China's Mobile Internet Messaging (IM) War, part 9: YiChat gets VOIP

One can find part 8 of China's Mobile IM war here:

Part 8 here

Yesterday, YiChat provided a major update and upgrade from version 1.1.2 to v.1.2. Please see the following articles for details:

Article 1 (in Chinese)

Article 2 (in Chinese)

Article 3 (in Chinese)

Article 4 (in Chinese)

Two major functions are added to YiChat. First, YiChat will start Voice Over IP (VOIP) service. In addition, calls from foreign country to China will be free (there could be a time limit however). Since YiChat has a sugar daddy in China Telecom, it will be China Telecom that will supply all the cost for this free service.

The second major function is that when a user uses YiChat and when the other party doesn't have access to internet, YiChat can convert the message to either SMS (if the message is text) or telephone messages (if the message is voice).

None of these two functions will grow the users by a lot in the short term. But both are very significant.

It is nice to have a sugar daddy, especially a sugar daddy who is a monopoly. Skyp had been trying to get into China for a long time now. In addition, all of China's private companies had known that VOIP is an incredibly lucrative business to get into.

But Chinese government won't allow any private, be it foreign or domestic, to get into this area because of the objection of its three state owned telecom operators, China Mobile (CHL), China Unicom (CHU), and China Telecom (CHA).

But now, Netease is able to get into this area through its cooperation with China Telecom. This is potentially a lot bigger than China's Mobile IM. If China truly allows VOIP, it could completely overtake all of China's telecommunication industry, considering the horrible reputation of the three state own companies among ordinary Chinese.

At this point, VOIP is not fully allowed yet. But China is allowing a crack, and only for the telecoms and Netease.

I am certain at this point, companies like Tencent, Alibaba, Sina, Sohu, are drooling with envy with Netease's great luck.

The second major feature is very important in YiChat's competition with Tencent's WeChat. Almost all of the analysis in China are on whether YiChat can replace WeChat. Well, I think the possibility of that is zero. If somebody comes up with a product that basically does what Facebook does. Even if that product is superior to that of Facebook. The possibility of that product to replace Facebook is basically zero.

I guess YiChat could be to WeChat for what Google+ is to Facebook. It could become a 2nd place player in China's Mobile Internet Messaging market. But I think YiChat can be much more than that.

Here in the US, we have Facebook, Twitter, LinkedIn, Tumblr, Instagram, Foursquare, Pinterest, etc. Any one person can have more than one social circle. Similarly in China, the top 3 are QQ, Weibo, and WeChat. But there is definitely more room for more.

But there are a basic limitation for the top 3 social media products. They are limited by that both side have to have internet access at the same time. This is where there is a niche for YiChat to thrive.

Because YiChat has the support of China Telecom, it provides its users free access to home phone and SMS (Short Messaging Service). Its true advantage that nobody else have is it allows its users  free access to 3 networks (internet, home phone, and SMS). This second feature is the start of Netease's attempt to start to integrate the three networks together. If China truly allows Netease to have full VOIP service, YiChat can combine that and we will have four networks integrated into one.

end.

NTES is going to create a new niche in China's online gaming, the Online Card game, part 2

There are an explosion of new games in China's top two game companies, Tencent and Netease. Just as I wrote an article on Netease's upcoming new online card game, NTES just announced another online card game that is close to come out. One can find my previous article here:

Part 1 here

In the last article, I reported that NTES's partner, Blizzard's new online card game, Hearthstone, is really catching fire in the west. I just checked its placement on twitch.tv. Hearthstone was still number 4 at 8pm yesterday (8/25/2013) and is number 5 right now (10 am 8/26/2013). It was an amazing performance, and somewhat unexpected.

That game is coming to China and it is starting to catch a lot of press and starting to catch on among gamer circles.

But it is clear NTES had been worked on this new area more than just being partner with Blizzard. A couple of days ago, NTES had announced that its in-house developed game, XYM, or loosely translated Westward Journey Mini, will be going into public Beta in a few weeks (in October). See the following two articles:

Article 1 on XYM (in Chinese)

Article 2 on XYM (in Chinese)

Netease had been dominant in the area of MMORPG (Massive Multiplayer Online Role Playing Game). As a player play a role or a character, gaming company need to create a massive virtual world for player to play in, thus it is the most complicated games. But MMORPG is starting to get saturated. Its growth in China had slowed down drastically.

But in the last few years, it is the other simpler forms of multiplayer online games that are growing. Tencents had captured this market. None of its top three games, League of Legend, Cross Fire, and Dungeon and Fighter, are MMORPG.

Tencent made 1.229 Billion dollars in 2Q2013 from online games. Majority of it comes from 3 games along. I estimate that its top three games along made 60% to 70% of total gaming revenue (about $800M, or about $266M per game). In comparison, NTES got $317 million dollars from gaming operation in 2Q2013. NTES got that $317M from operating about a dozen hit MMORPG games.

In another words, just about any one of the top three games Tencent operates made about as much money as NTES made in all its games combined.

The top three games Tencent has is League of Legend, Cross Fire, and Dungeon and Fighter. League of Legend is a MOBA (Multiplayer Online Battle Arena) game. Cross Fire is FPS (First Person Shooter) game. Dungeon and Fighter is a 2D side-scrolling multiplayer PC beat 'em up game.

In the next year or so, Netease will come out with its own games in each of these three areas. That is the reason I think in the next year or so, there will be a defining moment in the future of China gaming market. There will finally be a true competition between the number 1 and number 2 in all areas of online gaming market in China. But that is for another series of articles that I will write (assuming I have some free time).

Netease is famous for being careful, meticulous. Its products are always to be of high quality. But that also means that it will always being late.

But this is the first time that Netease is able to being the first (among major players) to come out with serious products in a new area.

China's online card game is largely a virgin territory. Tencent did had a online card game. But that game (like a lot of Tencent's self developed games) is of bad quality and flame out quickly.

Netease is going to have two major games in this area. One is licensed from Blizzard and is starting to be the talk of town in China. The other one is a self developed game based on its own number 1 property, Westward Journey.

By being the first to market, of high quality, and highly anticipated, one or both can have excellent chance of becoming major hit.

end.

Netease starts internal Beta for Blizzard's HearthStone

My last NTES related post can be found here:

Last NTES related post

That was part 8 of China's Mobile Messaging war. Netease's YiChat is still doing very well. Netease is concentrating on adding feature to its YiChat product right now. I suspect there will be major YiChat update soon.

But this article is not about YiChat.

Netease got the licensing right to operate Blizzard's (ATVI) Hearthstone. Hearthstone is not a MMORPG game. It is a new card game that is played on the internet on PC or through mobile phone.

I didn't think very much of this game at the beginning. But I start to think I could be wrong.

This game is all the rage in USA right now. Twitch is a pretty good place to find the games that are popular in the USA:

twitch tv/

The following is a screenshot taken on 9/22/2013 at about 8 pm Central time:

Note that is the fourth most popular games (in terms of number of viewers). It is about the same level as DOTA2 (licensed by PWRD). It is twice as popular as Blizzard's mega hits World of Warcraft and four times as popular as Starcraft 2. It is about 7 times more popular than another mega hits World of Tanks (licensed by KONG).

While I don't think DOTA2 will be extreme popular in China because it is much more complicated to play than League of Legend (definitely the most popular and most likely the most profitable game in China right now).

But this game fits all the criterions:

1. It is made by Blizzard. Blizzard had a mythical reputation in China.

2. It is designed to be free to play. Thus, it is pirate-proof. Starcraft 2 is very popular in China. But nobody in China pay for Starcraft 2 due to piracy. It won't be the case for Hearthstone.

3. It is designed to be free to play and it is not MMORPG. World of Warcraft is MMORPG and it is fee-based game, it is fading in China right now. Hearthstone is none of that.

4. It is easy to play. Tencent made 1.229 Billion dollars in 2Q2013 from online games (in comparison, NTES got 317 million dollars in 2Q2013). Virtually most of those money comes from three games: League of Legend, Cross Fire, and Dungeon and Fighter. All three games are not MMORPG and extremely easy to play. Hearthstone fit those profile.

5. It is a very social game. Just like all card game, it is a social game. You have to have a lot of social factor to be a hit game in China.

6. It is designed to play on mobile phone (in addition to PC) to start out with. Mobile gaming is the next frontier in China.

7. It is talk of the town in US gamer circles. As the above screenshot showed, gamers in US love this game. If this game is super popular in USA, Chinese gamers will play this game just try to be hip.

From the above reason, this game has a very good chance to be a truly major hit.

I see this game as either hit or miss in China. If it is a hit, it will be a hit so big it will be much bigger than anything Netease has. It will probably be the same type of game as Tencent's three true blockbusters.

But it also could be a complete miss. It is such a different game that Chinese just can't get use to it.

I give it 50/50 chance for either.

Anyway, this game is already in open beta in USA and Europe. Today, this game will also go into beta in China (open to Netease employees). See the following news:

Limited Closed Beta (in Chinese)

end.

China's Mobile Internet Messaging (IM) War, part 8: Quick Status after 2 weeks

It had been two weeks and it is still a hot topic in China. Today, I am going to do a quick status update on the popularity of China's Mobile Internet Messaging (IM) products.

This is part 8 of long series of articles on this subject. Part 7 of this article can be found here:

Part 7 here

From the following two articles (both are in Chinese):

Article one (in Chinese)

Article 2 (in Chinese)

I will summarize the important point in the above two articles:

Both of these articles talk about Netease's YiChat:

After the first day, YiChat had 700k new users.

After the first 24 hours, YiChat had more than 1 million users.

After the first 3 days, YiChat had more than 5 million users.

The majority of the users are IT workers, white collar workers, and students.

27% of users coming from China Telecom, 27% of users are coming from China Unicom, and 46% of users coming from China Mobile.

The short term goal for YiChat is 100 million registered users and 50 million active users within 6 months.

Those numbers are many times faster than when Tencent's WeChat first accumulate its new users. Netease's YiChat certainly had much faster start than the product it is trying to replace (Tencent's WeChat).

From part 5 of this series, Sina's WeMeet was also launched to compete with both Netease's YiChat and Tencent's WeChat. Let's see how all three products are doing in the last month. The following chart are the number of searches on Baidu for all three products.

 Note that green curve is the number searches in China for Tencent's WeChat. The yellow curve is for Netease's YiChat and the blue curve is for Sina's WeMeet.

The actual number for today, 9/2/2013 (Baidu made a mistake, it mistakes 9/2/2013 for 10/2/2013), is as follows:

The number of searches for Tencent's WeChat is 72242.

The number of searches for Netease's YiChat is 11088.

The number of searches for Sina's WeMeet is 854.

Note that we are talking about number of searches. One can't directly convert that to number of new users. For Tencent's WeChat, it had an install base of 500 million users. I am certain the vast majority of the searches come from existing users (bug fix, re-intall, etc.). But for both Netease's YiChat and Sina's WeMeet, since both are brand new product with install base of zero, vast majority of the searches come from potential new users.

From the above chart, we can already make two observations:

First, Netease's YiChat is for real. It is becoming a real competitor to Tencent's WeChat. Second, unless Sina's WeMeet really picks up steam in the near future, it is already dead on arrival.

Tencent got almost half its revenue from gaming. Frankly, it has virtually no expertise in developing games. But all its games (virtually all of them are from foreign licensed games, many of those licensed games are junks that nobody wants to play outside of China) are guaranteed to be popular at least for awhile due to its free QQ (Internet instant messaging) and WeChat (Mobile instant messaging) services.

By promising free elite QQ (or WeChat) membership or QQ (or WeChat) emoticons for one month, if the gamer will just play Tencent's game, Tencent can guaranteed any of its games great popularity (at lease for the beginning). And for some games that are not half bad, once sufficient player base formed, it starts to get a life of its own and Tencent would have a hit game.

But this is an unique advantage only Tencent has. But if Netease's YiChat becomes a significant player, life is going to be miserable for Tencent.

Netease had demonstrated its ability to develop popular games. If Netease's YiChat becomes a major player. It would truly be the worst nightmare for Tencent.

Tencent already show the world how to use its free popular instant messaging products (QQ and WeChat) to push for gaming and other Internet Value added services, even though it is pretty bad in developing games. Could one imaging if a competitor also get a popular instant messaging product (YiChat), except in this case, the competitor is much better in developing games?

end.

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:

part 6 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:

360Buy requires all its empolyees to use YiChat only (in Chinese)

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.

end.

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:

Part 5 is on Sina's new entry

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:

Netease's CEO's YiChat page (in Chinese)

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.

end.

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:

Part 4, quick update on Netease's YiChat

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

Sina's WeMeet (in Chinese)

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.

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:

part 3 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.

Major WeChat breakdown (in Chinese)

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.

YiChat after 24 hours (in Chinese)

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.

end. 

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:

part 2 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.

article in Chinese

article (in Chinese)

article (in Chinese)

article (in Chinese)

article (in Chinese)

article (in Chinese)

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.

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)

end

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.

Netease and China Telecom cooperate for a WeChat killer application

My last post on the cooperation between Netease and China Telecom can be found here:

chinas-telecoms-and-ntes-vs-tencents

There is a major battle brewing between the titans of China gaming industry. In the next 1 to 2 years, a true show down is happening between the overwhelmingly dominant player in China (that is Tencent) and the highest quality player (Netease).

This show down is largely happening without being noticed by the Wall Street. It seems all the analysts were concentrated on the mobile gaming area, they completely missed the true battle that is happening in front of them.

The outcome of this battle can be whether Tencent can re-tend its absolute dominant position in China's online gaming industry, or whether Netease can grow by 300% or 400% in the next couple of years and become a true competitor to Tencent. This will be the battle to determine the state of China's online gaming industry for the next 10 years.

Unfortunately, I just don't have time to write about them at this point. Hopefully, I will have some free time in a couple of months to documents this epic battle.

In this article, I will briefly talk about another area between Netease and Tencent.

Tencent's WeChat had becoming the most important new product on both the online and mobile industries. But it might just got a real potential competitor. From the following article (in Chinese)

Netease and China Telecom

Netease and China Telecom formed a new company and developed a new WeChat competitor.

Before now, WeChat doesn't really have much competitors. Sina is concentrating on its Weibo product. All three telecom companies in China are state own companies. Those state own companies are horrible in developing new products.

But an entity between Netease and China Telecom can be a real threat to Tencents.

Technology wise, Netease is better than Tencents. China Telecom is a state own monolith. It can provide service for free that Tencents can't match.

Of course, the devil is in the detail. If China Telecom is willing to give up control to Netease, we then will have a real battle with Tencents.

Again, Netease is the true winner in all this. Even if the joint venture didn't pan out, it will give Netease products access to China telecom users (I don't know what is the total users now, but in 2009, it had 192 million fixed line users, 62 million mobile users, and another 62 million broadband users).

At this point, there is no official announcement. But the rumors are getting more and more credible.


end.

China's MOBA battle, part 2: NTES will cooperate with Activision

Again, today, 4/2/2013, another potential game changing event occurs for NTES. At the point of this writing, there is still little movement on NTES's stock on light volume.

Today's news is regarding the upcoming MOBA gaming war in China. My first post is this area can be found here:

part 2 here

Like what I said in the last article, the next great gaming battle in China is not going to be over mobile games. The next great battle is going to be MOBA games. When I have some free time, I will write an article on what is MOBA games and how it differs from MMORPG games.

Today, NTES announced that it will cooperate with Activision (ATVI) to develop a MOBA platform in China. See the following news:

NTES with Activision

In the news, NTES obtained the right to operate Warcraft 3 and DOTA on this new MOBA platform from ATVI.

The first game on this platform will be NTES's own YXSG game. When I have more free time, I will write an article on YXSG.

NTES will also get other type of games such as shooting games, Music games, and Sports games to operate on this platform.

By receiving Activision's blessing on this platform, it really speak favorably that NTES is probably in the front row seat in obtaining the license to operate the upcoming Blizzard All-Star game.

I think within the next 1 or 2 years, there are most likely 1 to 2 true blockbusters and 2 or 3 other major games in the MOBA area. I think NTES just got its hands on 2 or 3 of them.

The biggest loser is probably Tencents.

Interestingly, in today two news, NTES is the bigget winner while Tencents is the biggest loser.

end

China's 3 Telecoms and NTES vs. Tencents, part 3. China Telecom to corporate with Netease against Tencents

Today there are two potential game changing events for NTES. Interestingly, NTES's stock price hardly moved (on light volume) even though NASDAQ is doing very well today. Wall Street can be so inefficient!

I will talk about the first significant event here. My last post on the war between China's 3 Telecoms (CHL, CHU, and CHA) and Tencents can be found here:

part 2 here

Today, it is all over China's news web site that there is a rumor that China Telecom (CHA) will cooperate with Netease (NTES) to coming out with a WeChat like product to counter Tencents. See the following article:

CHA and NTES

This is a great great news for NTES. NTES has no presence in WeChat like area. It could potentially be truly game changing for NTES.

China's 3 Telecoms are not just traditional monopoly. Think of them as Standard Oil with Department of Commerce combined. However, there are competition between the 3 telecoms.

They are state own industry. Even though there are competition between the 3 telecoms. But since they are all originally from monopoly, they still behave like one. They also produce inferior products.

I guess CHA realized its limitation and is going to invite NTES to form a 3rd party company to develop a product call "翼信" (Wing Letter?).

At this point, it is a rumor. But from all the web sites, it seems to be a highly reliable rumor. If this rumor is true, this can do so much for NTES. Through monopolistic behavior, it could eat into Tencent's WeChat. It give NTES's other products a direct way to mobile users (whether mobile users choose it or not). It also allow NTES access to 162.77 Millions China Telecom's home phone users.

At this point, NTES's presence is largely gaming. It has a very popular internet news portal that it is not really monetizing. If this become real, NTES will instantly become major player in two other areas: social media and mobile internet. It is truly game changing development for NTES.

When this rumor becomes real, I will provide a more detailed write up on this.

end

Netease's replay to CCTV 315 investigative report, part 3

One may find part 2 of this article here:

Part 2 here.

From my write up in part 2, CCTV actually had a pretty good target. There are about 4 or 5 3rd party companies that somehow grab the user information as contained in the cookie file through back door. It is not very clear how those 3rd party company did it.

CCTV actually make this reporting much weaker by turning it into a hit piece against Netease. It is not clear why will CCTV want to do that.

I can only think of four reasons why will CCTV wants to do this.

1st possibility: It is part of a larger plot. Government is trying to send a signal to Netease and its News editors. Netease News is famous in China for being the "News with Attitude". But the possibility for this is very low. Government can just summon NTES's CEO to Beijing for some tongue lashing. In addition, other government agencies would have gotten into the act. It had been 5 days and no other government agencies had any corresponding measures against NTES. Therefore, this possibility is very low.

2nd possibility: CCTV's 315 editor is not professional. Actually, this is not the case. The overall CCTV shows may be of low quality. But the show 315 is actually of high quality. I personally think this possibility is also very low.

3rd possibility: CCTV's 315 show actually have more materials in their pocket. I also consider this possibility is very low. Why would any editor want to make their show of low quality to begin with? That doesn't sense at all. One could hold on to some evidence while still coming out with high quality product. 315 show editor is too smart for that.

4th possibility: This is the one I considered to be by far the most probable. CCTV's editors coming out with a very good investigative reporting on how unscrupulous 3rd party companies stole personal user information through the back doors of China's four major portals (Sina, Sohu, Ntes, Tencent). But the editors is being overruled by their managers. Sina, Sohu, and others purchased advertising slots on CCTV. All except one, Netease, are major purchasers of CCTV's advertising slots. For commercial reason, CCTV managers forced 315 editors to change the original program into a hit piece against Netease. I think the reason why the central themes so ambiguous is because 315 show editors have to change the focus of the show at the last second. The show never address the central themes. Why does NTES's emails have anything to do with a bunch of 3rd party companies steal users' cookie file? Why will NTES want to let those 3rd party companies steal their internal company information?

Of course, the above are only my conjecture.

Finally, Netease announced its official position on 3/16/2013:

Netease's official announcement

I will translate below:

"Netease always protect user's privacy. As an company listed on NASDAQ, Netease has very strict system and technology to safe guard users privacy. We always obey all laws and industrial standards. We completely forbid any Netease organizations or Netease employees to read users email content. We always protect all citizens' constitutional rights of free and private information.

After reviewing CCTV's investigative reporting, and to completely remove any doubts by our users, Netease had established a special investigative team to investigate this matter. We will provide the result of our investigation at the earliest time. Netease wants to thank our users and CCTV for their attention and criticism. We offer our utmost gratitude for your continuous oversight."

Personally, I think it is a great reply. While I am pretty sure Ntes read the content of their users emails, it is machine that does that, not any individuals or organizations.

China is still a communist country. CCTV has the obligation to provide it users "proper guidance and to educate its users so the users can have the proper thoughts". CCTV and Netease News are not equal.

CCTV is still the most watched programs by far in China. Netease really shall spend some money to buy advertising slots on CCTV's shows. Hopefully, that will be the end of that.

end.

Netease's Reply to CCTV attack, part 2

My last Netease article talks about the attack from CCTV investigative reporting. One can find the link below:

My last NTES article

On March 15 every year, CCTV will conduct a 2 hours special on investigative reporting on fraudulent activities conducted by companies. Every companies that got mentioned by this episode usually suffer negative publicities. Worse yet, often times, government agencies crack down on it right away.

This year's CCTV 315 show went after the following companies/industries:

Apple, several gold companies, China JAC Motors, Volkswagen, several drug companies, several broadband suppliers, Netease, and Google's Android phones operating system.

Here is some English article on its report on Apple and Volkswagen. (It is WSJ, so you need to use google search to get it)

An English article

But the English articles usually are only interested in its effect on American Companies.

The Chinese article on the CCTV 315 reporting:

Much more detailed description in Chinese

It is a big deal to be on the CCTV 315 reporting. CCTV is the official government mouth piece. The 315 reporting is largely commercial in nature. But we are talking about China, most times, it is hard to tell apart governmental and commercial interests.

Company suffers negative PR from it. Most importantly, government agencies cracks down on it.

For example, one day after the reporting, China's General Administration of Quality Supervision, Inspection and Quarantine order the German company to conduct a recall. Knowing how slow Chinese government agencies work, it is pretty clear CCTV had provided those information to all the government agencies long time ago. So don't think of CCTV's 315 is just like America's 60 minutes. (I doubt any US government agency will conduct punitive order just one day after a 60 minutes show.)

See this English article (up to 680k VW autos will be recalled):

up to 680k VW vehicles will be recalled

In addition, China JAC Motor just announced a 120k vehicle recall.

But I am only interested in the part on Netease. The following Chinese article gives the detailed description on CCTV 315 attack on Netease:

CCTV's segment on NTES

This TV segment is really creepy. While the 315 segments on Apple and VW are actually pretty good and professional. They actually have footage to prove what they try to investigate. The one on Netease is the opposite. It is full of innuendo and insinuation.

Unlike other segments, it is actually kind of hard to know exactly what Netease is accused of. The name of the segment is "Netease collect users personal secrets". But the part that actually directly named Netease only consists of 1/5 of the segments. In the first 3/5 of this segment, it talks about the cookie file. Cookie file is part of every internet browsers. It records the users habit. In the first 3/5 of this segment, it interviewed many 3rd party companies that collects users cookie file. Therefore, those 3rd party companies collects user behaviors for all of China's users.

But the four major portals (Sina, Sohu, Ntes, and Tencent) won't allow the 3rd party to collect cookie file. But by putting the ads on those portals, the 3rd party companies can collect users' cookie.

The part where it attacked Netease is on the 4/5 of the segment. It said that in addition to cookie, Netease also use its email service to collect user's behavior. Netease is dominant in China's email market. It has about 70% of China's market. CCTV actually get a Netease email branch manager to say that they can see the content of users email. Netease can use email's content to analyze the users. Netease then can target the advertising more precisely.

The last fifth of the segment go back to cookie again.

Therefore, the totality of this segment gives the impression that Netease is really bad in protecting user privacy. It not just gives 3rd party cookie permission. It also do more than that and snooping users email content.

But if reviewing this segment in detail, it never prove that Netease gives 3rd party company permission to users cookie file. The part about Netease email service is really not central to what this segment is about. I am pretty sure google email or yahoo email uses content of users email to generate target advertising. I shall know. I have both gmail and yahoo email, the advertising I got certainly seem to be highly targeted only to my interest.

More importantly, the part about Netease is not highly tangential to the core of this segment. What does email privacy have anything to do with 3rd party companies snooping users cookie file?

I ran out of time. I will provide Netease's official response in my next post.

end.