(Beijing) -- Most of the vast consumer telecom sector in China, where three mobile phone operators together boast a world-leading 1 billion subscribers, is by law closed to foreign capital.

That's why the market cheered in 2009 when Australia's largest telecom, Telstra Corp., found a legal window and bought two privately held China Mobile service providers with potential for huge revenues.

Later, though, those cheers turned to tears when authorities leveled graft charges against two Chinese executives who helped Telstra buy controlling stakes in the service providers, China M and Sharp Point. The scandal also apparently contributed to a sharp decline in revenues at the two companies, hitting Telstra in the wallet.

China M and Sharp Point are content and software suppliers contracted by China Mobile to build and maintain music platforms, games and other Internet services for mobile phone subscribers. Telstra broke into the market because the Chinese government lets foreign companies invest in service providers that do business with the Big Three telecoms: China Mobile, China Telecom and China Unicom.

Telstra learned the hard way that foreign access to the Chinese telecom market carries more than a few pitfalls, especially if mainland company executives are on the take.

When Telstra bought a 67 percent stake in each company for a combined US$ 194 million, the Australian company's then-president Sol Trujillo said they got a good deal. He predicted China M and Sharp Point would generate AU$ 100 million in revenues in 2009, and that by 2013 Telstra's annual revenues from business in China would total AU$ 1 billion.

Within months of the deal, though, Trujillo left Telstra for unrelated reasons. The next year, China M posted a huge loss. And the following year, the Communist Party's discipline watchdog clamped down on the executives who helped Telstra climb through the investment window.

Cutting Deals

In 2011, authorities leveled bribery charges against Ye Bing, who was then general manager of China Mobile's data business department; Ma Li, who worked under Ye as the department's deputy general manager; and Wang Leilei, who worked as chief executive officer for the online media and services provider Tom.com, which is partly owned by Hong Kong billionaire Li Ka-shing's Hutchison Whampoa Group.

The saga ended in early this year when Ma and Ye were convicted by a court in Ya'an, in the southwestern province of Sichuan. Ye received the death penalty and Ma was handed a lighter sentence – life in prison – because he confessed and helped authorities convict Ye.

Wang was also detained but has been free on bond since being diagnosed with a severe illness.

According to the court, Wang was the initial mediator between Telstra and China Mobile executives in the run-up to deals for China M and Sharp Point. Moreover, while working at Tom, Wang also apparently was the main stakeholder of China M and Sharp Point.

Wang was appointed Tom's CEO in 1999 and oversaw the company's successful rise as a media provider and China's fourth-largest news portal. Tom was also Microsoft's domestic partner for the Chinese version of Skype, a voice and messaging service, until November.

Wang may have started more than 90 service provider companies through Tom or independently, according to a source close to the executive. Most of these companies were controlled by people close to Wang, including relatives, friends and business colleagues at Tom.

Sources at Tom said no one really knows which of these service providers were under a Wang-related wing and which might have been directly controlled by Tom.

Authorities found Ma had accepted US$ 17 million in bribes and Ye had taken US$ 50 million under the table, with all of the money coming from Wang, a source said. In addition, the court found Ma had accepted separate bribes from other sources totaling 122 million yuan.

Wang introduced Telstra representatives to Ma in late 2007. At the time, Telstra was eagerly seeking opportunities to break into the Chinese market. The company was eyeing China M and Sharp Point as service providers that, under the government's telecom investment rules, can be controlled by foreigners.

Ma told Telstra officials that he would make sure China Mobile signed contracts with China M and Sharp Point and would give each business preferential terms.

The backing from Ma and his boss Ye proved invaluable to closing the deal. In addition, Telstra's timing was good because it started looking at the deal just as China Mobile was undergoing a management staff reshuffling, the government was tightening its regulatory control of telecom service providers, and Wang was thinking about stepping down from Tom.

Good Connections

Wang and Ma got to know each other in late 1990s, while Wang was working at Tom and Ma was with China Mobile's branch in the southern province of Guangdong. The provincial division of China Mobile, Guangdong Mobile, at the time was reporting faster growth in service-provider contracts than any other company division. Many of the deals were with Tom.

Ma was promoted to a headquarters post with China Mobile's data business department in 2004 on the basis of his sterling performance in managing the company's service provider business in Guangdong.

Three years later, Wang knocked on Ma's door and asked for help. He wanted to revise a contract between China Mobile's Sichuan Province division and a service provider called Xunjie Network, which Wang and his partners controlled.

Wang argued that Xujie, a mobile music service provider, needed to improve its finances. Ma was then asked to use his position to revise the contract in a way that increased Xujie's share of annual income from its business with China Mobile from 6 percent to 9 percent, which could lead to an extra 78.7 million yuan in annual revenue for Xunjie.

Ma agreed, and soon China Mobile had an updated contract.

Wang rewarded Ma for his supporting by handing him a 10 percent stake in the company, according to court records. But in lieu of a stake, the court said, Wang gave Ma about US$ 7 million in cash and US$ 10 million worth of another company's stock after the Telstrasale was finalized.

The money changed hands in June 2009 and March 2010, when Wang remitted CA$ 400,000 and US$ 6 million to a bank account in Canada under the name of Ma's wife, according to court records. Morever, Wang bought HK$ 10 million worth of Hong Kong-listed stock in an Internet company called Prosten Technology Holdings in 2009 and 2010, then gave the stock to Ma, court documents show.

The court did release information about the bribery charges connected to Ye. But a source said that Ye pocketed US$ 50 million thanks to the Telstra deal.

Ye was working as general manager for China Mobile's data service department when he first met Wang in the early 2000. Ye helped Wang's companies land China Mobile contracts. He also helped purge China Mobile's records of any black marks against service providers tied to Wang, according to a source from China Mobile. This relationship ended in late 2007 when Ye was transferred to head China Mobile's Internet business subsidiary.

A major business turnaround for China M coincided with the data service department tenures of Ye and Ma. The contractor reported a 360,000 yuan loss in 2004, the year it launched from a Beijing headquarters with 10 million yuan in registered capital, and a whopping 46.9 million yuan net profit just three years later.

Things got better for two years starting in 2007 after Wang merged several separate service providers into China M and Sharp Point, which started in 2006.

The mergers improved the bottom line at each company. China M reported a net profit of 86 million yuan in 2008 on revenues of 114 million yuan. That year, Sharp Point posted a 110 million yuan net profit on 139 million yuan in revenues.

According to Wang, the companies developed popular software for more than 10 games and music programs under China Mobile contracts. The telecom said the number of its clients subscribing to mobile Internet music services added 50 million from the previous year to 66 million in 2008.

This was the promising business environment that Trujillo and the rest of the Telstra team encountered when they started looking at China M and Sharp Point. And boosting their confidence was an endorsement from Ma, who was transferred from Guangdong Mobile to the data service department in 2004 and named deputy general manager in 2006.

The data service division oversaw China Mobile's non-voice services including messaging, music and email. It also rates China Mobile's service and third-party content providers through a system that affects their revenues, based on a profit-sharing mechanism used by the telecom.

Wang arranged for Ma to meet Telstra officials in late 2007 and early 2008. At each meeting, according to court records, he promised to put China M and Sharp Point on a business fast-track.

After the deal went through, Wang and Ye engineered their respective exits. Ye started working as head of a China Mobile Internet service provider called ASPire Group in 2008. A few months later, Wang left Tom.

Telstra officials apparently did not realize that Wang's influence and his high-level connections were central to the success of China M and Sharp Point. So, to their surprise, and shortly after his exit, business started to sour at China M and Sharp Point.

In 2010, Sharp Point reported 78.8 million yuan in sales, down from 245 million yuan the previous year. Sharp Point's most recent financial report was for 2012, when it posted annual sales of only 35.9 million yuan.

The company's net profit also fell during the period to 16 million yuan in 2012, 52.8 million yuan in 2010 from 139 million yuan in 2009.

Meanwhile, China M said its revenues fell to 32 million yuan in 2010 from 100 million yuan in 2009, while its net profit slumped to 2.7 million yuan from 86 million yuan over the same period.

In December 2010, the companies' poor performance prompted Telstra to report book values for its stakes in the two companies had declined by a combined AU$ 138 million. Today, Telstra continues to control the service providers, which are still working for China Mobile. Thus, the Australian company still has a foothold in China's telecom data service business, although it is worth a lot less.

Hong Kong correspondent Wang Duan also contributed to the story

(Rewritten by Han Wei)