Rise And Stall Of SNS In China

THE CHINA TECH LETTER The Rise & Stall of SNS As RenRen preps IPO, China’s social networking sites face significant challengesResearch by …

Table of Contents 1. SNS Highlights 2. RenRen: Like, not Love 3. China SNS: Market & Drivers 4. Threat: Microblog 5. RenRen’s Competition: Several ‘Facebooks’ in China 6. SNS Profiles: Kaixin001, Tencent, 51.com, Taomee, Jiayuan 7. Monetization: Games, Ads & Social Commerce 8. Key Takeaways: RenRen’s OutlookAnalysts: Michael Clendenin, with assistance from Autumn Zhu. 2

SNS Highlights• Likes & Dislikes … ◦ We Like: That more than 200mn Chinese are experimenting with social networking sites (SNS), with most of the active users coming from the coveted middle-class. SNS sites like RenRen and Kaixin001 are winning converts from portals like Sohu, which makes them attractive to advertisers. Moreover, Chinese SNS sites contain a heavy game component – 40%-50% of revenue – and this market is expected to triple by 2013 to 2.9bn yuan. ◦ We Dislike: China’s social network site leader RenRen is looking to IPO just as the sector’s momentum is slowing. SNS growth stalled last year, as the rise of “Twitter-like” microblogs – particulary Sina’s Weibo – siphoned away user attention. Pure-play SNS growth declined across every metric, from page views to time spent on the site to strong revenue gains from gaming. ◦ We Dislike: That 2011 is a minefield of risk for pure-play SNS. Microblogs will look to maintain momentum by adding typical SNS features. The sector is fragmented – with many Facebook clones – and competition will also increase from the likes of Tencent, which is taking aim at SNS games. There also looms the overhang of a Baidu-Facebook parternship. To keep pace, independent SNS like RenRen will spend heavily on sales, marketing and R&D.• Niche Players Look Stronger ◦ Niche players are the best choice. Sites like Taomee, Jiayuan and Douban all appeal to user bases with unique interests, from children to urban singles looking for love. This makes their fans less fickle and helps the sites act as a credible conduit to related e-commerce opportunities for consumers already in a buying mood. Jiayuan filed for an IPO in April and Taomee is expected to go in Q2/Q3. Both are profitable.• RenRen Isn’t A DoDo ◦ Competition is intense, but RenRen will survive. Two recent, sequential quarters of revenue decline confirms the challenges RenRen faces. But the company is profitable (non-GAPP), which is more than can be said for its Chinese Web 2.0 cousin, the online video site Youku. RenRen has a great operational team, and its parent company, Oak Interactive, is good at pivoting quickly to catch opportunities. This is why it was able to stay in the game in 2010, while rival Kaixin001 sank. ◦ We’re on the sidelines, however, because RenRen’s valuation is a runaway train. Demand for this IPO is based more on the virtual fantasy of China+Internet+SNS than the financial reality of the hypercompetitive environment RenRen operates in. There is substantial risk that RenRen will not rekindle the kind of significant revenue growth required to justify such a stratospheric valuation. We credit RenRen with doing a decent job of riding out the onslaught from Sina’s microblog, and with investing heavily in Q1-2011 to spur growth through new games and e-commerce (i.e. group buy). But its competitors are doing the same, which is why we see RenRen’s page views and user views down 14% from six months ago (compared to a 3x rise in microblog). But, gauging from feverish interest in the roadshow, 3 we suspect the market believes this past (mediocre) performance is no guarantee of future results.

RenRen Like, not LoveBack to Top 4

RenRen Key Indicators & Features• Launched: Dec. 2005. Originally called Xiaonei (Inside Campus).• Target: Students, white collar.• Reg. Users: ~120mn.• Active Users: ~31mn.• User Interface ◦ Similar to Facebook  Custom features such as online radio, blog, and loads of games and application options.  Comprehensive functions and features make the pages quite busy. Some of the navigation is not very straightforward• Summary: Originally tailored toward college students, but now targets general audience. An early mover, RenRen is one of the most popular and open SNS in China. An aggressive marketing campaign helped build awareness for its games, value-added services and e-commerce site Nuomi. In essence, RenRen is really a gaming and (budding) group buy site that has some SNS functions attached to it. In future, ads will probably play a smaller role in growth. The company faces resurgent competition from rival Kaixin001, as well as Tencent, Sina and potentially Baidu.• Features: Chat, Groupbuy, LBS, Online Video, Site Search 5

RenRen 2010 Financial Indicators RenRen Revenue Sources• Revenue: $76.5mn. Other IVAS• Operating Profit: $7.6mn 13%• Net Loss: $64mn.*  Mostly due to warrants, which have all Online been exercised as of December 2010. advertising 42%• Client Base: 248 advertisers  Up from 224 in 2009; 139 in 2008.• Average client spend: $129k  Up from $82k in 2009 and $49k in 2008. Online games 45% RenRen Financial Indicators Sales Income from operations Net income200,000 000 USD150,000100,000 50,000 0 2008 2009 2010 2011 2012 -50,000 6-100,000

RenRen Top-line Growth Slowing• RenRen’s YoY sales growth will moderate during the next few quarters as it invests to regain momentum lost to new and old competitors in 2010.• Growth will begin to accelerate again in Q4-2011 as the benefits of increased marketing and product development start to show. Kick-starting games growth will be key, while tailwinds from the increasing popularity of group buy (Nuomi) should fuel growth. RenRen Revenue QoQ Growth YoY Grow th 160% 140% 136% 120% 94% 100% 80% 72% 55% 60% 37% 41% 36% 47% 40% 23% 23% 17% 27% 20% 10% 6% 10% -4% -2% 18% 0% Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 -20% -15% -40% Source: RedTech Advisors 7

Doesn’t Stand Out From The Crowd• As a “hot” SNS, Web 2.0 story, RenRen should be speeding past those “dowdy” Web 1.0 guys, right?• Wrong. Increasing competition (see Sec. 5) and stagnant growth in its games unit is a drag on RenRen’s top line. Most of China’s well-established Internet firms will outpace RenRen in 2011 revenue growth. 2011 Revenue Growth 80% 70% 60% 50% 40% 30% 20% 10% 0% Sina Sohu Baidu Tencent Youku RenRen DangDang Source: RedTech Advisors 8

RenRen vs. Baidu, Sohu, Youku & DangDang YoY Revenue Growth Sina Sohu Baidu Youku RenRen DangDang• Our conservative 160% estimates on 140% revenue growth for 120% RenRen’s peers still 100% see many of them outdoing the Web 80% 2.0 firm in the next 60% 1-2 years. 40% 20%• No doubt, the hype 0% 2010 2011 2012 2013 around RenRen’s IPO will propel its stock QoQ Revenue Growth to dizzying heights Sohu Baidu Youku RenRen DangDang in the early days of 70% trading. But the 60% post-IPO hangover 50% will see volatility in 40% the name as investors wonder if 30% this really is the 20% “next Baidu” or just 10% one of a handful of 0% struggling Facebook -10% Q110 Q210 Q310 Q410 Q111 Q211 copycats. -20% 9 Source: RedTech Advisors

Games Revenue Remains Stagnant• RenRen is really a games company disguised as an SNS firm. ~45% of revenue comes from games, with 14% of 2010 revenue sourced from one game – Tianshu Qitan. The stagnation of its games unit in 2010 retarded growth. Knowing this, the firm is heavily investing in product development: Q1-2011 R&D costs ballooned 80% YoY and 41% QoQ, to $8.4mn.• Though a big jump, anything less than a bold increase would have left us wondering if RenRen could stay in the game. For this reason, we’re expecting an acceleration in games revenue in late 2011 as new hits come out of the pipeline.• But it will face significant competition from Kaixin001, as well as Tencent, which is rumored to be working with Zynga to bring the popular game CityVille to China. RenRen Games Unit Games Revenue YoY C hange 12,000 200% 000 USD Game Off 180% 10,000 160% 140% 8,000 120% 6,000 100% 80% 4,000 60% 40% 2,000 20% 0 0% Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Source: RedTech Advisors 10

Group Buy An Important Future Driver• A big marketing push in Q1-2011 raised the profile of RenRen’s group buying site Nuomi.com and we are seeing more and more Chinese in Tier 1 cities use group buy services because they offer great deals.• Though competition is heated in this area, we believe RenRen is well positioned to spend heavily on keeping Nuomi among the lead competitors. For more on group buy in China, see RedTech’s Tencent, Groupon Deal With Chaotic Growth, Competition. RenRen IVAS (i.e. Group Buy) IVAS Revenue YoY C hange 7000 180% 000 USD 161% 160% 6000 151% 140% 5000 120% 109% 4000 92% 94% 100% 85% 89% 3000 80% 76% 60% 2000 40% 1000 20% 0 0% Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Source: RedTech Advisors 11

RenRen SWOT AnalysisStrengths Weaknesses Early-mover advantage/network effect.  Platform pretty similar to competitors, so Demographic: College students, the urban user loyalty can be low.young, emerging white-collar worker  Active users a small percentage of registered Profitable (non-GAPP). user base, typically about 25% for RenRen. ~$378mn in cash and ST investments.  Advertisers still uncertain of what value to place on social marketing. First SNS site to IPO (NYSE on May 4, 2011).  Gaming accounts for 45% of sales, and the Most ads are display from brand companies unit’s growth has stagnated during the past 4-5and charged by time rather than click through. quarters.Opportunities Threats Expand platform features to better compete  Microblogs winning user, advertiser interest.with microblogs.  Deep-pocketed Net firms like Tencent, Baidu Leverage real-name system to promote are very interested in the sector.deeper and stronger connections among usersand more loyal use. May also help with adding  Niche SNS firms like Jiayuan (dating) andgreater legitimacy to product suggestions. UShi (business) may divide user attention. e-Commerce; group buying.  Some regulatory risk, but considered low, especially compared to microblog. Long-term potential to explore interactivityof social ads. DIY ads platform for SMBs. 12

RenRen User Page Personal Page Friends Apps Upload content Diary SNS users you may know Album Music Share GroupApplications Recently used features Search for colleague, classmate or MSN contact. Suggested content 13

Lies, Damn Lies & China Net Stats RenRen Active Users: Before• RenRen had claimed a RenRen Monthly Unique Log-in Users Growth substantial increase in users in Q1, gaining more active 35 mn 31 35% users in one quarter than it 30 29% 30% did throughout all of 2009 and 29% 2010. This seemed highly 25 22 24 25% unusual, as most indicators 20 20% for RenRen all point to a 17 slowing of active user growth. 15 15%• RenRen later corrected the 10 10% numbers in its original IPO 9% filing to reflect that user 5 5% growth was faster in 2010, 0 0% and slower in Q1-2011. At 2008 2009 2010 Q1-2011 best, this is a careless mistake. At worst, it creates RenRen Active Users: After concern that RenRen is RenRen Monthly Unique Log-in Users Growth playing fast and loose with 35 mn 35% the numbers to pump up its 31 value. 30 29% 30% 26• In China, most stats are only 25 22 25% directional indicators. 20 20% Whether RenRen had 24mn or 17 18% 19% 26mn users at the end of 2010 15 15% matters less than the fact that user growth is slowing. 10 10% RenRen will need to spend 5 5% heavily on marketing in 2011 to regain lost momentum. 0 0% 2008 2009 2010 Q1-2011 Source: Company 14

History of RenRen• RenRen CEO Joseph Chen’s first start-up is Chinaren, an SNS for students. Sold to Sohu in 2000 for $33mn.• After a failed attempt to start a optical networking company in US, Chen returns to China and founds Oak Pacific in 2002.• Acquires Mop.com in 2004 and develops into online entertainment community. Also buys tech blogging site DoNews.• Raises $48mn from VCs to fund development.• Acquires Xiaonei (inside campus) in 2006.• 2008: Softbank pays $96mn for 14% stake in Oak Pacific. Also takes an option to raise stake to 40% with additional investment of $288mn within a year.• Acquires web game developer Peagame in mid 2008.• By 2009, Xiaonei claims 40mn users. Changes name to RenRen, which means “everyone.”• 2010: Growth slows as it faces increased competition from microblogs.• April 2011: Files for IPO, with a plan to sell 53.1mn American Depositary Shares at a price between $9 and $11. Looking to raise ~$580mn. Later, high demand enables it to raise pricing to $12-$14, putting the IPO proceeds at ~$690mn.• Alibaba Group, China Media Capital and CITIC Securities Co. have all agreed to purchase a total of $110 million worth of stock at the IPO price. 15

O: Ownership V: Voting Power O: 23% V: 56% O: 34% V:34% O: 13% V: 3% O: 30% V: 7%RenRenCorporateStructure 16

China SNS Market & DriversBack to Top 17

China SNS: From Analog To Digital Guanxi>250mn registered; less China SNS User Base than 100mn active. 450 mn RenRen Accounts Other SNS• Growth: From 2007 to 400 2010, viral marketing 350 300 helped spread SNS like 250 wildfire, especially among 200 teens, college students and 150 young office workers. 100 50• Penetration: About half of 0 China’s net users have 2008 2009 2010 2011F 2012F 2013F registered an SNS account. Source: CNNIC, Enfodesk, RedTech Advisors estimates. Excludes Qzone. But the intensity of activity RenRen Monthly Active Users varies because users often RenRen Accounts RenRen Active Users % Active have multiple accounts or 180 mn 60% log-in from multiple IP 160 52% 50% addresses, which can 140 120 40% exaggerate the true 100 number of SNS users in 80 27% 24% 27% 26% 26% 30% China. For instance, 3rd 60 20% party estimates had put 40 10% RenRen’s active users at 20 0 0% 94mn at the end of 2010, 2008 2009 2010 2011F 2012F 2013F but RenRen says they were Source: RedTech Advisors estimates 18 only about 26mn.

SNS 1000 mn China Internet Market Net users P e ne tra tion 54% 60% Macro 51% 47% 50% 800 41% 733 698 34% 40% 635 Drivers 600 400 16% 22% 29% 384 460 552 30% 20% 10% 298• Net penetration still 210 10% low in China relative 200 137 0% to most developed markets. Only 41% in 0 -10% 2011. 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F RenRen Kaixin001 Source: RedTech Advisors estimates• Most SNS use is in Tier 1 cities among the City Share middle class. Beijing Shanghai• Smaller cities still Tianjin don’t have that many Nanjing active users of SNS sites. Generally, gaming activity is the bigger draw for users in smaller cities. Source: Baidu Trends 19

SNS China SNS Website Activity Kill time 42%What’s Learn something 25%The Play game 27% Make new friends 35%Attraction? Maintain friendships 37% Other 2% 0% 10% 20% 30% 40% 50% Source: CNNIC Frequency of Use Source: CNNIC 40% 35.7%How 35% 30%Strong Is 25% 21.9% 20.8% 20%The 15% 10% 10.7% 10.7%Attraction? 5% 0% Less than once 1-3x/month 1-2x/week Once every 2-3 Daily per month days Source: DCCI 20

China SNS: Frequently Used Applications • SNS sites still appeal to Chinese users who want deeper personal connections. In this way, they are different from microblogs, which are more about broadcasting events and opinions. Popular SNS Functions Diary 69% Favorslinks with Photos 58%family &friends Music 51% Gaming 49% Share infos/files 44% Status 41% Video 40% Instant messenger 38% Groups 36% Testing 36% Present 36% Voting 36% Purchase virtual items 29% E-commerce 28% Others 24% 0% 20% 40% 60% 80% 100% Source: DCCI 21

SNS Gaining Against Portals … • Portals like Sohu & Netease are losing out to SNS players in the war for eyeballs. Source: Alexa • Only Sina remains in the game because of its microblog. 22

… But Pace Of Growth Is Slowing China Net Services: Ranking By Time Spent • SNS & online 60% Online Video Search Engine News SNS E-C ommerce video are the 50% 49% 39% 41% winners in 38% 38% 40% 34% China, as they 30% 18% 27% 23% 20% 23% are globally. 20% 8% 9% 13% 16% 20% 16% 13% 10% 12% 10% 10% 11% 9% 8% 9% 0% 6% 7% 7% 5% 5% • But growth is -10% slowing, likely 1H 2008 2H 2008 1H 2009 2H 2009 1H 2010 2H 2010 due to Source: DCCI China Net Services: Page Views microblogs. 60% Online Video Search Engine News SNS E-C ommerce 53% 50% 50% 46% 42% • News is the 40% 34% 34% biggest loser 30% 21% 25% 20% 17% 19% and this tends 20% 13% 11% 13% 11% 15% 15% 14% 13% 13% to hurt portal 10% 8% 9% 8% 9% 0% 6% 6% 5% traffic. 4% 5% 5% -10% 1H 2008 2H 2008 1H 2009 2H 2009 1H 2010 2H 2010 23 Source: DCCI

Threat: Microblog Sina’s WeiboBack to Top 24

Microblog Market Already Rivals SNS• China’s microblogs combine the RenRen vs Sina Weibo functions of Twitter and Facebook, RenRen Accounts Sina Weibo Accounts offering a one-stop shopping 250 mn opportunity by combining the best 200 of blogs, SNS, instant message, online video and more. Much more 150 powerful and wider impact than SNS. 100• It took RenRen five years to amass 50 120mn registered users. Sina’s microblog, Weibo, did the same in 0 2008 2009 2010 2011F less than two years. Source: RedTech Advisors• Sina’s Weibo is still growing rapidly, adding about 37mn users in Q1. RenRen added 5mn. Frequency of Use 50% Microblog SNS• Only about 20%-25% of RenRen’s 41.7% registered users are active; about 40% 80% of Sina Weibo users are active. 35.7%• Microblog is already “SNS lite” and 30% 26.9% will push to integrate more SNS-like 21.9% functions to expand its user base 20% 20.8% and maintain a high level of activity 10.7% 10.7% 16.2% among users. Emerging competitors 10% for RenRen will be Sina and 7.5% 7.6% Tencent. 0% Less than once per 1-3x/month 1-2x/week Once every 2-3 days Daily month• For more on China’s microblogs, see Source: DCCI RedTech’s Way of the Weibo. 25

Search Interest: Weibo Up; SNS Flattish• Keyword searches for Sina’s Weibo vs SNS sites RenRen and Kaixin. Kaixin Weibo RenRen Source: Baidu Index 26

Advertisers Eventually Follow The Eyeballs • Sina’s Weibo already exceeds both RenRen and Kaixin001 when it comes to user time spent on the site. • Sina’s Weibo is also chewing into the number of page views on Kaixin001; RenRen seems to be holding its own. 27 Source: Alexa

Ogilvy China: “stickiness and salience”• “With the advent of weibo, one can immediately feel that social network sites like Kaixin001.com are losing their sheen. I used to visit Kaixin every day, but now I visit the site only once or twice a week. But for weibo, its a different story. I can publish a microblog in a restaurant, at bedside, on the subway... It can be anywhere, any time. It is said some real fans would publish a micro blog even when they go to the toilet.”  Liu Yan, director of Digital Influence with Ogilvy Public Relations Worldwide 28

RenRen’s Competition There Are Several ‘Facebooks’ In ChinaBack to Top 29

Leaders But No Real Dominators• Compared with Facebook’s 60%-plus market share of US visits, China’s SNS counterparts have a long way to go to dominate. RenRen, Kaixin001, Tencent and 51.com control about half of the market.• Like the online video sector, consolidation is badly needed among SNS providers but this is unlikely to happen within the next year. Moreover, Kaixin001’s expected IPO will give it more cash to compete against RenRen.• Homogeneous: Most of China’s SNS sites provide very similar functions and user experiences, including message boards, photo sharing, videos, music & information, blogging, webpage games, etc. High product homogeneity and intense competition among SNS players leave the market with no dominators. 30

Market Growth Slows As Options Increase• SNS revenue notched up 93% CAGR from 2006-2010, but from 2011- 2013 we conservatively estimate growth for pure-play SNS will slow to 30% as competition increases from microblogs, online video sites and other Web 2.0 platforms, such as group buying.• Despite an increase in SNS users due to overall Internet user growth, the user activity and engagement with SNS dropped.• Product homogeneity and lack of innovation bored some users. C h in a S NS M a rke t R e ve n u e YoY Change 6 bn y ua n 350% 345% 300% 5 4 .0 4 250% R AG 4 %C 200% 3 30 2 .7 9 150% 115% 1 .8 6 2 G R 93% CA 1 .3 3 100% 50% 45% 1 0 .7 8 0 .5 0 71% 50% 56% 0 .0 5 0 .1 1 40% 0 0% 2006 2007 2008 2009 2010e 2011F 2012F 2013F Source: EnfoDesk, RedTech estimates 31

Sector DNA: Pure-play, Portals, Niche• Major Players: There are three types of SNS in China: 1) Standalone sites that are similar to Facebook; 2) Niche sites that cater to a specific audience; 3) Deep-pocketed portal providers with integrated SNS, such as Tencent, Sina, Sohu and potentially a Baidu/Facebook JV in future.• Standalone SNS sites usually have particular target users. RenRen (formerly Xiaonei) started by targeting students, Kaixin001 attracts white- collar workers, 51.com captures small cities.• Niche sites started getting attention in 2008/09, including Taomee for children, Douban.com and Neocha.com for young trendy users, P1.cn for the elite, iPartment for women, Jiayuan and Zhenai for dating, and Tianji, UShi.cn for business.• Portals: Driven by popularity of SNS sites, China’s leading portals joined the crowded and competitive battlefield sequentially. By linking QQ IM accounts, China’s largest internet company Tencent launched QZone to engage young teens and rural users. Baidu and Sina both launched Space and joined the battle. Sohu.com launched “Bai Shehui” (White Society) targeting the white-collar demographic in 2009, followed by Alibaba’s “Ren Mai Tong” business SNS. 32

Brief Profiles Of China’s SNS Players Registered Financial Company Type Founded Target User Base Status* Sohu ChinaRen Integrated 1999 Alumni 100mn N/A Douban Standalone Mar 2005 Teens, trendy user 50mn N/A QZone Integrated Mar 2005 Teens & rural users 388mn Profitable 51.com Standalone Aug 2005 Small cities 180mn Breakeven $76.5mn in Renren (Xiaonei) Standalone Dec 2005 College students 120mn 2010 Baidu Space Integrated Jul 2006 All 100mn N/A MySpace Standalone Mar 2007 Music fans ~10mn N/A $35mn in TaoMee Standalone Oct 2007 Children 180mn 2010. Profitable. White-collar ~$30mn in Kaixin001 Standalone Mar 2008 workers 90mn 2010 Sina Space Integrated May 2008 All Closed N/A Sohu White White-collar Integrated May 2009 15mn+ N/A Society workers Alibaba Ren Mai Integrated July 2009 Business N/A N/A TongSource: RedTech Advisors. *Note: Estimated market share and revenue. Registered user numbers are from company reports. Most sites have far fewer active users. 33

Does Facebook Stand A Chance In China? Unlucky Chinese transliteration - Fei Si Bu Ke (doomed to die)• Extremely unlikely. ◦ First blocked intermittently in 2007, then permanently in 2009 after authorities said it was being used to help organize riots in Xinjiang (western China). ◦ During his latest visit to China in late 2010, Facebook Chief Mark Zuckerberg met with China’s leading portals and telecom operators, including Sina, Baidu, Alibaba and China Mobile. ◦ Rumored to JV with Baidu, but the duo would be seriously behind. And Baidu hasn’t proven itself adept at social networking, just as Google has also struggled in this area. ◦ One potential asset for a Baidu/Facebook venture is that Chinese could be attracted to the potential global user base of Facebook, but government will likely put restrictions on this to limit the free-flow of information that could offend official sensitivities – similar to the self-censorship that Google faced in China. 34

SNS Leader Profiles Kaixin001, Tencent, 51.com, Sohu, Taomee, Jiayuan, DoubanBack to Top 35

Kaixin001 Key Indicators & Features• Launched: March 2008.• Sales: ~$30mn 2010. ◦ Expected to double in 2011• Target: White-collar.• Reg. Users: ~90mn.• Active Users: ~25mn• User Interface ◦ Very simple & easy to use  Main functions well organized by tabs. More flexible: allows users to customize apps in default navigation bar.  Fast loading time and clean design make the site more attractive.• Summary: Kaixin001 is a game-oriented SNS with smaller but more active user base of white-collar workers. As the first adopter of many games popular among office workers, such as Parking War, Friends for Sale & Happy Farm, Kaixin001 grew quickly in 2009 and boasted the most active users, which led to the “Kaixin addiction” phenomenon among office workers (and its banning at many offices). Now struggling with user churn as games mature – a warning about the fickleness of users that access SNS for games.• Features: IM, Groupbuy, Online Video, Site Search 36

Kaixin001: Challenges & Opportunities• Losing out to RenRen: Last year saw a big drop in user activity. Kaixin is trying to regain momentum with new initiatives, such as marketing campaigns with traditional and internet media and celebrities, launching a DIY advertising platform and stepping into e-commerce. But this won’t be easy, as competition is heating up on all fronts, from pure-play e- commerce sites to microblogs, as well as from RenRen.• Open API Helps: After opening its Application Programming Interface in May 2010, the platform now has 50 in-house apps and more than 100 from third parties, but the majority are still games.• IPO: Kaixin001 is expected to IPO in Q2/Q3, which will give it the cash necessary to re-arm in its war against RenRen, Tencent and Sina. 37

Kaixin001 User Page Friends Groups News Photos Users you may know Diary Notes Forward Gifts GroupBuy Upload content Recent visitorsApplications News Center All news Forward Note Special topics Company homepage Celebrities NetDisk Q&A Voting Poke Movies My friends 38

Tencent: Qzone & Pengyou Key Indicators• Qzone: March 2005. Target: Teenagers.• Pengyou (QQ Alumni): 2009. Target: Students, white collar.• Reg. Users: ~400mn for Qzone; 130mn for Pengyou.• Active Users: ~190mn/80mn*• User Interface ◦ From lousy to better  Pages are now well-designed, with better interactive experience.  Still too much advertising, crowded with media.• Summary: QZone was originally a product providing individual space, similar to MSN Space. In June 2008, Tencent added social network elements and formerly joined the battle of SNS. Tencent Pengyou (formerly QQ Alumni), launched in early 2009 and is another SNS service provided by Tencent, requiring real-name registration. Originally targeted students but recently extended to office workers as well.• Features: IM, Online Video, Site Search 39 * Claimed by company.

Tencent: Challenges & Opportunities• Qzone needs to mature: The site it too amateurish. It provides very few Tencent Q310 Revenue Breakdown options to make real and serious relationships by not requiring real name registration and background information. Other However, it does provide more than 50 Online ads 7% 1% apps to compete with other SNS sites.• Focus on Pengyou: QQ Alumni was Telecom value- Tencent’s trial in real-name SNS area, but added service it didn’t gain much traction. Tencent 13% Pengyou indicates Tencent’s new ambition in SNS, which will be a more credible threat to RenRen’s growth prospects.• Open API draws interest: In Sept. Online game 49% 2010, Tencent launched its open platform website. Since then, a series of Tencent products including QZone, Tenpay, Microblog, Tencent Pengyou and Tencent Groupbuy have been opened to third-party developers. SNS value- added service• Investment push: At the start of 2011, 30% Tencent said it would establish a 5bn yuan fund with the aim of investing in online games, social networking, the wireless internet, e-commerce and new media. This is bad news for other SNS players that lack the deep pockets to keep up and the advantage of Tencent’s powerful Internet ecosystem. 40

Pengyou User Page Friends Socialize Apps News Users you may know Upload contentIndustry All Info Related to me Alumni QQfriendsCompanySchoolAlumniChatDiaryPhotosShare Invite friendsAddress BookWall NotesMicroblog Applications Area Hot topic 41

51.com: Key Indicators & Challenges• Launched: Aug. 2005.• Early mover, but on the decline• Target: Small cities.• Reg. Users: ~180mn.• Active Users: ~40mn• User Interface ◦ Uninspiring  As a downgraded copycat of Facebook, 51.com has identical interface and contents as other copycats, and provides an OK but not excellent user experience.• Summary: 51.com is one of the earliest movers, with significant venture capital from SIG Asia Investments (SAI), Giant Interactive, Intel Capital, etc. Rather than reconnect offline friends, such as classmates and colleagues, 51.com focuses on connecting with those who are in/from the same town. Jumped into games as they turned hot and gaming revenue believed to generate more than one-third of sales. Although its large user base helped 51.com break even, the real value of this user group is still uncertain. Massive marketing campaigns, like online singing shows and cooperating with well-known brands, including KFC, Perfetti Van Melle and Samsung, indicates its exploring more ways of making money, but RenRen’s expansion, Tencent Pengyou’s new launch, and Kaixin001’s opening of its API all leave little chance for 51.com to break out.• Features: IM, Online Video, Site Search 42

Sohu: ChinaRen & White Society• ChinaRen: 1999.• Target: Students/Alumni.• BaiSheHui (White Society): May 2009.• Target: White collar.• Users: ~100mn for ChinaRen; ◦ 30mn for White Society.• Active Users: Defunct/4mn• User Interface (White Society) ◦ Easy and interactive interface and rich contents.• Summary: Chinaren is one of the earliest prototypes of SNS in China, but it’s not really an SNS anymore. Focusing on students and alumni, it was established by Renren’s CEO in 1999, achieved huge success in the first year, and sold out to Sohu in 2000 for $33mn. As only one small product in Sohu’s offering, Chinaren didn’t grow as fast as other SNS, despite its early- mover status. White Society is Sohu’s new white-collar oriented SNS product. It notched up fast growth initially but slowed in 2010 as competition increased. Neither of Sohu’s properties are credible competitors to other big SNS sites.• Features: IM, Groupbuy, Online Video, Site Search 43

Niche SNS: Taomee Targets Kids (& Moms)• Launched: October 2007.• Sales: ~$35mn 2010. ◦ Revenue should grow 30% YoY ◦ Profitable on GAPP basis. ◦ Will IPO in Q2-2011.• Target: Children (6-14).• Reg. Users: ~180mn.• Active Users: ~20mn aka 61.com• User Interface & Features ◦ Simple & colorful  A lot of high-quality animated features, clear navigation and instructions.  Taomee censors bad language, closes servers at midnight, and puts a two-hour limit on continuous online time.  The company likes to promote the safety of its platform, and talk about how it engages parents to monitor their kids online time. While this sounds nice, we’re not convinced that Chinese parents are very active in doing this.• Summary: The Taomee online community is more like a cartoon series. Each kid has their own character, and can participate in and influence the story by playing and interacting with others. Taomee is a closed platform but its recent recruitment of SNS platform managers for third-party product development indicates it will open up soon. Overall, Taomee will benefit from the hype surrounding SNS, but it is less susceptible to the churn of mainstream SNS sites like RenRen and Kaixin001. The site makes most of its money from games and VIP fees, rather than from ads, and is exploring offline product retailing and licensing. 44• Features: Games, Online Video, Site Search, e-Commerce

Niche SNS: Jiayuan Targets Lovers• Launched: October 2003.• NASDAQ IPO pending (DATE)• Sales: ~$25mn 2010. ◦ Profit: $1.3mn loss, GAPP ◦ Profit: $3.5mn gain, non-GAPP• Target: Urban singles• Reg. Users: ~40mn.• Active Users: ~4.7mn SNS vs Niche SNS (Dating)• Market Share: ~50% (dating) 10 Dating SNS bn yuan• Summary: Jiayuan has built brand 8 recognition in China’s highly competitive online dating market, 6 which has helped it accelerate away from competitors. Despite the 4 popularity of online dating services, the industry is hampered by fraudulent 2 practices and low profitability, but we 0 believe that Jiayuan is more active 2010 2011 2012 2013 2014 2015 with its user outreach services than many of its competitors. 45

Monetization (1) GamesBack to Top 46

Games The Core Business For Most SNS• In the past two years, the number of RenRen Revenue Sources webpage game users experienced rapid Other IVAS growth, exceeding 100mn, while the 13% number of traditional online game users stayed relatively stable at 60-70mn. Online• Cheap and easy to play, SNS games are advertising starting to take the lion’s share of the 42% webpage game market, accounting for 88% of total revenue.• Chinese users show a high willingness to install applications, most of which are Online games games: 35% of users have more than 10 45% applications installed. China SNS Game Market Market revenue YoY C hange 3 bn yuan 109% 2.9 120% 100% 75% 2 86% 80% 1.6 75% 60% 1 0.8 40% 0.4 0.2 20% 0 0% 2009 2010F 2011F 2012F 2013F 47

Games Improve Stickiness, But Users Fickle SNS Games Improve Loyalty• About 40%-50% of SNS users Question: What if your SNS had no games? play games. More Will not leave importantly, about 20% say 8.9% Will definitely they choose an SNS site leave 27.4% based on its games. May not leave 15.6%• Risk: RenRen gets ~45% of revenue from games. 14% of 2010 revenue came from one Not sure game – Tianshu Qitan. 3.1%• Tencent: Pushing hard on May leave casual games. Reportedly 45.0% working on deal to bring Zynga’s CityVille to China. Source: CNNIC 48

Popular Games on RenRen Tianshu Qitan • A role-playing game, which accounts for 31% of firm’s Sina Wanwan Aonlinegame platform with a variety of small web games. 2010. large games revenue and 14% of total revenue in Small Battle Users manage a barbarian tribe and fight with other players in the pasture. Happy Farm A game in which users upgrade by planting and harvesting vegetables. The Three Kindoms Casual role-playing game based on Chinese history. 49

Monetization (2) AdsBack to Top 50

China Online Ads Market Seeing Strong Growth• The online ad market slowed in 2009 but is accelerating again. Optimistic estimates put the market at 42bn yuan ($6.6bn) by the end of 2011, up 40% YoY. High, double-digit growth will continue through 2013, when the market nears 100bn yuan. China Online Ads Market Online Ads Revenue (bn yuan) YoY C hange100 60% 51% 46% 46% 80 40% 40% 60 40 22% 20% 20 0 0% 2009 2010e 2011e 2012e 2013e Source: iResearch, RedTech estimates 51

SNS Still Small Part Of The Ad Pie• Compared with other segments, such as search 2010 Online Ad Market Share engines and portals, the SNS platform is not yet a SNS powerful tool for grabbing the ad budget. For the 4.8% moment, basic display ads are the most common format for SNS sites. We expect this to continue. Ad Networks 13.1% Portal Online video• In China, the ads market is all about reach, not 27.4% 5.3% about user data mining to intelligently place ads. In this respect, RenRen and Kaixin001 are already at a disadvantage compared to the likes of Tencent or Sina since they lack the raw number of Search users. This is why they need to be active in the engine gaming and e-commerce sectors. 49.3% China Online Ad Market Ad Ne twork O nline vide o Se arch Portal SNS 50 50 bn yuan 38 40 29 30 21 20 15 14.4 11 7 7.5 10 5 4.1 3 1.5 2.3 0.4 0.7 0.8 1.1 0 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 52 Source: DCCI

SNS Sites Still Testing Ad Placement• Most ads are display based, but more SNS providers are using non- game applications as a place for ads and marketing campaigns, accounting for more than 30% of non-game applications. 35% of social game players get virtual currency by watching ads; 40% are willing to click ads in social games. Source: RedTech Advisors 53

DIY Ads Platform Not A Big Deal• RenRen and Kaixin001 launched DIY platforms at the end of 2009 and 2010, respectively, allowing personal and corporate advertisers to place ads on the website and target specific user segments and particular time periods. The deposit for DIY advertising in the website can be as low as 100 yuan. However, if advertisers want to increase the visibility of their ads, they have to increase the quote per click.• DIY ads are a key revenue generator for Facebook, bringing in at least a half of its ads revenue. But we don’t expect China’s SNS sites to rely on them much in the near future, even though they may pay lip service to having the platforms.• RenRen and Kaixin001 rely on traditional sales forces that service bigger accounts, with minimum buy-ins at around 120-150k yuan. DIY Ad 54

Monetization (3) Social CommerceBack to Top 55

Online Trend: More Shopping, Less Gaming Most SNS users have tried group buying.• Though e-commerce is growing, it is still unclear More than 10 whether SNS can be competitive enough if they times 7% operate standalone e-commerce sites. Already, we 5-10 times have seen Kaixin001 cut back on group buy staff in 9% smaller cities and say it will focus on a handful of None big cities, like Beijing and Shanghai. 36%• RenRen operates group buy site Nuomi. In early 2011, RenRen built up online shopping platform Fanli.renren.com, partnering with e-commerce sites including Vancl.com and 360Buy.com.• Following RenRen, other SNS players such as Kainxin001, 51.com and even Tencent and Sina 1-5 times have all jumped into the “SNS + Group Buy” game. 48% Source: iResearch (2010) Chinese Online Consumption Online Shopping Other Internet Spending Basic Internet Access Fees Online Gaming 100% 27.0% 23.9% 32.9% 40.6% 75% 54.6% 7.4% 7.6% 66.5% 3.0% 73.0% 8.1% 3.0% 3.2% 8.5% 50% 3.5% 10.6% 4.3% 62.4% 65.7% 11.8% 55.8% 25% 47.4% 12.3% 4.4% 30.4% 3.4% 11.3% 17.3% 56 0% Source: DCCI (2010) 2007 2008 2009 2010e 2011F 2012F 2013F

e-Commerce Low Priority For SNS User• Patience needed Popular SNS Functions ◦ Group buy is gaining popularity Diary 69% in China, and RenRen stands a Photos 58% good chance of leveraging its Music 51% user base to gain a foothold. Gaming 49% But the competition will be Share infos/files fierce and require heavy 44% investment in sales and Status 41% marketing to keep Nuomi a Video 40% contender. Instant messenger 38% Groups 36%• Low interest Testing 36% Presents 36% ◦ e-Commece is low among popular features on SNS. Voting 36% RenRen notes that only 1.3mn Purchase virtual items 29% people have used the service in E-commerce 28% aggregate, out of a total of Others 24% 31mn active users. We estimate 0% 20% 40% 60% 80% that less than 5% of revenues come from Nuomi at this stage. Source: DCCI 57

Key Takeaways Likes & DislikesBack to Top 58

Outlook for RenRen• Ahead Of The Pack – For Now ◦ Despite the onslaught of competition from microblogs, RenRen stands out as one of two pure-play SNS firms to hold user attention. ◦ ~130mn registered users by year end, up 20% YoY. ◦ Optimistically, the site could have 40mn active users by end of 2011 – half of Sina’s estimated 80mn active users, so not bad if achieved. ◦ Growth strategy  Leverage user base to increase e-Commerce sales.  Resist simple replication of microblog features. Need to stress to advertisers the more personal nature of SNS as a “private” online space, whereas microblog is a public platform that is more fleeting.  Attack smaller cities using proceeds from IPO.  Invest in gaming pipeline to rekindle stream of hits.• Downside Risk ◦ Key concern is whether microblogs will succeed in annexing SNS features.  In the short-term, microblogs and SNS will coexist. Advertisers will not want to make one bet, but will experiment with different sites in China to gauge the effectiveness for particular product campaigns.  But users may gravitate to microblogs for links to group buy and gaming, which would hurt RenRen. ◦ Stop the Stall.  RenRen needs to prove it can accelerate growth, so that investors don’t think it is just cashing out while China IPOs are hot. The proceeds from the IPO will give the company a huge advantage in expanding its sales and marketing to better capture growth in e-Commerce and lower tier cities.  Kaixin001 will fight back. Once it IPOs, expect Kaixin001 to use its warchest to steal share from RenRen. 59 It’s also being aggressive in group buy and gaming.

THE CHINA TECH LETTER Thanks! michael.clendenin@redtechadvisors.com inquiry@redtechadvisors.com +86 21 6248 3975Research by … Back to Top

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Rise And Stall Of SNS In China

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Rise And Stall Of SNS In China Presentation Transcript