospects could be materially and adversely affected. We used to rely on wireless services for a significant portion of our revenues. Wireless revenues have fluctuated in prior periods and may decrease in the future. We rely on contracts with the mobile network operators in a number of ways with respect to our wireless services, including the billing of, and collection from, mobile phone users of wireless service fees. If our arrangements with mobile network operators were to be terminated, altered or not renewed, or if such operators did not provide continuous or adequate service, our revenues could be reduced. Risks Related to China s Telecommunications Infrastructure The telecommunications infrastructure in China, which is not as well developed as in the United States, may limit our growth. We depend on China Unicom, China Telecom and CERNET for telecommunications services, and any interruption in these services may result in severe disruptions to our business. The successful operation of our business and implementation of our growth strategies, including our ability to accommodate additional game players in the future, depend upon the performance and reliability of the Internet infrastructure and fixed telecommunications networks in China. The limited use of personal computers in China and the relatively high cost of Internet access in relation to per capita gross domestic product may limit the development of the Internet in China and impede our growth. The high cost of Internet access may limit the growth of the Internet in China and impede our growth. To the extent we are unable to scale our systems to meet the increasing PRC Internet population, we will be unable to expand our user base and increase our attractiveness to advertisers and merchants. Unexpected network interruptions caused by system failures may result in reduced visitor traffic, reduced revenue and harm to our reputation. Our operations are vulnerable to natural disasters and other events, as we only have limited backup systems and do not maintain any backup servers outside of China. Our network operations may be vulnerable to hacking, viruses and other disruptions, which may make our products and services less attractive and reliable. Risks Related to China s Regulation Environment All of Changyou s revenues are generated through Gamease, its VIE, and Changyou relies on payments made by Gamease to AmazGame, its subsidiary, pursuant to contractual arrangements to transfer any such revenues to AmazGame. Any restriction on such payments and any increase in the amount of PRC taxes applicable to such payments may materially and adversely affect Changyou s business and its ability to pay dividends to its shareholders and American depositary shares ( ADS ) holders. AmazGame s contractual arrangements with Gamease and its shareholders may not be as effective in providing control over Gamease as direct ownership of Gamease and the shareholders of Gamease may have potential conflicts of interest with us. AmazGame and Gamease s contractual arrangements may result in adverse tax consequences to us. If the PRC government determines that the VIE structure for operating our business does not comply with PRC government restrictions on foreign investment in the online game industry, we could face severe penalties. If our current ownership structure is found to be in violation of current or future PRC laws, rules or regulations regarding the legality of foreign investment in the PRC Internet sector, we could be subject to severe penalties. We may be unable to collect long-term loans to officers and employees or exercise management influence associated with High Century, Sohu Entertainment, GoodFeel, Sogou Information and Gamease. We depend upon contractual arrangements with our VIEs for the success of our business and these arrangements may not be as effective in providing operational control as direct ownership of these businesses and may be difficult to enforce. The contractual arrangements between our subsidiaries and our VIEs may result in adverse tax consequences. If we are found to be in violation of current or future PRC laws, rules or regulations regarding Internet-related services and telecom-related activities, we could be subject to severe penalties. Our business may be adversely affected by public opinion and governmental policies in China as well as in other jurisdictions where we license our MMORPGs to third parties. Even if we are in compliance with PRC governmental regulations relating to licensing and foreign investment prohibitions, the PRC government may prevent us from distributing, and we may be subject to liability for, content that it believes is inappropriate. Sohu.com Inc. may need to rely on dividends and other distributions on equity paid by Sohu.com Limited and Changyou, our wholly-owned subsidiary and majority-owned subsidiary, to fund any cash requirements we may have. Sohu.com Inc. may not be able to obtain cash from distributions to the extent such distributions are restricted by PRC law or future debt covenants. Our subsidiaries and VIEs in China are subject to restrictions on paying dividends or making other payments to our overseas entities. Any dividend received by Sohu.com Inc. would be subject to U.S. tax at 34% or 35%. We may not have exclusive rights over the marks that are crucial to our business, including but not limited to Sohu.com, Sohu Fox logo, 17173.com, Focus.cn, GoodFeel, Sogou, Go2Map, Tian Long Ba Bu, Blade Online, Changyou, DMD. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business. We may need to incur significant expenses to enforce our proprietary rights, and if we are unable to protect such rights, our competitive position could be harmed, especially for our online game business. We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us, materially disrupt our business. We may be subject to, and may expend significant resources in defending against claims based on the content and services we provide over all of our Websites. Activities of Internet content providers are or will be subject to additional PRC regulations, which have not yet been put into effect. Our operations may not be consistent with these new regulations when put into effect, and, as a result, we could be subject to severe penalties. Regulation and censorship of information distribution in China may adversely affect our business. We may be subject to the PRC government s ongoing crackdown on Internet pornographic content. Political, economic and social policies of the PRC government could affect our business. The PRC legal system embodies uncertainties which could limit the legal protections available to us and you, or could lead to penalties on us. The laws and regulations governing the online game industry in China are evolving and subject to future changes. We may fail to obtain or maintain all applicable permits and approvals. Contract drafting, interpretation and enforcement in China involve significant uncertainty. Recent regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and could adversely affect our business. SAFE rules and regulations may limit our ability to transfer the net proceeds from Changyou s initial public offering to Gamease, our VIE in the PRC, which may adversely affect the business expansion of Gamease, and we may not be able to convert the net proceeds from Changyou s initial public offering into RMB to invest in or acquire any other PRC companies, or establish other VIEs in the PRC. We may be subject to fines and legal sanctions if we or our employees who are PRC citizens fail to comply with recent PRC regulations relating to employee stock options granted by overseas listed companies to PRC citizens. It may be difficult to enforce any civil judgments against us or our board of directors or officers, because most of our operating and/or fixed assets are located outside the United States. If the status of the PRC subsidiary and VIE as New Technology Enterprise or Software Enterprise are revoked, we may have to pay additional taxes to make up any previously unpaid tax and may be subject to a higher tax rate, which may materially and adversely affect our results of operations. Dividends we receive from our operating subsidiaries located in the PRC are subject to PRC withholding tax. We may be deemed a PRC resident enterprise under the Corporate Income Tax Law and be subject to PRC taxation on our worldwide income. Dividends payable by us to our foreign investors and profits on the sale of our shares may be subject to tax under PRC tax laws. Restrictions on currency exchange may limit our ability to utilize our revenues effectively. We may suffer currency exchange losses if the RMB depreciates relative to the U.S. Dollar. The market price of our common stock has been and will likely continue to be volatile. The price of our common stock may fluctuate significantly, which may make it difficult for stockholders to sell shares of our common stock when desired or at attractive prices. We are controlled by a small group of our existing stockholders, whose interests may differ from other stockholders. Anti-takeover provisions of the Delaware General Corporation Law, our certificate of incorporation and Sohu s Stockholder Rights Plan could delay or deter a change in control. The power of our Board of Directors to designate and issue shares of preferred stock could have an adverse effect on holders of our common stock. Changyou s initial public offering could have an adverse impact on Sohu

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1104188--2/26/2010--SOHU_COM_INC