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Inside Tencent

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A time capsule of China's internet icon.

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Inside Tencent

  1. 1. Inside Tencent +8* | Plus Eight Star Ltd Mobile & Internet Innovation Arbitrage China, Japan & South Korea www.plus8star.com Learning from the world’s leading online community
  2. 2. Congratulations! You are about to look into Tencent, China‘s most astonishing Internet success This report explores the details of its services, strategy, business models and actual usage. It also highlights the key catalysts and best practices that led to its success and overwhelming presence in the Internet life of an entire generation. © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage
  3. 3. About this report © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage
  4. 4. Mobile & Internet Innovation Arbitrage 4 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Why we publish a report about Tencent Asia is advanced? We have been researching advanced Asian markets for nearly 10 years. During that time, we found that while Western social networks were struggling with advertising-based models, several Asian services were doing very well with B2C models, notably personalization, avatars and games. Why Tencent In 2007, Tencent was on its way to record over 500 million USD in revenue and over 200 million USD in profit. We thought it was a good time to get the word out and published the first edition of this research. In 2008, Tencent was getting more and more attention and passed 1 billion USD in revenue, with over 400 million in net profit. According to its first quarter 2009, Tencent might record over 1.5 billion USD in revenue this year with and a net profit over 600 million USD. This is more than the acquisition price of MySpace by News Corporation. We will not explain why ―people buy things that don‟t exist‖. We will assume you understand digital goods exist as much as MP3 songs and accept the fact that dozens of millions find something of value in buying or offering digital objects to enhance their online life.
  5. 5. Mobile & Internet Innovation Arbitrage 5 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com How you can benefit from this report Whether you are a social network, a gaming company, a telecom carrier, a media group, an investor, or simply interested in knowing more here are some of the reasons why Tencent makes sense to look at: First, Tencent is the world’s largest online community (over 377 mln monthly active IM accounts vs. Microsoft Windows Live‘s estimated 320 mln) and casual gaming portal. Only China Mobile can claim such a large user base. • How can you gather so many users? • How to keep them interested? Second, its revenues were 1,047 mln USD in 2008, much higher than Facebook and MySpace, most of it coming from non-advertising services. More, the company is incredibly profitable with 412 mln USD in net profit! • What are Tencent‘s key services? • How can they make users pay for Internet services in a low-income market? • What are the successful business models at work to achieve such results? • What kind of economy & ecosystem are being created around the service? Last, Tencent is still growing fast and there is much to learn from it. • What are Tencent‘s recent strategic moves? • What are their ambitions for overseas markets?
  6. 6. Mobile & Internet Innovation Arbitrage 6 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Leveraging best practices Now the next step is to dive into this report and spread its knowledge to your key people – a client of our previous Inside Cyworld report translated it entirely into Chinese for his Chinese management team! We encourage you to look beyond numbers and focus on what are the proven concepts and great ideas that Tencent implemented in QQ. Tencent itself was inspired by ideas from outside such as ICQ (US IM), Cyworld (Korean SNS) or Hangame (Korean casual game portal) and more. Last, we wish you to successfully adapt the best of Tencent‘s concepts and business models to become – who knows – the Tencent of your own market! The editors Benjamin Joffe | Founder & CEO | +8* Yiqun Bo | Consulting & Research Manager | +8*
  7. 7. Mobile & Internet Innovation Arbitrage 7 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com They purchased the 2008 edition Selection of companies who purchased the previous version Microsoft | Tencent is MSN‘s main competitor and the first company to monetize IM and build an ecosystem with such scale. Nokia | ―Connecting people‖ is what Tencent is also about – connecting most of China‘s Internet users – but it also monetizes connections! As Nokia is evolving towards becoming a web company, benchmarking a successful web and mobile service counterpart makes lots of sense. Harvard Business School | The centenary institution stays at the top by researching successful economic models. Tencent is an outstanding example of how to get paid in the information goods market. DeNA | Operator of ―Mobile Game Town‖, Japan‘s largest and richest mobile social network made about 250 mln USD in 2008). Learning best practices to improve their service. Mail.ru | Russia‘s leading email provider and top portal site. Possibly on its way to become Russia‘s Tencent? Vinagame | Vietnam‘s leading online gaming company. Virtual goods is the king of revenue models in the region and adding communication to gaming can be a killer recipe.
  8. 8. Mobile & Internet Innovation Arbitrage 8 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Methodology A company as large and complex as Tencent is unlikely to be covered in its entirety. To make the best use of your time, we provided views from different angles to help grasp the key elements the QQ universe. This research, which was conducted and enriched over more than 2 years, includes input from: Research in online and print media. Use and analysis of QQ‘s various services. Interviews and discussions with Tencent executives. Interviews of experts involved in China‘s Internet and mobile scene. Interviews of users. We hope you will enjoy your reading and encourage you to apply QQ‘s numerous proven ideas to your own context. China is now an innovation powerhouse for IM, gaming and social networking and it is time for the rest of us to learn from it!
  9. 9. Mobile & Internet Innovation Arbitrage 9 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com About the Authors Benjamin JOFFE, CEO, +8* Benjamin founded the digital strategy company +8* (www.plus8star.com) while being part of Japan‘s mobile revolution, Korea‘s Internet boom and China‘s mobile crash & Web 2.0 revival during the past 9 years. He is a regular keynote at industry events (Ad:Tech, GSP East, Asia Venture Capital Forum, eComm, etc.), quoted by the media on Asian web and telecom sectors (The Economist, CNN) and was named among China‘s Top 100 Mobile Industry Influencers in 2007 & 2008. Benjamin co-founded and runs monthly the Beijing chapter of Mobile Monday, making it the leading mobile industry forum in China with over 3,000 members and part of a global network. He is also a founding partner of Cmune, a startup building the next-generation social games platform. Benjamin speaks fluent English, French and Japanese with working knowledge of Korean, Chinese and Spanish. Yiqun BO, Consulting & Research Manager, +8* Yiqun has been working in China‘s ICT industry for the past 10 years. Before joining +8*, he was notably involved in research on B2B e-commerce, as well as Beijing Eleventh Five-Year (2006-1010) Plan on informatization. He has been the lead consultant in numerous projects ranging from the evaluation of MVNO opportunities in China, mobile innovation and ecosystem assessment, research on Web 2.0 and virtual worlds and has provided his expertise to clients such as Mitsui Global Strategic Studies Institute, Microsoft, Adidas, MIH and the EU-China Information Society Project. Yiqun speaks fluent Mandarin, English and French.
  10. 10. Mobile & Internet Innovation Arbitrage 10 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Acknowledgements We would like to thank for their contribution and support at Tencent Ms. Charlotte CHAN, General Manager, Investors Relations, Tencent. Tencent executives who regularly contribute their views to the local media at various conferences and seminars. Unnamed executives and friends who gracefully enlightened us during informal discussions. The numerous expert interviewees who added perspective to media reporting and corporate talk. They are listed on the following page. Our clients and partners who helped us tailor this research to their needs and bring more perspective to it. Last, thanks to the millions of users of QQ – you made it what it is!
  11. 11. Mobile & Internet Innovation Arbitrage 11 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Experts interviewed in this research Leo WANG Founder Mobile 2.0 Forum Jim LEE General Manager EA Mobile Gang WANG Vice President Sina Xing WANG Founder Xiaonei, Hainei, Fanfou Brian RU Senior Analyst Matrix Partners Zili REN Founder Appleap Project Manager China Mobile Olivier GLAUSER Managing Director Steamboat Ventures Gang LU Founder Mobinode Yong LV Investment Director SK Telecom, China Leon HUANG Product Manager Jiapu.com Former Project Manager Tencent Catherine CHAN IR General Manager Tencent Kaiser KUO Digital Strategy Director Ogilvy China Tangos CHAN Editor China Web 2.0 Review Alex LIANG CEO Pica.com Dr. Song LI CEO Digu, Zhenai Buddy YE CEO Wangyou Media Wayne SHIONG Partner WI Harper 2008 2009 Dirk HE Senior Manager Huawei
  12. 12. Mobile & Internet Innovation Arbitrage 12 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Disclaimer Opinions Opinionated views are expressed in several chapters, those should be seen as our opinion or the interviewee‟s opinion according to the case. Claims Due to the nature of this product, all our sales are final. We recommend that you study the information, table of content and sample pages provided on our website to determine whether this report fits your needs. We are interested in your feedback! Tell us your opinion and what you would like to see in the next version. info@plus8star.com
  13. 13. Table of Content © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage
  14. 14. Mobile & Internet Innovation Arbitrage 14 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Table of Content | Overview About this report 3 Table of content 14 1. Introduction 17 2. Market Overview 24 3. QQ Facts and Figures 95 4. Key Services 123 5. Strength & Weakness 236 6. Users Interviews 241 7. Experts Insights 249 Appendix 277 Notes 1. Chapters are accessible via the hyperlink 2 This icon takes you back to this page Exchange rate 1 RMB (= 1 QB*) = 0.146 USD; 1 USD = 6.8 RMB * QB is Tencent‘s virtual currency
  15. 15. Mobile & Internet Innovation Arbitrage 15 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Table of Content | Details About this report 3 Table of Content 14 1. Introduction 17 1. Tencent and China‘s Internet 18 2. Tencent‘s bright future 19 3. Tencent vs. Foreign SNS 20 4. Profitable SNS in Asia 21 5. Turning SNS into successful businesses 22 6. What to learn from Tencent 23 2. Market Overview 24 1. General figures 25 2. Why do global giants fail in China? 35 3. Dispelling Misconceptions: Internet & Media Censorship 41 4. Key players 45 5. Market Trends 61 6. Internet heroes and social trends 71 3. QQ Facts and Figures 95 1. General figures 96 2. Key milestones and results 107 3. Legal stories 116 4. Key services 123 1. QQ service map 124 2. QB: Tencent's virtual currency 126 3. Economic value of QQ digital assets 132 4. Payment systems 137 5. Instant messaging 141 6. QQ Show 145 7. Qzone 157 8. QQ Games 168 9. QQ Pet 172 10. Premium Memberships 188 11. Mobile services 191 12. Additional services 203 13. Online Advertising 215 14. Access solutions 223 15. Future Developments 230
  16. 16. Mobile & Internet Innovation Arbitrage 16 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Table of Content | Details 5. Strengths & Weaknesses 236 1. Tencent‘s strengths 237 2. Tencent‘s weaknesses 238 3. Opportunities for Tencent 239 4. What are the risks for Tencent? 240 6. Users Interviews 241 1. Methodology 242 2. Profiles 243 3. Interviews 244 4. Image of QQ 248 7. Insights from Experts 249 1. Experts interviewed in this research 250 2. Experts interviewed in 2009 251 1. Views on QQ's local competitors 253 2. Views on QQ's international competitors 255 3. The digital goods business model 256 4. Tencent's innovations 257 5. What is the limit for growth 258 6. What could go wrong? 259 7. What is the potential of mobile for QQ? 260 8. Overall Consensus 261 3. Experts interviewed in 2008 262 11. Exclusive interview with Tencent 263 12. Characteristics of China's Internet industry 267 13. What made QQ so successful? 269 14. What is your professional opinion of QQ? 270 15. What would be QQ‘s weaknesses? 271 16. Who could compete with QQ and how? 272 17. Can Tencent internationalize? 273 18. QQ‘s influence on Chinese society? 274 19. Favorite Chinese Internet services? 275 20. What‘s next in the Chinese Internet? 276 8. Appendix 277
  17. 17. 1. Introduction © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage
  18. 18. Mobile & Internet Innovation Arbitrage 18 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Tencent and China’s Internet In China, Internet is QQ QQ is China‘s largest online community with over 377 mln active IM accounts. Many users connect to Internet solely for using QQ. QQ evolved from the initial IM into an array of services ranging from Internet portal (#1 in China, source: Alexa.com), blogs (#1), avatars, virtual items, virtual pets, online games (#1 casual game platform) to WAP portal (#1). And users pay for it Tencent generated 1,047 mln USD in revenue and 412 mln in net profit in 2008. Close to 90% directly from users. All this in an environment with low GDP/capita (the average revenue of an Internet user in China is 400 USD), low trust and moderate network speed. And it is not only about business, but social influence as well The most powerful online media in China. Lifestyle – for mlns of Chinese, ―Internet is QQ‖. QQ meets their needs on entertainment, communication, business, learning, etc. Over 3 mln USD of donations from QQ users was collected via the QQ platform. Even the police uses QQ to communicate with residents.
  19. 19. Mobile & Internet Innovation Arbitrage 19 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Tencent’s bright future And there is more to come Despite its incredible Internet influence, Tencent derives only a minor share of its revenues from online advertising. Recognizing this untapped potential, Tencent is beefing up its advertising team and working on building a higher trust in their capacity as an advertising platform. This requires notably to improve the understanding of it with advertisers, as those are gradually shifting advertising dollars to Internet and embrace online communities. Mobile is expected to grow faster than before as operators have a more open content policy, lowered data fees and started to roll-out 3G networks.
  20. 20. Mobile & Internet Innovation Arbitrage 20 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Tencent vs. Foreign SNS Facebook, MySpace and Twitter might be the poster boys of the new wave of Internet services but many experts have questioned their business models and the viability of social networking as a whole. Though Tencent might be the most visible of all, three social networks in Japan are not only profitable but also market-listed for hefty sums. Mixi, Gree and DeNA‘s ―Mobile Game Town‖ services record 30% to 60% profit. Both Gree and DeNA are mobile services. 0% 10% 20% 30% 40% 50% 60% 70% 0 200 400 600 800 1,000 1,200 0% 10% 20% 30% 40% 50% 60% 70% 0% 20% 40% 60% 80% 100% Revenue vs. Profits Revenue from users Share or revenue from users vs. Profits Revenue (mln USD) OperatingProfitMargin OperatingProfitMargin
  21. 21. Mobile & Internet Innovation Arbitrage 21 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Profitable SNS in Asia The following table summarizes the differences between leading social networks. Among key differences: The most profitable ones monetize users directly, via digital goods or games. The average revenue per user of those services is about 10 times Facebook‘s. Facebook Tencent Mixi DeNA Gree Sales 2008 350 (est.) 1,047 127 258 146 Operating profit 0 (est.) 475 40 103 88 Profit margin 0% (est.) 45% 31% 40% 60% Registered users 200 377 17.4 14.5 12.6 Revenue from users 10% (est.) 88.5% 7.5% 75% 75% Market cap (bln USD) 3 to 15 (est.) 25.1 1.0 1.5 1.9 Notes: 1. Numbers for Facebook are estimates. 2. Sales from Mixi and DeNA are from April 08 to March 09. 3. Sales for Gree are from July 08 to June 09. 4. Only the ―Mobile Game Town‖ service are considered for sales for DeNA. 5. DeNA‘s profit margin is taken as the one of the whole company. 6. Active users for Tencent are counted as ―registered users‖. 7. Market capitalization is taken as of August 5, 2009.
  22. 22. Mobile & Internet Innovation Arbitrage 22 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Turning SNS into successful businesses Why are Western services stuck with the advertising business model? In most advanced Internet markets, the only way to gather revenues on the Internet seemed to be by using online advertising, in the form of banners, paid search or paid listings (houses, cars, personals, etc.). After studying dozens of leading players in advanced markets, we came to the conclusion that the real reasons for this situation were the following: Online payment mechanisms are too few and inefficient to provide hassle-free 1-click macro or micro-payment. Young generations do not think twice about enhancing their personal image or entertainment experience online, similar to what older generations do… offline. Measurement tools are lagging behind new usage patterns and technologies. Online communities need sociologists and psychologists, not only engineers. • As technology is becoming more and more a commodity, the real issue lies today in the assessment of trust, social links and privacy. Our words are poor to describe the differences between key elements. • What are the differences between a ―good friend‖, a ―business friend‖, a ―best friend‖?. Who would you lend your car keys to? Who can see the pictures from your latest cross-dressing party or fishing trip?
  23. 23. Mobile & Internet Innovation Arbitrage 23 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com What to learn from Tencent Online communities, social networks, online games and virtual worlds are converging and face very similar challenges in their development How to attract users and build a community? (Virality) How to keep them interested? (Engagement) What do users value? How to monetize it? (Monetization) As we worked closely with numerous innovative companies, we found that Many Western services do not work well in markets where the online advertising market is too small, or online payment systems are not developed. As a result, while the first wave of Internet services in China needed strong execution skills, the second wave required numerous adaptations to the local environment and improvements leveraging local characteristics and led to innovation in service concepts and business models. Chinese models offer today proven business models and services ideas that can help develop Internet services worldwide. Just as the US powered the first Internet wave, Asia is now proving an innovation powerhouse in business models and service concepts. This report demonstrates how QQ not only triggered a social phenomenon but also proved numerous business models that can be adapted globally.
  24. 24. © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage 2. Market Overview
  25. 25. 2. Market Overview © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage General figures
  26. 26. Mobile & Internet Innovation Arbitrage 26 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com 0 100 200 300 400 500 600 700 million Fixed Mobile Internet(CNNIC) Broadband Key market figures Subscribers in 2008 Fixed line: 341 mln Mobile: 641 mln (world‘s #1) In 2002, mobile overtook fixed lines Since 2005, fixed lines started decreasing due to competition from mobile Internet users in 2008 298 mln users World‘s #1 since early 2008 Broadband subscribers: 84 mln Internet penetration: 23% High growth potential Online advertising still early stage Market size: 2.5 billion USD in 2008 Value per internet user: 8.4 USD 0 10 20 30 40 50 60 % Internet | 23% Sources: MIIT, CNNIC, +8* User growth Penetration rate 641 341 298 84 Fixed line | 26% Mobile | 49%
  27. 27. Mobile & Internet Innovation Arbitrage 27 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Online advertising, games and e-commerce Online Payment & E-commerce (online shopping including B2C and C2C) Emergence of payment systems like Tenpay (from Tencent/QQ), AliPay (from Alibaba.com) and billing by mobile operators make online payment easier. As a result, the volume of online payments is projected to rapidly increase. Online advertising Online advertising includes both brand advertising and paid search. Online game 70% of Internet users in China are under 30 years old, fueling the online gaming market. Year-on-year growth over 50% with a sound B2C revenue model B2C model resilient to crisis, offering low-cost communication and entertainment. 0.3 0.6 0.9 1.6 2.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2004 2005 2006 2007 2008 blnUSD Online ad 0.5 0.7 1.1 2.0 3.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2004 2005 2006 2007 2008 blnUSD Online game 0.7 2.2 3.7 8.2 18.8 0.0 5.0 10.0 15.0 20.0 2004 2005 2006 2007 2008 blnUSD E-commerce Source: iResearch
  28. 28. Mobile & Internet Innovation Arbitrage 28 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Internet users demographics Younger demographic 67% are under 30 years old. 36% are under 20. In the US, 70% are above 30 y.o. <20 36% 20~29 31% 30~39 18% 40~49 10% 50~59 4% >60 1% China‘s internet user breakdown by age <middle school 5% middle school 28% high school 40% college 14% bachelor 12% master or above 1% China‘s internet user breakdown by education level Relatively low education levels 27% of Chinese Internet users have a college degree or above, lower than 36% in 2007; Little potential in this point, as China has only ~5% of total population as college graduates Source: CNNIC, Jan 2009
  29. 29. Mobile & Internet Innovation Arbitrage 29 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Three telecom operators in China The Chinese government reorganized telecom operators in 2008 (operators are still over 70% owned by the govt). It formed three ‗integrated operators‘ with licenses for mobile, fixed and internet services. China Mobile • Absolute leader in mobile with 74% market share. • Very weak in fixed market. • 3G license: TD-SCDMA. China Unicom • The most balanced operator in terms of business breakdown. • 3G license: W-CDMA. China Telecom • Dominant in fixed line market. • The weakest one in mobile. • 3G license: CDMA2000. Broadband (2008) 84 mln subs Fixed lines (2008) 341 mln subs Mobile (2008) 641 mln subs Source: MIIT, 2009
  30. 30. Mobile & Internet Innovation Arbitrage 30 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Top 10 sites and global players # Name Category 1 Baidu Search 2 QQ IM + Portal 3 Sina Portal 4 Google.cn Search 5 Taobao E-commerce 6 Netease Portal + games 7 Google.com Search 8 Yahoo! Portal 9 Sohu Portal 10 Soso Search Source: Alexa Traffic Ranking by country, March 2009 Among the top 10 Internet sites 5 are general portals and IM services 4 are search engines 1 is an e-commerce platform Tencent covers IM (QQ), portal (qq.com), and search (soso.com) The difference between Google.cn and Google.com is the location of their server Local vs. Foreign Only two foreign players in the Top 10 (Google and Yahoo) Yahoo.com.cn acquired 40% of Alibaba and gave to Alibaba control over their Chinese operations (August 2005) Alibaba founder Jack Ma and Yahoo former COO Daniel Rosensweig give a joint press conference to announce the deal in Beijing.
  31. 31. Mobile & Internet Innovation Arbitrage 31 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Top 10 sites and global players Local players won the top spot in all the main Internet sectors. Baidu (search engine) and QQ (IM) enjoy a strong lead in their sectors in terms of market share. No foreign company operates directly in the online game sector (mostly due to Chinese regulation). eBay China lost its #1 position in C2C auctions to Taobao since 2005, then lost again its #2 position to Paipai (Tencent), and is unlikely to bounce back in the near future. Sector Local player Global player Portal #1, QQ #4, Yahoo Search #1, Baidu #2, Google E-commerce #1, Taobao #3, Ebay China IM #1, QQ #3, MSN Online game #1, NetEase WoW is in Top 3 in terms of PCU Where are the global players? Sources: +8*
  32. 32. Mobile & Internet Innovation Arbitrage 32 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Chinese Internet Giants Company Tencent Baidu Shanda Alibaba Foundation 1998 2000 1999 1999 Service IM, online community Search Online game E-commerce (B2B subsidiary) Revenue in 2008 1,047 mln USD 468 mln USD 522 mln USD 439 mln USD Market position 377 mln active accounts >70% IM market share >70% search market share #1 in online gaming and #1 in MMORPG, 17% market share. 38 mln B2B users >50% B2B market share Business model Digital goods, mobile services, advertising Advertising Virtual goods VIP account / certification fee Market cap (2009.08) 26 bln USD 12.3 bln USD 3.4 bln USD 11.8 bln USD Sources: Company Reports, +8* Tencent‘s market cap is equivalent to Baidu + Shanda + Alibaba combined. It is almost twice the valuation of Facebook based on the Microsoft deal (15 bln USD).
  33. 33. Mobile & Internet Innovation Arbitrage 33 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com SNS in China: from copycats to local innovations The Market is dominated by local players. Nickname-based SNS started much earlier than MySpace or Facebook‘s copycats in China. Monetization is not only from ads but also from B2C models (game, digital goods, etc.). Source: Web2Asia, March 2009
  34. 34. Mobile & Internet Innovation Arbitrage 34 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Major social networks in China User pages of Xiaonei, Kaixin001, 51.com and Facebook. Xiaonei.com Kaixin001com 51.com Facebook.com
  35. 35. 2. Market Overview © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage Why do global giants fail in China?
  36. 36. Mobile & Internet Innovation Arbitrage 36 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Foreign company Local company People Team leader often coming from HK, Taiwan; Employees are educated white-collar staying in high-class buildings in Shanghai Field of vision is limited to high-class buildings in Shanghai, and Fortune 500 Companies Know Gmail, but not 163. They use MSN Messenger, but not QQ, considered to be ‗less professional‘ Look down on netizens from Internet cafés, fans of Super Girl, because of their education. Would prefer to close their website rather than run one with no taste or differentiation They cover not only white-collar, but ‗small potatoes‘ Target regular people and SMEs, do not care about having good taste Comment: Without attention to the masses, it is difficult to be a Top 3 website Attitude Earning a salary 8 or 10 times higher than local competitors, they worry about negative news. They prefer ‗no achievement‘ than to take a risk which could bring a mistake. Cautious, conservative, polite, educated, but little fighting spirit. Prefer to be hated than to be forgotten Always ready to make mistakes Comment: Local players don‘t care about sounding good or making mistakes. The worst for them is to be forgotten. Jack Ma, CEO of Alibaba, and Zhou Hongyi, CEO of 3721 are representative of this philosophy. Efficiency Long term strategy, spend a lot of money on market research May have to wait one month for HQ‘s answer on the purchase of a laptop if it is out of budget. React fast Numerous small steps, and correct quickly when making a mistake. Comment: As the Chinese saying goes, „Eagerness for quick success and instant benefit should not be encouraged‟. But in the ICT sector, efficiency and speed are of the essence. Why do global giants fail in China?
  37. 37. Mobile & Internet Innovation Arbitrage 37 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Foreign company Local company Result or Means? Have complicated Key Performance Indicators (KPI) to match, and a lot of rules to follow. Combination of long-term and short-term objectives with close attention paid to brand image and ethics. Results-oriented. Decide on clear objectives, ‗this year for traffic, next year for subscription‘. Any ‗not clearly illegal‘ way to achieve the objective might be used: ‗hooligan software‘ (self-installed in browsers), promotion in adult websites, etc. Comment: For local players ‗objective is all‘ and don‘t care about anything else. That creates efficiency. Localize Can care too much about users‘ requirements. In addition, follow Western customs and tastes. Only follow the local taste and needs. Comment: Considering the security of customer‘s private information, the chatting history of ICQ can only be saved on one PC, limiting the use of this function. However, Chinese users often surf in Internet Cafés and don‘t mind saving online. Note: There are over 100,000 Internet Cafes in China in 2006 (about 1 per 10,000 inhabitants, but concentrated in large cities). Internet Cafes are popular with students, migrant workers and generally low- income customers. Design Clean, neat, gentler, elegant, appreciated by maybe 20% of Internet users Crowded with content, pictures and ads, including floating flash Ads. Many could hardly be described as beautiful. Comment: hao123.com is the best example. Founded by a Cantonese who only completed junior high school, it is just a website navigator targeting people with little Internet and PC experience. Hundreds of links are collected in the home page. It spent a grand total of US$0 on promotion, but kept ahead of Yahoo China in terms of PV and unique visitors. Why do global giants fail in China?
  38. 38. Mobile & Internet Innovation Arbitrage 38 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Foreign company Local company Communi cation means They spend 90% of communication time on writing email or MSN Messenger. They are happy of their English skills. Sometimes, instead of making a 5 minutes phone call, they write, reply, transfer 10 emails. When ten people make a meeting, even with only one foreigner, they all speak English. They call and see their customers, dine them, even go to Karaoke with them. Comment: If you do business in China and earn money from Chinese people, it‘s better to communicate in the Chinese language and to understand the Chinese way. Ad strategy Target high-level customers Spend large amounts of money, hire 4A PR firm, get excellent Ad design. Put Ad in subways, commercial centers, bus stations. Meanwhile, they design an Ad suiting white-collar‘s taste, then pay much for banners on Top 3 Internet portals in China, and buy key words of Google. Their thinking is to pay 1000 RMB, and get 10 high-level customers They win the reputation battle, but not traffic Target: no-target, whoever They don‘t pay so much on advertising. They don‘t use the same distribution which costs too much for them. Their thinking is to pay 100 RMB, and get any 1000 users. Among these 1000, there could be 100 high- level customers. Instead of reputation, they first target traffic Comment: Education and culture level in China is not same as in high-ranking OECD economies. The market segmentation is also very different. Why do global giants fail in China?
  39. 39. Mobile & Internet Innovation Arbitrage 39 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com ‗Free‘ is something very attractive. The best example of it is not myself with Alibaba but Pony Ma and his QQ. Since 1999, QQ has provided free IM service, and has never stopped to improve. When QQ‘s penguin will announce it starts to charge users, we will understand how much we cannot abandon it. Everyone around you – from policeman to prostitute – uses QQ. Until now, QQ has maintained its free strategy for each new service and monetizes premium content and services. When you see that a .GIF picture of just some KB can be sold for half a dollar, you have to admit that Pony is really a fox! Jack Ma Founder of Alibaba Alibaba operates China‘s #1 B2B and #1 C2C e-commerce websites Alibaba also runs Yahoo! China Eventually, ‗Free‘ is the most expensive thing in the world! Comments from Industry Insiders
  40. 40. Mobile & Internet Innovation Arbitrage 40 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Comments from Industry Insiders Compared to Google, Baidu has no advantage in capital, brand or technology, even for Chinese language. Despite these disadvantages, Baidu matches better local people‘s needs. ZHOU Hongyi Angel Investor Former CEO of Yahoo! China The performance of Google, Amazon, Microsoft in China depends totally on their localization work.
  41. 41. 2. Market Overview © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage Dispelling Misconceptions: Internet & Media Censorship
  42. 42. Mobile & Internet Innovation Arbitrage 42 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Media and Internet censorship in China China has the world‘s largest population in a territory similar in size to the United States. Unlike its Western counterpart, China has extreme gaps between haves and have-nots, East and West, cities and countryside Within this context, the key objectives of the Chinese Government is stability and ―avoiding chaos‖ whatever the cost. The consequence on the Internet is that websites are required to get a license (Internet Content Provider or ―ICP‖ license) and to filter some politically-sensitive and illegal keywords Sensitive issues: Falung Gong, Tibet Independence, Tian‘anmen, Taiwan democracy Illegal content: Adult, Drug and Gambling Those issues are treated more or less like Nazi groups or pedophilia in Western countries Intimidation power? The Shenzhen Public Security Bureau created two anime- style "Internet Police" characters named "Jingjing" and "Chacha― (―Jingcha‖ means ―police‖ in Chinese); each cybercop has a blog and a chat window where Chinese citizens can talk to them. The main function of Jingjing and Chacha is to intimidate all Netizens to be conscious of “safe and healthy use of the Internet, self-regulate their online behavior and help support a healthy Internet.“ That being said, Western media are much more aware than local netizens of the existence of those mascots. ICP license of Google China Jingjing Chacha
  43. 43. Mobile & Internet Innovation Arbitrage 43 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Media and Internet censorship in China The Chinese government is furtive about its censorship Censorship is only a political issue The government checks everything It is too hard to follow regulations and know what is legal to do. Chinese people suffer from the censorship. Misconception The government is quite matter-of-fact about regulation and some topics. • e.g. Jingjing and Chacha • Rewarding ―self-regulators‖ • Public signs posted in Internet Café: ―Don‟t go to pornographic and illegal website.‖ In China, censorship is not only a political arm, but also a competition tool between companies (especially in the Internet and mobile fields). Intimidation and "self-regulation" are more ―efficient‖ than official checking. • To get an ICP license, companies must sign a document agreeing not to circulate content on certain subjects. Usually, the definition is unclear and no official ‗black name list‘ exists so Internet companies ―reverse engineer‖ tolerance. • Companies have to consider in depth what the government wants. Consequence: The filtering is done mostly ‗voluntarily‘ by websites moderators. For safety, many companies check and likely delete content beyond what is possibly needed. It‘s true that government‘s expression is not clear. But people who know Chinese culture understand more or less what are the limits. According to a founding executive of Sohu.com (#2 Internet portal) “it's not harder than dealing with Sarbanes-Oxley”. Free speech • Compared to traditional media, Internet enjoys a freedom of several orders of magnitude difference, and has already largely impacted the Chinese society. Reality
  44. 44. Mobile & Internet Innovation Arbitrage 44 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Comments from Industry Insiders I don't want to call it censorship, each country has its own bias. There are taboos you can't talk about in the US, and everyone knows it. Charles Chao CEO of Sina #1 Internet and news portal We don't want to annoy the government so anything that is illegal in China, it's not going to be on our search engine. After all, we are a business and our shareholders want to make money. This goes with making the customer happy, not with doing this or that political thing. Jack Ma Founder of Alibaba Alibaba operates China‘s #1 B2B website and #1 C2C website. Alibaba also runs Yahoo! China
  45. 45. 2. Market Overview © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage Key players
  46. 46. Mobile & Internet Innovation Arbitrage 46 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com The struggle of mobile and Internet companies Internet is a low-trust and crowded place While China‘s Internet has seen an overflow of content, portals and Web 2.0 companies, it remains a low-trust environment due to poor measurement. Alexa ranking? This has been the key measure to raise venture capital in the Internet space, making page views a critical metric, above actual service quality (we say China follows the ―Alexa School of Investment‖). In addition, many companies have used self-installing ―hooligan software‖ to beat competitors, gain subscribers and boost their ranking. As a result, advertisers have been very cautious and unwilling to switch from traditional media to online media. Today, about 8% of China‘s advertising spending goes to Internet. The prevalent ad sales format is an antiquated CPD ―cost-per-day‖, rather than CPM (per thousand) or CPA (per action). Mobile content providers are under tremendous pressure Due to operators‘ policies working in a self-serving mode, mobile CPs have been declining steadily since 2005, undergoing major changes of strategy. Mobile operators are more or less using content providers as free research centers: once a CP achieves some success with a service, operators will replicate it and launch their own version. The trend today for CPs is to find new distribution channels and business models independent from operators, working with manufacturers and media companies.
  47. 47. Mobile & Internet Innovation Arbitrage 47 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Web Portal Mobile content IM Portal + Games Online games Mobile and Internet market leaders Source: Company reports mln USD Search engine Online games Only B2B e-commerce part Revenue 2008 of key market players Source: Companies +8* | www.plus8star.com
  48. 48. Mobile & Internet Innovation Arbitrage 48 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Performance of leading Internet and mobile companies Not all business models are born equal All companies are recovering since October 2008. The most badly hit has been the mobile player KongZhong, which has suffered from government and mobile operators‘ policies. ―Brand advertising‖ (especially pay-per-day or pay-per-week banners) shows limited growth, in spite of the reorganization of Sina‘s media power based on its news portal. Baidu‘s keyword search model shows a better trend than Sina. Shanda has not been overly impacted by the crisis thanks to its B2C-based virtual goods model. Tencent enjoys amazingly good karma since its introduction on the Hong Kong Stock Exchange. 2004 2005 2006 2007 2008 2009 KongZhong Mobile content Baidu Search Ad Tencent Sina Brand Ad Shanda Game Source: Yahoo! Finance Comparison over 2004-2009 +8* | www.plus8star.com
  49. 49. Mobile & Internet Innovation Arbitrage 49 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Sina Positioning #1 Internet portal in terms of ad value #2 MVAS provider A reference for news and entertainment products. Peak PV > 800mln/day Full time employees: 2,080 Comments #1 online brand ad player Will largely expand its media reach and customer base by acquiring Focus Media‘s digital out-of-home advertising networks (see details in next page) Total revenue in 2008: 370 mln USD Sina + FMCN may create No.2 ad company in China Revenue growth rate 50% Operating margin 20.2% Source: Company 2008 annual report
  50. 50. Mobile & Internet Innovation Arbitrage 50 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com In December 2008, Sina announced its intention to acquire Focus Media‘s assets of digital out-of-home advertising networks, including LCD display network, poster frame network and certain in-store network. Sina + FMCN may create #2 ad company in China Sina Charles Chao CEO of Sina Jason Nanchun Jiang Chairman & CEO 370 mln USD in 2008 370 mln USD in 2008o Movie theatres o Billboards o Online Ad o LCD Display Network o Commercial building o In-store o Poster Frame network o Elevator 32% 68% o To acquire FMCN‘s outdoor digital media – 68% of total rev. 2008 o Online Ad – 60% of total rev. 2008 o MVAS, Others o The combination of #1 online brand ad player and #1 outdoor ad player gave birth to the #2 ad company after CCTV, and #1 private ad company in China. o Will largely expand Sina‘s ad customer base thanks to Focus Media‘s 3,000+ advertising clients, nearly 3x that of Sina.
  51. 51. Mobile & Internet Innovation Arbitrage 51 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Sohu Positioning China‘s #5 largest portal #2 online brand ad player after Sina Owns China's top vertical sites including ChinaRen (alumni community), Focus.cn (real estate), 17173.com (online game portal) and Sogou (search). Partner of Beijing Olympics 2008 Full time employees: 3,200 Comments Sohu has shifted focus on advertising and gaming as its core businesses. High growth rate in 2008 thanks to the success of its gaming business. #2 Internet portal and major online search player Rev growth rate 127% Operating margin 38.2% Total revenue in 2008: 429 mln USD Source: Company 2008 annual report
  52. 52. Mobile & Internet Innovation Arbitrage 52 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Changyou: Sohu’s second IPO on Nasdaq Changyou (CYOU), ex-gaming division of Sohu, IPO on April 2nd 2009 in Nasdaq. First IPO on Nasdaq since November 2008. The shares went up 26 percent in strongest debut in a year. Sohu‘s game revenue in 2008: 202 mln USD, 47% of total revenue YoY growth: 380% Net margin: 54% Tian Long Ba Bu – flagship product of Changyou Translation: "Heavenly Dragon: The Eighth Episode.‖ Launched in May 2007. Contributed 94% of Sohu‘s game revenue in 2008. PCU: over 800,000 in March 2009. Changyou‘s game (Tian Long Ba Bu) video on the wall of Nasdaq
  53. 53. Mobile & Internet Innovation Arbitrage 53 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Tencent (QQ) Positioning #1 brand for teenagers 78.5% IM market share in terms of frequency of use 377 mln IM active accounts 49.7 mln IM PCU 4.7 mln game PCU Full time employees: 2,300 Comments Online platform integrating a large number of internet and mobile VAS Monetizes mainly via virtual goods and casual games Money collection of micro-payments Tenpay, proprietary online payment platform Expanding from Internet to mobile, from entertainment to media Leader in IM, #1 Internet portal in terms of PV Total revenue in 2008: 1,047 mln USD Rev growth rate 87% Operating margin 45.4% Source: Company 2008 annual report
  54. 54. Mobile & Internet Innovation Arbitrage 54 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Baidu Positioning #1 in traffic in China #1 Internet search engine Over 70% usage market share for search #1 for online ad revenue Full time employees: 6,252 Comments Absolute dominant in Internet search market, Google is #2 but far away. Expanding from search to diversified services such as blog, BBS, IM, e- commerce, online music, online TV, etc. Difficult to keep the same growth rate in 2009 due to single business model (100% from online ad) #1 Internet search in China Total revenue in 2008: 468 mln USD Rev growth rate 83% Operating margin 34.3% Source: Company 2008 annual report
  55. 55. Mobile & Internet Innovation Arbitrage 55 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Alibaba.com Positioning #1 B2B e-commerce player Over 60% B2B EC market share in terms of paying accounts 432,031 paying accounts Full time employees: N/A Comments Alibaba.com is the B2B part of the e- commerce empire built by Alibaba Group. Alibaba benefits from the synergy with other companies held by Alibaba Group including Taobao (#1 C2C in China + Ad exchange), Alipay (#1 online 3rd party payment), and Aliwangwang (#1 IM for trading) Alibaba.com is positioned as ‗one-stop shop‘ to clear various bottlenecks for China‘s over 40 mln SMEs, the growth engine for the country‘s economic boom. Leader in B2B e-commerce Total revenue in 2008: 439 mln USD Rev growth rate 39% Operating margin 39.7% Source: Company 2008 annual report
  56. 56. Mobile & Internet Innovation Arbitrage 56 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com NetEase Positioning #2 game developer and operator. #1 email service provider with 280 mln accounts or over 70% market share. Average daily PV: 640 mln Full time employees: 2,368 Comments One of the first Internet companies in China and among the first to list its stock. Started from Internet portal, then entered into gaming market. Leader of in-house development of games. Diversifying services such as e-commerce search by leveraging traffic from portal. Second most cash-rich Internet company in China with 823 mln USD (Morgan Stanley). Online Ad, 13% MVAS, 2% Online gaming, 81% Others, 4% #2 in online gaming, #3 Internet portal Total revenue in 2008: 452 mln USD Rev growth rate 39% Operating margin 62.1% Source: Company 2008 annual report
  57. 57. Mobile & Internet Innovation Arbitrage 57 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Shanda Positioning #1 game developer and operator 80 mln active accounts including 5.89 mln active paying accounts for MMORPG. Average revenue per paying user (ARPPU) for MMORPGs stabilized to 7.2 USD per month. A diversified game portfolio with 20+ games under operation and 15-20 new games in the pipeline. #1 online literature portal with over 20 mln subscribers and 300 mln PV per day. Full time employees: 2,564 Comments Started with games licensed from South Korea and moved gradually to in-house development. #1 in online gaming Total revenue in 2008: 522 mln USD Rev growth rate 42% Operating margin 40.4% Source: Company 2008 annual report
  58. 58. Mobile & Internet Innovation Arbitrage 58 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Shanda #1 in online gaming Shanda vs. Tencent Widening Gap in Casual Game Accounts Source: Company data, Morgan Stanley Research Shanda is #1 online games operator in terms of revenue (mln USD) Source: Company 2008 Annual Reports Content providing and service platform were split. Shanda Game (SDG, game content development), Shanda Online (SDO, third- party service platform open to all content providers) Dominant in MMORPG but losing market share for casual games. Launched online literature business in 2008 with 15 mln USD revenue. Invested 13 mln USD to build licensing platform for those user-generated works. +8* | www.plus8star.com
  59. 59. Mobile & Internet Innovation Arbitrage 59 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com KongZhong Positioning Top mobile MMORPG #1 player in java games Top WAP portal Full time employees: 804 Comments Transforming Kong.net from a pure mobile portal to community-based portal, then try to monetize not only from ads but digital goods as well. Received 6.8 mln USD investment from Nokia Growth Partners in 2009 to reinforce the partnership with Nokia which could be an important sales channel for its mobile gaming business. Lost 0.2 mln USD in 2008 due to the decrease of traditional MVAS revenue. Leader in mobile VAS and mobile gaming Total revenue in 2008: 96.7 mln USD Rev growth rate (-9%) Operating margin (-25.5%) Source: Company 2008 annual report
  60. 60. Mobile & Internet Innovation Arbitrage 60 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com KongZhong Leader in mobile VAS and mobile gaming Kong.net Mobile portal cn.NBA.com NBA official mobile portal Mobile game portal o Info portal + mobile community; o Peak PV: 150 mln per day thanks to Olympic Games; o Started getting mobile ad rev. o Launch: Sep 2007 o Operated by Kongzhong with content provided by NBA including NBA live video; o 0.6 mln daily unique visitors o Mobile gaming is booming in China. o Tian Jie Online, a mobile MMORPG developed in-house is one of the most popular mobile online games in China.
  61. 61. 2. Market Overview © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage Market trends
  62. 62. Mobile & Internet Innovation Arbitrage 62 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Online population reached 298 mln at the end of 2008 and is still growing fast (42% YoY in 2008). As of the end of 2008, Chinese internet users outpaced US ones. China is still at the beginning of the ―S‖ curve of adoption and far from saturation, as barely 1/4 of its population is online, vs. 60~70% in US, Japan, and Korea. Overall Chinese online industry sales should grow 20-30% YoY in 2009, exceeding other sectors. Internet sector outgrows most others Source: Morgan Stanley Research Internet Sector: Fastest-Growing Sector in China 2009IndustryGrowth (estimates)
  63. 63. Mobile & Internet Innovation Arbitrage 63 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com in 2008, Internet and media companies produced an average operating margin of 30-40%, higher than others. The Chinese Internet and media sector includes some of China‘s most profitable companies. For instance, NetEase has net profit margins in the high 50% since 2005. Companies should be able to sustain or expand their margins, as they are often asset-light but human capital heavy, and their key cost driver is human capital cost. Human capital costs in China are <20% that of the US. Over 6 mln students graduated from college in China in 2008. Over 1/3 of them did not have a job on graduation day. IT as a major ranked #1 by its number of graduates. Internet & media players enjoy the highest margins Averageoperatingmargin(2008estimates) China Internet/Media: Enjoying the Highest Margins Source: Morgan Stanley Research
  64. 64. Mobile & Internet Innovation Arbitrage 64 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Online gaming, secure and prosperous under crisis Changyou‘s IPO is just the beginning Reflecting on the country‘s level of development with the average income remains around 400 USD per Internet user, most of them find that online gaming is a very attractive value proposition for entertainment, especially under the current economic conditions. Why is there no strong online gaming market in the West yet? Legacy of packaged software. Focus on low-hanging fruits (advertising). It took time to understand the human motivations behind the success of digital goods (we still hear ―why would anybody pay for something that does not exist?‖). What are the next steps for Chinese hugely profitable gaming champions? Buy licenses? Fledgling foreign companies? Chinese companies might shop for foreign brands and licenses in US, Europe and Japan within the next few years. It would be similar to what Lenovo did with IBM laptops, with the difference that there are much less difficulties with distribution. E.g. Shanda has become #1 shareholder of Actoz (game developer in Korea) by acquiring its 29% shares with 91.7 mln USD in 2004. In fact, Legend II, game which helped Shanda get the dominant position, was licensed by Actoz. Online games (e.g., those from Shanda and NetEase) offer cheap and yet ―sticky‖ entertainment options, which explains why Korea‘s online game companies saw accelerated growth in the last Asian financial crisis. Richard Ji Analyst, Morgan Stanley
  65. 65. Mobile & Internet Innovation Arbitrage 65 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Social games: SNS + Online games converging The combination of game and SNS is emerging in China too A new business model for SNS sites • SNS sites have a large users base, huge traffic and stickiness of service. • However, their business model relies heavily on online advertising, which is unable to sustain them in most markets. In China, most of the ad money goes to larger properties such as portals and search engines and the rest is split among an ever-increasing inventory. Games increase social features and stickiness of service • In China, the online game market is larger than the online ad market. • Client-based MMORPG shows great success but cover rather young people (students, migrant workers, etc.) playing in Internet café. White-collars with strong consuming power have less time and lower interest on MMORPG. Happy Farm – a leading social game in China o Compete in growing vegetables! o Web-game on Xiaonei.com (#1 real name SNS in China) o Started charging user on Dec 16, 2008. o Over 9.5 mln installations and over 1.7 mln active accounts in May 2009. o Also on Facebook! o Revenue of 600,000 RMB/month (88,000 USD/month)
  66. 66. Mobile & Internet Innovation Arbitrage 66 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Social commerce: convergence of SNS and shopping People put more weight on recommendations as they are increasingly disenchanted with advertising. New service concepts and business models are emerging from this situation. Alimama | regular internet users can promote Taobao (China‘s ―eBay‖) sellers in their own websites and get a commission. Taobao SNS | Online shopping-based SNS. NicoNico Video | Users of this Japanese service can add affiliate links to shopping sites. ―Favorites‖, ―Votes‖ – two key points of Taojianghu representing online shopping guide features Two applications with strong gaming features to accelerate popularity and stickiness o Beta launch: Mar 31, 2009 o SNS with regular features for all of Taobao‘s buyers and sellers (about 100 mln in total) o Upgraded from community service inside Taobao.com o Two strong shopping guide features: • Favorites: ―my favorites‖ and friends‘ favorites. • Votes: online survey system. • Gaming applications Taojianghu: SNS within Taobao.com
  67. 67. Mobile & Internet Innovation Arbitrage 67 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Year 2008 (%) US China Ad market (bln USD) 293.3 29.5 Ad market YoY growth 3% 15.9% Online ad market (bln USD) 25.8 2.5 Online ad market YoY growth 21.7% 60.4% Online ad / Total ad share 8.8% 8.4% Online media’s high potential Compared to US, China‘s media consumption is still modest. Both China‘s total and online ad market are 1/10th of the US. However, growth in China is much higher. Chinese online media players enjoy world- class profitability. Unlike ‗old media‘ players, ‗new media‘ leaders often dominate their markets in China. Source: iResearch, 2009 ~40% ~80% Baidu+Sina +Sohu Company Operating Margin Company Operating Margin Chinese companies US companies NetEase 62.1% eBay 24.3% Alibaba 39.7% Google 30.4% Tencent 45.4% Yahoo! 0.2% Sohu 38.2% Amazon 4.4% Shanda 40.4% IACI -4.3% Baidu 32.8% EA -13.3% Sina 20.2% VeriSign 7.4% Average 39.8% 7.0% Source: Company 2008 Annual Reports Advertising in commercial buildings IM Online ad TV ad
  68. 68. Mobile & Internet Innovation Arbitrage 68 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com E-commerce on its way to explosive growth In 2008, China‘s online shopping market size was 18.8 bln USD (+128% YoY) C2C represents 92% of the total market. There were over 70 mln online shoppers in 2008, about 26% of Internet users. In China, C2C is much more important than B2C due to: More choices & cheaper price. Wider coverage for delivery. Combination of Search + Community + Commerce creates a better shopping experience and increases stickiness. 3 main C2C players in terms of GMV (gross merchandise value): – Taobao (Alibaba Group), 82.2% – Paipai (Tencent), 9.9% – Eachnet (JV of Ebay with Tom Online), 7.9% The growth of third-party e-payment (online, telephone, mobile) is a catalyst for e- commerce Third-party e-payment has grown from 1 bln USD in 2004 to 40 bln USD in 2008. The market will maintain its growth rate in 2009 China is expected to have 40% more Internet users by the end of the year. More users go shopping online due to the economic situation. Source: iResearch
  69. 69. Mobile & Internet Innovation Arbitrage 69 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com B2C will be a long-term driver B2C is expected to grow faster than C2C due to: Maturity of e-commerce market • Better logistics. • Online payment is accepted by more users, especially third-party payment solution with Alipay and Tenpay expanding their business to all the e-commerce players. • Increased trust from users with improved reputation of B2C websites. More vertical B2C websites More offline retailers extending online B2C C2C auction Vertical B2C B2C based on C2C platform C2C fixed price E-commerce market started from B2C Larger products choice. Long process due to auction. Integration of IM service Faster deals. Maturity of platform More professional service. Maturity of e-commerce market environment. Combination of B2C and C2C. Dangdang Joyo (Amazon China) Taobao Ebay China Paipai Taobao Ebay China Paipai 360buy, PPG, Redbaby Taobao, Tom-Ebay, Paipai, Dangdang, Joyo…
  70. 70. Mobile & Internet Innovation Arbitrage 70 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Chinese Internet companies going overseas Chinese internet companies going abroad Just like Lenovo, TCL and Haier were a while ago - entering the next phase in China‘s development by establishing co-operations with international partners, licensing their services, and some of them are even in the phase of initiating overseas operations. Partnerships, licensing, co-production The entertainment industry – especially game companies – has caught up with advanced markets such as Japan, South Korea, the US and Europe: • Tencent | Gaming business in cooperation with AOL in the US. • Perfect World & Changyou | Launching online games in Vietnam, Hong Kong, Macau, Taiwan, Singapore and Malaysia. Self operated or wholly owned overseas initiatives Alibaba | Its services and business model are international by nature • B2B business serving Chinese suppliers doing export. • Online payment business helping overseas sellers reaching Chinese consumers. Baidu | Opened a Japan office and launched a local version leveraging its regional advantage.
  71. 71. 2. Market Overview © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage Internet heroes and social trends
  72. 72. Mobile & Internet Innovation Arbitrage 72 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Digital natives have their stars and trends In China, there are limited alternatives for affordable entertainment The media/music/cinema industries are still in their infancy and tightly controlled. Internet is thus filling a gap. Consequences Social networks, digital creations, interactive TV are all booming in China. Online advertising is also taking off. Digital music sells more than ―offline‖ music, most of it via mobile phones The following cases provide a glimpse of the current Chinese Internet pop culture. All are whether ―user-generated‖ or ―interactive‖ content. Mice Love Rice | Internet-originated national hit song Backdorm Boys | Lip-synch artists Furong Jiejie | Self-proclaimed Internet beauty SuperGirls | China‘s ―American Idol‖ leverages mobiles “Heart” China | Viral phenomenon on MSN to support China pre-Olympics Online Olympics | The most ―web 2.0‖ event in history MSN Rainbow | Viral support for the Sichuan earthquake victims by adding a rainbow Little Fatty | Success from user-modified Content / China‘s ―Star Wars Kid‖ The public relates strongly to net stars, who can generate direct and indirect revenue while costing a fraction of mainstream celebrities.
  73. 73. Mobile & Internet Innovation Arbitrage 73 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com “Mice Love Rice‖
  74. 74. Mobile & Internet Innovation Arbitrage 74 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com “Mice Love Rice” In October 2004 the song ''Mice Love Rice'' is released on the Internet The author, Yang Chengang, was a 26-year-old music teacher by day and lounge singer by night in central China's Hubei province. The song became an instant hit online and its popularity quickly spread to traditional media Over 100 mln Internet downloads (mostly free). At peak, it sold 6 mln ringback tones (RBT) in one month (sales equivalent to 700,000 CDs). #1 in ringtones, ring songs and ringback tones over mobile phones and Internet and made it to iTunes Top 10 World list in 2005. The rights holder and SP Hurray Freeland generated $21.5 mln in licensing fees (170 mln RMB, mostly coming from RBT). Sources: Hurray, 2006.9; Chongqing Evening News, 2006.10
  75. 75. Mobile & Internet Innovation Arbitrage 75 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Comments from Industry Insiders I don't see it as a threat, but as a complement to our business. Harry Hui, President of Southeast Asia Universal Music The Internet is becoming a very good promotional platform that did not exist before for finding new talent. In 2005, 4 out of the top 10 hit songs in China came from the Internet. According to China Mobile’s Chairman Wang Jianzhou, the digital music market is now larger than the traditional music industry in China.
  76. 76. Mobile & Internet Innovation Arbitrage 76 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Backdorm Boys
  77. 77. Mobile & Internet Innovation Arbitrage 77 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Backdorm Boys Two university students from Guangzhou reach fame through lip-synch Technical requirements: webcam in campus dorm room Among the most watched viral videos in China No direct benefit from video but… Extremely high recognition among netizens Advertising contracts (Motorola), brand ambassadors (Pepsi)… • http://edu.sina.com.cn/y/2006-06-15/163352672.html Their blog is one of the most visited in China Artist contract (Feb 06, Taihe Rye Music) Movie: Shi Quan Jiu Mei (―Almost Perfect‖) (Aug 08) Shi Quan Jiu Mei
  78. 78. Mobile & Internet Innovation Arbitrage 78 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Comments from Industry Insiders Young Chinese want to chose their own stars and marketers want to be part of this environment. Michael Darragh, Digital Influence Strategist Ogilvy PR, Shanghai Web surfers believe the Internet brings them closer to people who are interested in the same things. It echoes the popularity of reality TV.
  79. 79. Mobile & Internet Innovation Arbitrage 79 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Sister Hibiscus
  80. 80. Mobile & Internet Innovation Arbitrage 80 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Furong Jiejie (Sister Hibiscus) Furong Jiejie became a controversial Internet celebrity in 2005. Attention came after she posted comments and pictures of herself striking self-important poses on a famous online forum (Tsinghua University BBS). …Many call her a narcissist, but she prefers the term "self-confidence.― Some quotes from Furong Jiejie. ―I'm pure and noble (this is how my classmates describe me, it isn't my fault)‖ ―My life is now so annoying. All the time I am the focus on the street. Why do the eyes of the men fall hot upon me? I have no place to hide.‖ Furong Jiejie participates in various commercial activities, exhibitions, press conferences, brand endorser, etc.
  81. 81. Mobile & Internet Innovation Arbitrage 81 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com SuperGirls
  82. 82. Mobile & Internet Innovation Arbitrage 82 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com SuperGirls (“Chinese Idol”) Main sponsor: dairy firm Mengniu (founded in 1999) Produced by local TV channel (Hunan Satellite TV) Social phenomenon! 150,000 candidates nationwide 10 short-listed 47 episodes The whole country almost stopped to watch the finale
  83. 83. Mobile & Internet Innovation Arbitrage 83 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com The business of “SuperGirls” The ―SuperGirls effect‖ boosted the sales of the main sponsor an estimated 250~350 mln USD for a total cost of 12.5 mln USD split between sponsorship (1.8 mln USD) and promotion (10.7 mln USD). SMS voting was part of the show‘s DNA 8 mln SMS votes for the finale! Total over 20 mln SMS votes at 0.1 RMB (0.015 USD) • Registration: 1 RMB. • Information: 6 RMB /month + 15 info SMS per month at 1 RMB / SMS. • Total: 21 RMB / month / user! Total SMS revenues over 30 mln RMB (4 mln USD) Ad revenues for TV channel & producer ~40 mln RMB (over 5 mln USD). All finalists became famous brand endorsers and/or singers.
  84. 84. Mobile & Internet Innovation Arbitrage 84 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com “Heart” China initiative on MSN In light of the turmoil surrounding the torch relay overseas, a mass MSN ―Heart China‖ signature campaign broke out online. The campaign was initiated by netizens to show both their support of the Beijing Olympics and support for China. People's Daily: 7 mln MSN users joined the ―Heart China‖ initiative.
  85. 85. Mobile & Internet Innovation Arbitrage 85 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Online Olympics The Beijing Olympic Opening Ceremony on 2008.08.08 was a moment China had been working toward for seven years. Before the ceremony had even begun, netizens were already discussing and exchanging information about the event. Then, during the ceremony, netizens were uploading screenshots and reporting on the ceremony‘s progress on BBS forums. Quote: ―I am so excited about the drummers, the view is so grand that I cannot type.‖ Time: 19:56 PV: 2,601,435 Replies: 2,649 Source: Sina BBS
  86. 86. Mobile & Internet Innovation Arbitrage 86 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Comments from Industry Insiders Sam Flemming CEO, CIC Data Leading Internet Word of Mouth (IWOM) Research and consulting firm in China • The 2008 Beijing Olympics Games were one of the best possible case studies for marketers on how online channels are utilized by netizens to participate around special events. • More than just reading about the Olympics online, netizens made the 2008 Beijing Olympics the most “Web 2.0” in the Games’ history by becoming not only spectators, but also commentators through a variety of channels which serve host to the massively active Chinese Internet Community. Olympic-related page views reached 24.7 billion
  87. 87. Mobile & Internet Innovation Arbitrage 87 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com MSN rainbow signature On May 12, 2008, a massive earthquake hit Wenchuan, Sichuan Province, killing at least an estimated 68,000. Following this, Toyota and MSN jointly launched a ―rainbow‖ signature initiative on MSN. For each ―rainbow‖ signature added to a screen name, MSN and Toyota each donated 0.1 RMB to support the relief efforts Results of the campaign (ended on June 2) 6,216,469 MSN users participated. 1,243,293.80 RMB (182,000 USD) were raised for the earthquake victims.
  88. 88. Mobile & Internet Innovation Arbitrage 88 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Internet and Sichuan earthquake relief Online third-party payment platform has been an important donation channel for internet users, within 10 days, 19.4 mln RMB (2.84 mln USD) from Alipay (Alibaba Group) platform, 21.9 mln (3.2 mln USD) from Tenpay (Tencent). Taobao.com homepage promoting the donation The symbol of online donation launched by QQ, 32,754,656 QQ users participated in the campaign.
  89. 89. Mobile & Internet Innovation Arbitrage 89 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Mourning online in black & white May 19~21, 2008 were declared Mourning Days for the earthquake. Online media mourned by removing commercial ads from the sites and changing the colors to black & white. • QQ.com homepage. • #16 on Alexa.com worldwide • #2 in China • Ad replaced by mourning words.
  90. 90. Mobile & Internet Innovation Arbitrage 90 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com People seeking 2.0 In May 2008, right after the earthquake, Tencent‘s search engine SOSO added a ―human search‖ functionality, called ―xunren‖ to find missing persons in the Sichuan earthquake. Within 10 days, over 100,000 persons had published information and 11,415 survivors had been identified.
  91. 91. Mobile & Internet Innovation Arbitrage 91 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Little Fatty | Success from user-modified content Xiao Pang or ―little fatty‖ has become an unexpected celebrity, as one day someone snapped his photo during a school traffic safety activity. The rest is history. ―Little Fatty's soulful, eye-catching gaze quickly conquered the hearts of net friends, setting off a crazy flood of Photoshopping and making Little Fatty unwittingly into a star known around the world.‖ ―The most common form of new media production in China is “e‟gao”, a combination of the words “evil” and “to make fun of” that now signifies a multimedia expression that pokes fun at an original work‖ | China Daily, 2007
  92. 92. Mobile & Internet Innovation Arbitrage 92 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Xiao Pang | ―Little Fatty‖
  93. 93. Mobile & Internet Innovation Arbitrage 93 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Xiao Pang’s commercial success 2008.08 | Video ad produced by Ku6 (a leading video site in China) and Intel for Centrino product 2007.06 | A marketing campaign launched by Pepsi 2008.03 | Video ad for Google China http://v.ku6.com/show/1SBsmZCd3vzarBo_.html Invited by Apple Institute (online presence of Apple Store inside Xiaonei.com, #1 SNS in China), taught internet users how to use Apple Mac. Xiao Pang is covered by global media such as CNN, BBC, Times, Yahoo! News, etc.
  94. 94. Mobile & Internet Innovation Arbitrage 94 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Xiaopang.cn | Official website
  95. 95. 3. QQ Facts and Figures © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage
  96. 96. 3. QQ Facts and Figures © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage General figures
  97. 97. Mobile & Internet Innovation Arbitrage 97 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com QQ is the main service brand of Tencent, founded in November 1998 and located in Shenzhen (South of China, near Hong Kong). Tencent is the #1 Instant Messaging (IM) service provider in China, and a leading provider for Internet and mobile value-added services. Tencent‘s IM community counts over 377 mln active accounts and is said to be covering 95% of Chinese Internet users and 78.5% of China’s IM market. Tencent‘s is operating 3 main lines of business: The first two represent about 90% of Tencent‘s revenues in 2008. Core services Its IM tools include Tencent QQ, Tencent Messenger and RTX. Though these services are free, they are the core of Tencent‘s business and are the foundation for VAS products. Tencent is reinforcing its portal QQ.com to activate its huge IM user base and introduces all kinds of WVAS and IVAS. QQ uses a penguin as its brand mascot. The brand commands very strong awareness thanks to its early entry and its ‗cute‘ factor. Service Target Internet value-added service Individual users Mobile and telecommunications value-added service Individual users Advertising service Corporate What is QQ?
  98. 98. Mobile & Internet Innovation Arbitrage 98 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Key services and figures Internet Portal (QQ.com) Alexa ranking #16 global, #2 in China, after Baidu.com (2009.04) C2C platform: #2 in terms of GMV after Taobao (Alibaba) Search engine (Soso) Alexa ranking #75 global, #3 search engine in China Game Portal: 4.7 mln PCU, 117.4 mln USD in 2008 Music Portal: 5 mln daily unique visitors SNS nickname- based (Qzone): 200 mln subs, including 150 mln active users SNS w/ real ID (Xiaoyou) 20 mln subscribers (launched in 2009.01) IM (QQ) •#1 in China •892 mln reg. accounts •377 mln active accounts •49.7 mln PCU
  99. 99. Mobile & Internet Innovation Arbitrage 99 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com 1 paying account for 10 active = 1 billion USD 14.7 mln paying mobile users 31.4 mln paying web users 892 mln registered IM accounts (2008). 298 mln Internet users in China. Avg. 3 QQ accounts per Internet user. 377 mln are active accounts. Revenue About 8% of QQ‘s active accounts bring revenue
  100. 100. Mobile & Internet Innovation Arbitrage 100 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com 95.0% 32.9% 24.6% 16.6% 7.7% 4.9% 2.7% 1.4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Tencent QQ AliWangwang MSN Fetion Skype Sina UC NetEase Popo Yahoo! IM market in China in 2008 • QQ reaches 95% of Chinese Internet users. • AliWangwang: IM of Taobao, vertical usage for e-commerce. • MSN: Distant competitor to QQ, mostly used by urban white collars. • Fetion: IM of China Mobile, growing fast thanks to free IM-to-SMS. • Skype: JV with Tom Online, limited impact due to local regulations and competition from a variety of voice chat services including Tencent's. Quite popular with users of Alibaba.com doing B2B e- commerce. Source: iUserTracker, April 2009 +8* | www.plus8star.com
  101. 101. Mobile & Internet Innovation Arbitrage 101 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Tencent’s market position in key service categories 9 18 24.5 36.1 49.7 135 202 233 300 377370 493 580 742 892 0 200 400 600 800 1000 2004 2005 2006 2007 2008 IM PCU Active account Registered account Service Date of entry Market position Competitors Portal 2003.12 #1 Sina, Sohu, NetEase Paipai (C2C) 2005.09 # 2 Taobao, Eachnet Mobile content 2000.08 #1 Internet portals Casual Game 2003.09 #1 Shanda, NetEase, The9 SNS 2005.03 #1 51.com, Xiaonei, Kaixin Search 2006.03 #3 Baidu, Google Online payment 2005.09 #2 Alipay IM: Holding 377 mln active accounts (2008), QQ has the second largest user base in the ICT field in China, second only to China Mobile with 457 mln mobile subscribers QQ is a formidable competitor in many key Internet fields mln Source: Tencent Source: Tencent, +8*
  102. 102. Mobile & Internet Innovation Arbitrage 102 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Competitors to Tencent by category Tencent has managed to position itself in all key B2C services in China‘s digital space. Service Name Rank Main Competitors IM QQ #1 in users Market share: 78.5% Reach: 95% of Chinese Internet users, more than the sum of all rivals Portal QQ.com #1 in traffic Sina, Sohu, NetEase Paipai (C2C) Paipai.com # 2 in GMV Taobao, Eachnet Mobile content m.qq.com #1 in revenue Internet portals Mobile portal Wap.qq.com #1 in traffic Tianxia, 3G.cn Casual Game QQ Game #1 in PCU Shanda, NetEase, The9 SNS Qzone (nickname) Xiaoyou (real ID) #1 in users Top 3 in users 51.com, Xiaonei, Baidu Search Soso.com #3 in traffic Baidu, Google Online payment Tenpay.com #2 in transaction 19% market share, after Alipay (51%)
  103. 103. Mobile & Internet Innovation Arbitrage 103 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com All Chinese leading game companies are very profitable. The net profit of most of them is higher than 40% In contrast, EA (Electronic Arts), one of the world‘s leading global video game publishers, was losing money in 2008. Comparison of leading game companies Shanda NetEase Game Tencent Game The9 Giant Perfect World Chang you Net Dragon King Soft Revenue mln USD 522.2 366.2 341.7 250.4 233.3 210.3 202 87.2 81 MMORPG Share 85% Mostly N/A 100% 100% 100% 100% 100% 100% Casual games share 12.4% Little N/A 0% 0% 0% 0% 0% 0% Net Profit 35% >52% >39% 20% 70% 45% 54% 40% >37% Business models • Free to play • Virtual goods • Mostly time- based • Free to play at the beginning • Pay to play • Virtual goods • Free to play • Virtual goods • Free to play • Virtual goods • Free to play • Virtual goods • Licensing • Free to play • Virtual goods • Free to play • Virtual goods • Licensing • Free to play • Virtual goods Sources: Company Reports, +8* +8* | www.plus8star.com
  104. 104. Mobile & Internet Innovation Arbitrage 104 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Revenue and profitability of game companies Giant recorded 70% in net profit margin, with 90% of revenue from a single game. Tencent game is #3 in terms of revenue, catching up fast (+90% y.o.y.). 0% 10% 20% 30% 40% 50% 60% 70% 80% 0 50 100 150 200 250 Note: The net margin/profit value used for Tencent game and NetEase is the one of the whole company. +8* | www.plus8star.com Comparison of leading game companies Net profit (mln USD) OperationProfitMargin
  105. 105. Mobile & Internet Innovation Arbitrage 105 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Comparison between local and global SNS QQ not only leads China‘s SNS market, but also shows much better performance than the Western leaders despite the challenge of operating in a developing country. Service name QQ Qzone Xiaonei Kaixin001 51.com Facebook MySpace Launch Date 1999 2005.03 2005.12 2008.03 2005.08 2004.02 2003.09 Users (mln) 892 200 40 May 09 35 Jun 09 140 200 200 Active users (mln) 377 150 22 Daily 10 Daily 40 150 125 Revenue (mln USD) 1,047 N/A N/A Little N/A 350 750 Profit (mln USD) 412 N/A Not profitable Not profitable Not profitable Expected in 2010 N/A Business models • IVAS (game, virtual goods, premium membership) • WVAS • Ad • IVAS (game, virtual goods, premium membership) • WVAS • Ad • Ad • Virtual goods • Rev. sharing with developers with its own virtual currency and payment system. Ad • Ads • Virtual goods • Premium members Over 85% Ad 95% Ad Sources: Company Reports, +8*
  106. 106. Mobile & Internet Innovation Arbitrage 106 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Why is QQ so successful in China? Limited competition Initial competition gave up on IM as they could not get revenue. When QQ started to grow strongly, the three biggest Chinese Internet portals (Sina, Sohu and NetEase) didn‘t pay attention to IM and didn‘t touch this market. Western giants (Microsoft, Yahoo) were more focused on a global strategy. High conversion cost and network effects of IM service The connections on an IM service generally makes switching a painful exercise. Network effect based on the huge user base of 377 mln makes it easy to promote any service. Learning from successful foreign services such as ICQ (US), Cyworld (South Korea) and Korean online game companies Matching the needs of Chinese users: Entertainment! In China, the #1 priority for Internet users is entertainment while in the US, it‘s information. That is why Google leads in the US and Tencent rules China. Richard Ji Analyst, Morgan Stanley
  107. 107. 3. QQ Facts and Figures © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage Key milestones and results
  108. 108. Mobile & Internet Innovation Arbitrage 108 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com QQ’s history Largely inspired by ICQ, Tencent launched OICQ in China in 1999. OICQ means: ―Oh, I seek you!‖ Tencent launched many other services such as Paipai: online shopping Soso: search Xiaoyou: SNS Nov. 1998 Feb. 1999 Aug. 2000 Jun. 2001 Sep. 2003 Dec. 2003 Jun. 2004 Mar. 2005 Jun. 2005 Sep. 2005 Company founded in Shenzhen OICQ Mobile QQ Internet VAS QQ Game/ RTX QQ.Com IPO at HK Stock Exchange Q Zone QQ Pet Paipai.com Oh, I seek you soso.com Xiaoyou.qq Mar. 2006 Jan. 2009
  109. 109. Mobile & Internet Innovation Arbitrage 109 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Became the most profitable Internet company using online games & virtual items business model Strong growth thanks to mobile value-added services QQ bloomed with China’s Internet Industry Survived thanks to online ads within QQ IM Start-up Rapid development Dominant position 1998 2000 2004 2006 Internet portal WVAS E-commerce Online game Online search New media InternetTransitionQQdevelopmentstage 2007 Web 2.0
  110. 110. Mobile & Internet Innovation Arbitrage 110 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Business results 2001 2002 2003 2004 2005 2006 2007 2008 Others 0.3 0.5 0.6 1.2 1.3 1.0 0.9 2.1 Online Ad 1.0 2.4 4.2 7.1 14.5 34.1 67.5 120.9 WVAS 4.9 25.5 59.9 82.2 66.3 89.7 110.6 204.7 IVAS 0.1 5.1 29.5 56.3 100.9 234.0 344.1 719.1 0 200 400 600 800 1000 1200 Total 6.3 33.7 94 147 183 359 523.1 1047 2001 2002 2003 2004 2005 2006 2007 2008 IVAS % 2.0% 15.2% 31.3% 38.4% 55.2% 65.2% 65.8% 68.7% WVAS % 77.6% 75.7% 63.5% 56.1% 36.3% 25.0% 21.1% 19.6% Online Ad % 16.3% 7.2% 4.5% 4.8% 7.9% 9.5% 12.9% 11.5% Others % 4.1% 1.5% 0.7% 0.8% 0.7% 0.3% 0.2% 0.2% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% Total revenues were 1,047 mln USD, an increase of 87.2% over 2007. IVAS grew steadily as far as 68.7% in 2006 but due to new regulations for mobile content in China, the share of WVAS dropped significantly over the years. Online advertising remains a minor share of revenue at 11.5% in 2008. Comparison between the 3 main services HKSE code: 700 Total number of shares: 1,797 million Main shareholders: MIH (35.07%) Ma Huateng, CEO (11.71%) Zhang Zhidong (4.28%) Market Cap: 26 billion USD (August 2009) Stock Exchange Information Revenue Breakdown (mln USD) Revenue Breakdown (%) Source: Company Annual Reports 1,047 mln USD in revenue 412 mln USD in net profit
  111. 111. Mobile & Internet Innovation Arbitrage 111 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Business models Content-based SMSOnline identities QQ Show, Qzone, QQ Pet.. QQ.com 2.5 G MMS, WAP… QQ Games Casual, MMORPG Search Fee-based IM Mobile QQ Fee-based IM Premium QQ, QQ Xing IM Client-end WVAS (Wireless value-added service) IVAS (Internet value-added service) Advertising Mobile Voice VAS IVR+CRBT Others Dating, e-card, e-magazine… Personalization, value-added Fee-based revenue Interactivity Traffic-based revenue Free services to attract user to come and to keep them stay in the community (QQ IM, QQ.com, WAP portal, QQ Group…) SNS
  112. 112. Mobile & Internet Innovation Arbitrage 112 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Users paying for personalization and games 0.0 20.0 40.0 60.0 80.0 100.0 120.0 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 110.3 mln USD in 2007 341.7 mln USD in 2008 QQ Game revenue mln USD 2007 2008 Growth Rate IVAS 344.1 719.1 95.5% Games 110.3 341.7 189.8% MVAS 110.6 205 73.2% Online Ad 67.5 121 67.5% Total 523.1 1047 87.2% IVAS represent 68.7% of total revenue ARPPU = Average Revenue Per Paying User / month = 1.9 USD. Games are a key component 50% of IVAS revenue, and one third of total revenue of QQ in 2008. 190% YoY growth, much faster than other revenue sources. #3 game operator after Shanda and NetEase in terms of gaming revenue. Operates 65 casual games titles. Top games: Dungeon and Fighter (DNF, PCU 1.7 mln, 2009.03), QQ Dancer, Cross Fire (PCU 1 mln, 2009.04), QQ Speed. Revenue from QQ Registered Membership grew thanks to Increased user loyalty and stickiness based on the differentiated VAS (music, digital goods, online storage, etc.). Convergence across platforms (IM, SNS, game, e-commerce, email, etc.).. Source: Tencent, +8* Note: Calculation of growth rate based on the RMB figures.
  113. 113. Mobile & Internet Innovation Arbitrage 113 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Growth of games and presence in Internet cafes QQ showed high growth in China‘s online game market share in 2008. QQ enjoys a dominant position in Internet cafés: Four QQ games are among Top 10 applications within the cafes served by Goyoo Networks (10,000 cafes, ~10% of China‘s total). # Company 2008 2007 YoY 1 Shanda 17% 19% -1.7% 2 NetEase 13% 15% -1.7% 3 Tencent 11% 6% +5.1% 4 The9 9% 10% -1.6% 5 Giant 8% 12% -4.1% 6 Perfect World 7% 5% +1.7% 7 Sohu/Changyou 7% 2% +4.4% 8 NetDragon 5% 5% n.a. 9 Kingsoft 5% 3% +2% 10 CDC 1% 2% -1% Total 80% 79% Source: Morgan Stanley Research # Application Genre Publisher 1 Dungeon & Fighter RPG Tencent 2 QQ2008 IM Tencent 3 Cross Fire FPS Tencent 4 X5 Dance Tencent 5 QQ2009 IM Tencent 6 Audition Dance Battle Dance 9You 7 Speed Car Racing Tencent 8 Counter Strike Online FPS Tiancity 9 ASKTAO RPG GYYX 10 XYQ | RPG RPG NetEase Source: Goyoo Networks, 2009 Online game market share Top 10 applications in Internet cafe
  114. 114. Mobile & Internet Innovation Arbitrage 114 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Mobile services recovering The mobile services market shrank during the past two years Operators tightened control over the mobile VAS value chain and launched their own services (music platform, IM service and mobile blog services for China Mobile). Pushed by the Government to clean up the mobile sector, operators continue to punish SPs that do not comply with regulations (overcharging users, spamming, etc.). Emerging opportunities Mobile market competition improved thanks to the new round of industry reorganization pushed by the government in 2008. • The market has now 3 mobile carriers instead of 2 previously. • Prices of voice and data are going down. 3G licenses were awarded in January 2009 and trigger important investments. As the leading online community, Tencent is already the #1 mobile VAS player in terms of traffic. Mobile VAS sector is recovering Tencent is leading the recovery Source: Tencent, Morgan Stanley Research
  115. 115. Mobile & Internet Innovation Arbitrage 115 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Advertising still limited but strong potential Advertising revenue in 2008 was 120.9 mln USD (+67.5% vs. 2007), growing faster than the average of industry (60.4%). Driven by the media power across multiple platforms: IM (#1), portal (#1), SNS (#1), casual game portal (#1), WAP portal (#1), avatar (#1). Reducing the gap with Sina and Sohu. Negative growth in 4Q08 due to the economic slowdown. High potential for long term. A user‘s QQ account provides access to all services and usage can be tracked across services. Advertising campaigns can be run across all properties (Internet/mobile, IM/SNS/avatar/game/portal). While we continue to see significant long-term potential in the Internet market, we are conscious of the potential negative impact of a slowing economy and intensifying competition in the market. Our online advertising business will experience particular pressure as advertisers reduce or delay their advertising budget, while our user-paid small ticket based entertainment and membership services will be relatively more resilient. Huateng (Pony) MA CEO, Tencent 270% 176% 146% 352% 250% 213% 0% 50% 100% 150% 200% 250% 300% 350% 400% 2006 2007 2008 Sohu/QQ Sina/QQ Source: Tencent, +8* Sohu and Sina‘s online ad rev. as % of Tencent's
  116. 116. 3. QQ Facts and Figures © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage Legal stories
  117. 117. Mobile & Internet Innovation Arbitrage 117 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Domain name Originally OICQ Tencent launched its IM service in February 1999 under the name of QICQ, inspired by ICQ (now property of AOL). Loss of OICQ name In August 1999, Tencent was sued by AOL because of the two domain names registered by Tencent, oicq.com, and oicq.net. According to AOL, the word ‗OICQ‘ includes ‗ICQ‘. That infringes the intellectual property of AOL. Finally, Tencent had to give up in March 2000 its domain names and the brand it had operated successfully for one year. From OICQ to QQ Since then, Tencent changed its brand from OICQ to Tencent QQ. In March 2002, they bought the domain name of QQ.com from an American engineer. I wasOICQ!
  118. 118. Mobile & Internet Innovation Arbitrage 118 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com QQ and Chery In November 2005, Tencent sued the Chinese domestic automobile manufacturer Chery for the use of the "QQ" brand. Chery released a new car called Chery QQ in July 2003. The model was very successful and reached #5 in sales in China. Chery might pay to Tencent for the right to use the brand "QQ" for its automobiles. Still in process One year later, another fight took place between Tencent and Chery. The latest song of S.Wing (a Chinese band) ―QQ Love‖ got extremely popular. Tencent and Chery fought to buy the rights for this song. Eventually, neither bought the song, but this case generated a lot of (free) media coverage.
  119. 119. Mobile & Internet Innovation Arbitrage 119 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com QQ sues PICA In October 2006, Tencent sued Beijing-based mobile IM service provider PICA for software copyright infringement. According to Tencent, PICA allows its users to log on to QQ's servers to use the mobile QQ service through PICA's software without paying service fees to mobile QQ. Interconnection with QQ Log in QQ QQ buddy list 1. PICA paid 2 mln RMB (290,000 USD) as compensation. 2. No more interconnection with QQ. Result
  120. 120. Mobile & Internet Innovation Arbitrage 120 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Embezzled QQ accounts QQ is becoming an important target of hackers and criminals. Beyond the curiosity of the young IT geeks and hackers, professional criminal groups are more threatening for virtual money operators. At the end of 2006, China a group stole millions of QQ numbers (up to 300,000 in a single day) and earned ~1 mln RMB (0.15 mln USD) by reselling virtual currencies and online game equipment belonging to these QQ accounts on Taobao.com (China‘s eBay). The value of a QQ account may include QQ number, Q coin, and virtual items. QQ number: 61030 Meaning of number: Date of birth of Diego Maradona Bid from 1 RMB Price sold: 6,416 RMB (over 700 USD)
  121. 121. Mobile & Internet Innovation Arbitrage 121 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Stealing dreams: theft of virtual currency In May 2005, Tencent reported to the police in Shenzhen that they received more and more complaints from users for the stealing of their QQ accounts including QQ number and QB. Thieves created 3 studios in different locations, hacked commercial and government websites, and put Trojans and backdoors to steal QQ accounts. Millions of QQ accounts were stolen, and generated about 1 mln RMB (150,000 USD) for the thieves. 11 persons were arrested and sentenced to jail (from 6 months to 1 year) for their violation of freedom of communication, Studio 1 Studio 2 Studio 3 Websites Put Trojans / Backdoors, and steal QQ accounts Sell QB on Taobao, #1 e- commerce site in China In Nov 2005, a VOIP service provider virtualized some fixed line numbers and pretended to recharge QQ accounts by dialing the fixed line IVR-based QB (Tencent‘s virtual currency) recharging system via their virtualized fixed numbers. During 4 months, they recharged over 10,000 QQ accounts in this way which represented over 2 mln RMB (300,000 USD) fixed-line communication fee and 0.7 mln RMB (100,000 mln USD) profit by selling the QB via Taobao.com. Two leaders were arrested, and sent to jail for 10 years and 13 years due to stealing. Virtual fixed-line Dail 96160902, recharge QQ account 1st case of arrest for QQ account theft 1st case of a sentence for QB robbery Sell QB on Taobao, #1 e- commerce site in China
  122. 122. Mobile & Internet Innovation Arbitrage 122 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com Virtual currency extortion In October 2008, four people beat up an Internet user playing game in Internet café forced him to turn over 100 QB worth 100 RMB (US$14.7). The attackers also extorted virtual equipment for online games and 200 RMB in cash from the victim. The men were each fined and the main attacker sentenced to three years in prison due to extortion. No law in China clearly grants protection to virtual property. The court ruled that it should be covered by criminal law in this case since the victim had spent time and money to acquire it. 1st case of extortion for virtual currency
  123. 123. © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage From Instant Messaging to instant noodles 4. Key services
  124. 124. © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage QQ service map 4. Key services
  125. 125. Mobile & Internet Innovation Arbitrage 125 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com QQ service map Internet services QQ Pet Q Zone QQ Online Storage QQ Search QQ Email Internet Portal QQ Show QQ AlbumQQ Games QQ Membership QQ MusicQQ Live QQ Love QQ Dating Wireless services Super QQ QQ Notice QQ Mobile WAP Mobile E-commerce services Tenpay C2C service In addition to mass market services, QQ activities cover online advertising QQIM
  126. 126. © Copyrights 2009. All rights reserved. www.plus8star.comMobile & Internet Innovation Arbitrage QB: Tencent’s Virtual currency 4. Key services
  127. 127. Mobile & Internet Innovation Arbitrage 127 | 284 © Copyrights 2009. All rights reserved. www.plus8star.com What is QB? QQ‘s value-added services belong to two groups: Internet VAS and mobile/telecom VAS. In 2008, Internet VAS generated 719 million USD, 68.7% of Tencent‘s revenue. The whole amount was paid using QB, Tencent‘s virtual money. With QB, QQ users can buy virtual items to personalize their avatar or homepage, pay for online anti-virus software, download films, play online games, etc. Though not authorized by Tencent, QB became so popular that it can be used to pay the services or products offered by other providers, for example game points of World Of Warcraft. The official rate between QB and RMB defined by Tencent is 1:1. In China, all major Internet companies have their own virtual currency system: Tencent, Baidu, Sina, NetEase, Shanda, etc. 1 QB = 1 RMB = 0.146 USD 7 QB = 7 RMB = 1 USD

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