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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.

Tuesday, August 20, 2013

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.


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