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:

part 1 here

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

Article 1 (in Chinese)

Article 2 (in Chinese)

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:

NTES's CEO's announcement (in Chinese)

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.

Neutral:

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)

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