The financial crisis may have dealt a blow to the world’s most powerful economies, but it has also brought once-skyrocketing valuations to a reasonable level. Venture capitalists are now taking a second glance at China’s internet sector.
“We’re aggressively looking into internet [investments] for the first time in a while,” said William Bao Bean, a partner with Softbank China & India Holdings, speaking at a recent technology conference in Beijing.
Opinion is divided, however, as to where money would be best spent. Social networking sites (SNS), one-time darling of the Chinese venture investment, appear to have fallen out of vogue with many investors. Their attention has shifted to online gaming, seen by many as a recession-proof segment of the IT sector.
Others, though, insist on the long-term potential of SNS in China. What’s more, there are signs that some of the most successful Chinese social networking sites have done what their counterparts in West have still largely failed to do: begin monetizing their user base.
Much of the success lies in Chinese youths’ willingness to pay for virtual goods. The industry’s trailblazer is Tencent, which runs one of the country’s largest social networking communities, QZone. Tencent posted total revenues of just over US$1 billion in 2008, US$719.1 million of which were from internet value-added services. The vast majority of these involved the sale of virtual goods.
Chenhao Zhang, an analyst with JLMcGregor in Shanghai said that leading SNS firms such as Xiaonei.com have followed Tencent’s lead in developing virtual goods and the trading of virtual money, which he sees as a sign of domestic innovation compared to foreign players in the Chinese marketplace.
The concept of paying hard cash for a virtual item – say a special sword in an online game, or a new outfit for your online avatar – may strike many in the West as a foreign, even ridiculous, concept. But in China a vibrant online identity may have a particular resonance compared to in Western countries.
“If you’re a [Chinese] teenager living in a small room with your mom or dad and want to have a place to call your own, then it makes sense to go online and create your own virtual space,” said Dan Brody, CEO of Koolanoo Group, an internet and new media investment company which invested in 360quan.com, a social networking startup targeted towards fashionable, outsider Chinese youths.
The bet is that Chinese teenagers will be willing to pay small amounts to enhance their virtual identity. While it’s a strategy that’s worked for the likes of Tencent, JLM’s Zhang notes that many of the leading SNS firms have yet to come up with a truly sustainable business model.
The problem is that Tencent’s success is built upon the massive scale of its user base, according to George Godula, co-founder of Web2Asia, an incubator for Asian startups and consultancy for Western internet firms entering the Asian market.
“For companies like Tencent, it’s easy to monetize because they have more users than there are internet users in China. It’s all about scalability and size until this model works,” he said.
As of the end of the first quarter, Tencent had 934.9 million instant messaging users, up 4.8% from the previous quarter, a number made possible by the fact that many users have multiple accounts. The firm’s Qzone has around 350 million users.
The biggest Chinese SNS firms may finally be playing catch-up and developing revenue models that work, analysts say these players still have their work cut out.