About this Blog

The purpose of this blog is for my personal use. It serves as my personal diary as I investigate Chinese internet/gaming companies for investment purpose. If you have any comments or disagreement, please give me feedbacks.

Monday, August 26, 2013

China's Mobile Internet Messaging (IM) War, part 7, China's 360Buy is pushing YiChat

Netease's YiChat is all the rage right now in China. There are multiple significant developments virtually every days.

My last post on this subject can be found here:

The development of YiChat and the cooperation between China Telecom and Netease are capturing a lot of attention in China right now.

Over the weekend, China's largest B2C company (or China's Amazon), 360Buy, requires all its employees to use YiChat in all its official operation. See the following:

The company has 30k plus employees, 40k plus partnering companies, and 100 million plus customers. This development will definitely deliver many users for YiChat.

But more importantly, there is a sense of gathering momentum.

In addition, since everybody is talking about this, it is the best form of advertisement. It spares both Netease and China Telecom of advertising spending.

A week ago, when this news first hit, I was more excited about how Netease can take advantage of China Telecom's customer base. But I didn't think much about the chance of YiChat actually over-thrown Tencent's WeChat.

A week ago, I thought YiChat will have 0% chance of defeating WeChat. But I thought it might have 20% chance of being a 2nd place player (taking maybe 20% of the market).

But now, there seem to be an urge in China for YiChat to take it to WeChat. China's David vs Goliath story. I am adjusting my expectation. I think it might have 20% of actually defeating WeChat. But the more realistic goal for YiChat is to be a significant 2nd place player. I give that 60% chance of success.

To be a significant 2nd place player is nothing to be sneered at. Just look at QIHU. By being a 2nd place player in Search in China has cause its stock to quadruple in the last 6 months.


Sunday, August 25, 2013

China's Mobile Internet Messaging (IM) War, part 6, Netease's YiChat Update

China's Mobile IM is white hot right now. But the development of cooperation between Netease and China Telecomm represents something even bigger. This development had captivated the attention of China (even for those who have no intention of ever using mobile IM).

Part 5 of this series can be found here:

YiChat is for real!

Both China Telecom and Netease are devoting true and significant resources on YiChat. It is clear that, from the amount of new customers, the freebies from China Telecom is not going to be just from spare capacity. China Telecom is taking up real resources to give YiChat users free Short Messaging Services, free Mobile Bandwidth, etc.

For Netease, its technical excellence is shining through.

After the first day of YiChat, there are signicant complaints from Chinese users. The two biggest complaints are people can't register and SMS messages take a long time to deliver.

It is clear it is largely a capacity problem. Netease and China Telecom didn't anticipate the amount of user adoption.

The biggest YiChat tester is none other than CEO of Netease itself:

From the following images, it is clear the CEO of Netease is testing the YiChat:

Above is Netease CEO's YiChat account. Where he is doing his accounting of his YiChat usage experience. "Too many people, we were not prepared...". "Machine crashed..." A big Yellow "SORRY" sign with an emoticon show he kneel down on all four begging for forgiveness. "Emergency Capacity expansion."

One can follow his account. It is easy to see he is testing YiChat's service all day and all night.

Netease's CEO is a serious person. He is an engineer by heart and can be obnoxious toward people in finance or budgeting. For him to use that emoticon to apologize to YiChat users. Even though it is through an emoticon, it is clear he felt a little humiliated and he is putting his personal prestige in this product.

Netease's vaulted technical team are doing double or triple shift. Within 3 days of launching the product, 3 updates had been generated to eliminate all the software bugs that came up. See the following images:

As of Friday (4 days after the launch), YiChat had already gone from v1.0 to v1.0.1 to v1.0.2 to 1.0.3. With each version update, significant bugs had been squashed.

At this point, it is clear that YiChat is real. Both China Telecom and Netease are sparing no resource for it.

China Telecom is devoting whatever resource to give Chinese users free stuff while Netease's technical team is delivered its end of bargain.

Netease's CEO can be hard to get alone with (he used to like to snicker at Wall Street analysts). But he is an engineer in nature and he build his company devoted to be excellent in engineering. I always thought Netease is number 1 by far in excellence in engineering in China's internet sector. So far, Netease is delivering.

Finally, this story had create something more than just YiChat alone. This thing had create a life of its own. The story had becomes whether a new model had been created. A model that one day may breaks down China's state dominated market economic system.

This story had just becoming a lot more interesting than just China's Mobile IM market.


Saturday, August 24, 2013

China's Mobile Internet Messaging (IM) War, part 5, Sina's WeMeet

China Mobile IM battle field is white hot right now. There are shattering news every few days now. My last update is on Netease's YiChat, see the following:

Today, Sina is announcing it is launching its own version of Mobile IM application, WeMeet. See the following:

Quick observations from this announcement:
1. WeMeet is certainly a catchy name. Except it is catchy for English speakers. WeMeet actually sounds like "Micro-Rice" in Chinese. Sina needs to learn some basic marketing. Needs to know your audience. WeMeet is developed for Chinese (not English speaking customers). I am certain Sina can find another more catchy name for their product.

2. It is integrated with Weibo. I think this is the calling card for this application. If it has any chance of being popular, this is it.

3. Feature wise, it is not impressive at all. It didn't have any features of importance that current dominant application (Tencent's WeChat) doesn't have. Compared to Netease's YiChat that has quite a few significant features that are clearly superior to Tencent's WeChat.

4. It also didn't get a tie up with a telecom service provider unlike that of Netease's YiChat tie-up with China Telecom. Customers will not get any freebies from any of China's big three telecom service providers.

5. The application itself was not developed by Sina itself. The company that develops this product has some investment from Sina. It is not clear at this point whether this company is majority owned by Sina. For almost all cases, it would be a bad arrangement. Integration and inter-office politics usually doom those type of arrangement.

But for this case, I think it is good. Sina is terrible in developing technologies. Its own inter-departmental politics are terrible.

This new company will encounter significant resistance from Sina's many departments. But it is still a better arrangement than having Sina does it itself.

For me, I would rather have a company that I never heard of to develops a new technology product than having Sina itself develops it.

6. The timing is terrible. At this point, everybody is talking about Tencent's and China Telecoms' YiChat. It represents a truly significant event not just in China internet industry, but it is significant in China's overall economic development. It is a first time that a Chinese state own monopoly (China Telecom) cooperates with a private industry (Netease) and giving all execution power to that private company.

For Sina's announcement, it only has average Chinese customers' attention for a few hours. Vast majority of Chinese is much more interested in how the Netease/China Telcomm venture works out. Even those who don't care about Mobile IM products, they pay attention to Netease/China Telecomm venture because it represent a monopoly deliberately giving up power, a truly rare event.

I guess for Sina to pick this horrible timing, they are probably stuck between a rock and hard place. For Sina, now is the least worst.

In summary, under normal circumstances, Sina's WeMeet would represent the most formidable competitor Tencent's WeChat would face.

But this is not normal circumstance. Next, I would give another quick update on Netease's YiChat development.

Tuesday, August 20, 2013

New Killer application from Netease and China Telecom against Tencent's WeChat, part 4 A Quick Update

One can find my previous article on this subject here:

It is the first day after the official announcement. There are good news and bad news... and surprising development also. So this is a quick update.

First, I am a little surprised by how aggressive Netease and China Telecom are promoting YiChat. They are blanketing China's internet with ads right now. The following are screenshots of China's four internet portals (the red brush indicated YiChat ad).

Sina's Front Page:
Sina Front Page
Netease's Front Page:

Sohu's Front Page:

Tencent's Front Page (not surprisingly, no YiChat ads here):

YiChat's ads are completely covering Sina, Netease and Sohu portals. As expected, there is no YiChat ads on Tencent.

Tencent's WeChat may be monopolized China's mobile instant messaging space. But they content. It is companies like China Telecom that control the pipeline that these content goes. Companies like China Telecom are true monopolistic and behaving like one. They definitely have no problem in conducting monopolistic tactic that are completely illegal in most other countries.

They can always cut off the pipe that support Tencent's WeChat. Surprise, surprise, the same day YiChat is announced to the public, Tencent's WeChat suffers a major breakdown in service.

After the first 24 hours, there are quite a few technical issues that crop up facing YiChat. But a lot of it are because of the significant traffic YiChat is facing in its first day.

Most of these issues had been fixed already. But some non-China Telecom users (it is not if it is China Unicom or China Mobile users) still have problem in SMS service and telephone messaging services. But most of them are promised to be fixed in 1 week.

So far, within the first 24 hours, YiChat already accomplished the following:
700000 new registered users.
20000 new circles of friends.
300000 pictures uploaded.
1 million SMS delivered.
400000 phone messages delivered.

I am a little surprised at how fast they are promoting YiChat. Usually, for a nationwide service that provides so many functions to so many people, there are always great amount of technical issues.

I am a little surprised at how little those technical issues came up and how fast the early adoption there is. It is clear they already had significant amount of beta testing done. Yet no information on those beta testing were ever leaked.

So far, I will say they are doing great. I will have to say Netease is great at execution.


New Killer application from Netease and China Telecom against Tencent's WeChat, part 3

The news are coming hot and heavy. I will provide the latest update.

But first, one can find the previous part of this ongoing story here:

CEOs of Netease and China Telecom had a press conference. The exact deal is out now. The followings are some detailed story of this new company.

I will summarize all the important details here. Note that my own comments will be enclosed in square brackets [ - ].

1. China Telecom and Netease had created a new company. YiChat is its first product.

2. Additional products will be developed by this new company.

3. China Telecom will have 73% share of the new company and Netease will have 27% share of the new company.

4. The cooperation started in August 2012.

5. Netease's CEO was the one who initiated the cooperation.

6. The new company has capital of 200 million RMB.
                [ 200M RMB = 32.7 Million USD. This new company is tiny. Netease's share is 27% * 32.7M = $8.82M. Netease has 130M outstanding shares. Thus, in the third quarter 2013, the company's earning will be negatively affected by 8.82M/130M = -$0.07. That is it, a 7 cents write down.

                Netease really got a sweet heart deal. This is an earth shattering news in China right now. All Netease lose is 7 cents per ADS write down for one quarter!]

7. YiChat already offers more than that of Tencent's WiChat:
                7a. YiChat's voice quality is 3 times higher than that of WeChat.
                7b. WeChat free users can only send low quality pictures. Only the paid users for WeChat can send high quality pictures. YiChat users can send free high quality pictures.
                7c. WeChat group is limited to 40 users. YiChat group is limited to 100 users.
                7d. WeChat charges users for emoticons. YiChat offers them for free.
                7e. WeChat is only useful for mobile phone. YiChat expand it to mobile phone, PC, and even fix line phones.
                [ This is a killer application that WeChat can't compete.]
                7f. WeChat is a closed platform. YiChat is an open platform.
                7g.  Other companies can participate in this new company.
                7h. YiChat offers users free SMS (Short Messaging Service).
                [This is the single most important feature that WeChat can't compete.]

8. YiChat will not just be free. Users Mobile internet service fee (the part that uses YiChat) will be free also. There are conflicting report that this only apply for China Telecom users or for all users (including China Unicom and China Mobile).
                [Again, this is killer feature.]

9. In addition, during the promotion period, China Telecom will offer special deal all free Mobile internet service (not just the part used by YiChat).
                9a. Any YiChat registered users get 300Mbyte of free mobile Internet service free.
                9b. After the first month, All YiChat users get 60Mbyte of mobile internet service free as long as they remain active on YiChat. (Not quite sure this is for the rest of the year).
                [Again, promotion like this is killer feature that Tencent can't compete. Tencent can't afford to pay service providers to let users free stuff. But for the service providers like China Telecom, those are largely coming from spare capacity.]

10. YiChat account will be completely connect to all Netease products (Email users, News Readers, Netease games, etc.)
                [ Boy, Netease sure get lucky. Now, all Netease's products get access to China Telecom's users as well as large part of China Unicom and China Mobile's users.]

11. Chairman of the new company coming from China Telecom. CEO of the new company comes from Netease. Vice CEO comes from China Telecom. Head of Accounting department comes from China Telecom. Head of Marketing department, Head of Product Development department, Head of Personnel department come from Netease.
                [Basically, Netease is effectively running the new company.]

So, let me summarize. This new company is only a $32.7 Million dollar company. It is tasked to directly compete with the number 1 single most important core product of Tencent, a 700 Billion dollar company. To do that, China Telecom is going to foot the real money. The cost to provide all users free mobile internet services.

China Telecom behaves like a monopoly. It uses bullying tactic. Tencent can't afford to provide China's hundreds of millions of users free mobile internet as well as free SMS (Short Messaging Service). But China Telecom can. Because to a service provider, these are just spare capacity.

Especially important is the free SMS service. Even with some free Mobile internet promotional deal, it will not be enough to truly affect Tencent's WeChat. But SMS is different.

Just like here in the United States, the same people can have multiple circles, he could have his twitter circle, facebook circle, etc. Similarly, in China, the same people is going to have his WeChat circle, Weibo circle, and SMS circle. But now if YiChat took over the SMS circle but also provides WeChat function. Since it is the same group of people, there is a real danger that WeChat could lose those users to YiChat because the natural barrier of entry of a social media no longer exists.

Netease has to be the biggest winner by far. It is amazing what a sweet heart deal they got. They only have to put up 27% of a tiny $32.7 Million dollars. That equate to 7 cents (per ADS) write down of earning for one quarter only.

For that, they get effect control of this new company. More importantly, they get to develop the product and market it so that all Netease products can get access to China Telecom (and most likely big part of China Unicom and China Mobiles) users.

To the designers of Netease games and Netease Mobile applications, this is their dream come true.

For telecom service providers such as China Telecom, China Unicom and China Mobile, they are so frustrated with Tencent. Those monopolies are so furious that another company dare to get into their turf, they are willing to open their back door wide open to Netease, another super competitor.

Even with all that, even though this new company could take significant market share, Tencent still have better odd at retaining number 1 in this area.

But the service providers now have to open their back door to Netease. China is starting to phase out monopolies. I wonder if they just invite a wolf into their house.


Monday, August 19, 2013

New Killer application from Netease and China Telecom against Tencent's WeChat, part 2

Two months ago, I posted the following article regarding this subject:

It was a highly believable rumor two months ago. Now it is for real. The agreement was officially agreed. See the following link:

Netease and China Telecom (NYSE: CHA) jointly form a new subsidiary company and developed a new product called 易信, YiXin. It is a direct competitor against Tencent's WeChat product.

In 2011, the number 1 internet product in China is Sina's Weibo (China's Twitter). But in 2012 and 2013, it was eclipsed by Tencent's WeChat. It is similar to WhatsApp in the West. Due to the uniqueness of China internet space, a facebook like product couldn't take off like that in the west. Instead, its function was fulfilled by Tencent's WeChat.

Just like Facebook in the west, Tencent's WeChat completely dominate China's social media space (with the exception of Sina's Weibo that fills Twitter's role in China).

Nobody can compete with it. Major internet companies and major telecom companies tried. But none of them can even get close. But now this new joint venture represent a real threat.

Now, a little background on China Telecom. It is a state own company. Like all state own company, it behaves like a monopoly because it is a monopoly. It monopolized all home phone and internet services for all the south provinces (by 2008, it had >200 million users for home phones and home internet service). It has the largest Wi-Fi network in China. It is also the third largest mobile phone provider in China.

I don't have the latest user numbers. China's internet had been growing by leaps and bound, I am sure China Telecom has a lot more than 200 million users by now. In the Southern province, they are in all practical purpose, the only game in town as far as internet provider and home phone service.

From the announcement, China Telecom will be the majority owner. But Netease will operate the company. The chairman and vice President will come from Telecom. The CEO and all the departments heads (engineering, operation, marketing, etc.) will come from Netease.

This new product will have several killer benefit that Tencent's WeChat doesn't have. It will allow free short messaging service. It will have free voice messaging service to home phones.

In addition, any new users will get 300 Mbyte free mobile internet service for the first month. After that, all active users will get 60 Mbyte of free traffic per month afterward. In addition, all users will get free or reduced priced instant messaging service.

All those benefits not just apply to China Telecom's users but also China Mobile and China Unicoms' users.

The following is the speech of Netease's CEO during the product announcement:

I am certain there will be more details to follow.

Do I think this product will completely replace Tencent's WeChat? No. But I do think it will take significant market share from Tencent. Why? I will give the reason below:

Netease is a 8 Billion dollar company. Tencent is a 700 Billion dollar company. Why? There is only one product separate the two. That product is Tencent's instant messaging service, QQ. Back in 2003, Tencent's free instant massager QQ is starting to becoming the dominate IM service in China. But Netease came out with a competing product called PoPo (short for PP). It provided free instant messages. While Tencent provides free applications, Netease not just provide free applications, it will also pay the service to service provider for the users.

In the duration of few months, Netease's PoPo took significant market share from Tencents. But eventually, Netease's CEO just can't justify why Netease has to pay so much money so it can be number 1 for a "free" product.  Netease stopped paying free IM service for PoPo users before a critical mass can be achieved and surrender the fight to Tencent.

Of course, the rest is history. Tencent never charge users for its QQ application. But it build its empire around that single product. (just like today, Twitter and Facebook build their empire based around its free core product).

That single mistake on Netease's part cause Netease to be a 8 billion dollar company rather than a 700 billion dollar company. I don't think Netease will make the same mistake again.

On top of that, Netease got a sweetheart deal. From the structure of the deal, Netease provided technical and operational expertise while freebie services users will get come from China Telecom.

The big winners and big losers:

The big losers:
Tencent. Now Tencent finally have a real competitor. All of Tencent's services are build around its social service core (QQ Instant messager and WeChat application). Now, there is a real competitor that can attack its core.

China Mobile and China Unicom. There is no way their WeChat competitor can compete with the technical competence of Netease. Those stogy state own companies get ahead by being monopolistic and by pushing people around. But China Telecom is also a state own company and is not one to be pushed around.

All other private internet companies. They just can't provide those services for free like China Telecom can.

China Telecom. They got stuck with the bill to provide all the freebies to China's users. But at least there is now a real chance that they can be a player in the exciting new field of social media.

The big winners:
Sina. In the past two years, Tencent's WeChat had been the noose that tighten the neck of Sina's killer product, Weibo. Now that Tencent's own core product is under threat, Sina is going to get some breathing space.

Netease. This has to be the sweet heart deal of a life time. I bet Netease's CEO is smiling in his sleep tonight. Even in the unlikely event that this new venture fell. Netease will still make out like a bandit. Since Netease is in charge of the marketing and technical development of the new company, all of Netease's product can get access to China Telecom's users in the name of cross promotion. Just imaging the following: Netease developed a new game. In the name of cross promotion, it can leave a message to the home phone of all the Chinese in all southern provinces that says any new users of the new product can have free in-game items of the new game. One can't get more exposure than that. Now, all of Netease products can get access to all the home phones and internet connections in all of China's Southern provinces. They also get access to the largest Wi-Fi network and the number 3 mobile phone network. No amount of sales and marketing can get access like that.

Finally, the Iphone and Androit version of this new product, Yixin, had been developed. It can be downloaded here:
Yixin (in Chinese)


Sunday, August 4, 2013

XYQ got a record high for 2013, part 9

This is part 9 of a long running series, the previous article in this series can be found here:
part 8 here

In February this year, NTES increased the money it charges its players by 50%. Considering that XYQ and XY2 are one of very few paying games in the world while the market is dominated by free to play games, NTES was conducting a very dangerous gamble.

But since XYQ and XY2 are the largest revenue generators for NTES, if this gamble is successful (that there are not a lot of player loss), it would mean great news for NTES.

On 8/4/2013, at 14:55pm Beijing time, NTES achieived a PCU=2633380 players. Please see the following news (in Chinese):
2nd highest in record

To put this is perspective, the Peak Concurrent Users (PCU)
PCU = 2630k for 2013
PCU = 2710k for 2012
PCU = 2300k for 2011
PCU = 2600k for 2010
PCU = 2560k for 2009
PCU = 2320k for 2008

While this is not the all time record, it is still amazing considering each players are spending 50% more to play comparing previous years.

It is clear that NTES is able to reverse the player loss due to fee increase. NTES adds a lot of new contents for XYQ and add a mobile game option, XYQ is actually starting to grow again. This is clearly beyond my wildest imagination.

I am extremely impressed by NTES ability to understand its customers. I don't know of too many other cases where a company can increase its fee by a whopping 50% at one time and proceed to starting major growth 6 months later.


A test for now