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.
end.