Tencent creates $35B of wealth in 11 years

Our work is quoted on Tencent’s revenue models and our estimates on the virtual goods market. Of course, Morgan Stanley cannot cover Tencent in details (as we do in our “Inside Tencent” report) as their report tries to cover global trends with some local focus, such as China/Tencent for virtual goods and Japan for mobile commerce. Among interesting factoids, Tencent is recognized as having created $35B worth of wealth over the past 11 years – to compare to Amazon’s $58B over 15 years and Google’s $186B over 11 years. Tencent’s profit margin is 49% vs. Amazon’s 6% – guess digital goods have better margins than analog ones.

Five companies out of “Desktop Internet Winners of the 90’s” are no less than 5 Asian companies

Here is the list compiled by Morgan Stanley:

• Google
• AOL
• eBay
• Yahoo!
• Yahoo! Japan
• Amazon.com
• Tencent
• Alibaba
• Baidu
• Rakuten

If we categorize a bit:

• Search: Google (US), Yahoo Japan (JP – operated by Softbank) Baidu (CN)
• Portal: Yahoo (US), Yahoo Japan (JP)
• E-commmerce i.e. B2B, B2C, C2C and payment: eBay (US), Yahoo Japan (JP), Amazon (US), Alibaba (CN), Rakuten (JP)
• IM/Other: AOL (US), Tencent (CN)

Not bad for Asia. Ever wondered why we focus on China, Japan and South Korea? Strangely, NHN/Naver, Korea’s largest portal and search engine is not included in the list though it passed the $1B revenue mark this year. Naver is totally dominant in its market and pretty innovative: ever heard of “Knowledge Shopping”? It is the combination of “Knowledge Search” i.e. Yahoo Answers, copied from Naver in 2005, and online shopping mall).

Oh, did I mention Yahoo’s hidden treasures were in Asia? It owns large shares in both Yahoo Japan and Alibaba.

Enjoy the read!
@benjaminjoffe

–
+8* | Plus Eight Star helps Morgan Stanley make presentations about Asia. Find us also on Twitter!

I did not plan to write about Yahoo but got carried away by the post on VinaGame (“Replicating Tencent’s Model“), which made me think about how Internet giants can win overseas (instead of failing). In the light of Google’s recent trouble with its China business, it might be of interest to share those ideas.

I find both Tencent (China’s largest IM and online game company) and Alibaba (China’s largest e-commerce and payment company) being quite unique companies among Internet giants because they are (1) very pragmatic and (2) much less arrogant than their leading position could make them. Alibaba confirmed this recently.

Two weeks ago, David Wei, CEO of Alibaba.com was presenting the company at a workshop at the French Chamber of Commerce in Beijing and clearly stated that they would rather find a local partner who had control in local operations rather than going alone or with a subsidiary to expand to foreign markets (notably India). This is very uncommon practice but if you take a step back, both their merger with Alibaba in China and their JV with Softbank in Japan might be among Yahoo’s top 3 best strategic decisions of the past 10 years. In both cases, they left the control of local operations to the local partner (more or less reluctantly: willingly for Japan; after a few tough years of their local operations for China).

Those two deals represent:

1. Japan
Yahoo Inc. market cap today was 21.5 billion USD, while Yahoo Japan is worth 42.2 billion USD. Yahoo Inc. owns 34.79% of Yahoo Japan and Softbank has 40.95%. In case you wonder why: in Japan you only need 33.34% to block any board decision, so Yahoo Inc. can technically veto whatever they want.

2. China
In China, Yahoo owns 40% of Alibaba Group, which includes Alibaba.com (B2C e-commerce), Taobao (B2C and C2C e-commerce) and Alipay (payment). Alibaba.com alone is worth 11 billion USD on the HKSE. David Wei said tentatively that it might represent 20% of Alibaba Group’s value.

Update (2010.02.08): Alibaba Group owns only 74% of Alibaba.com, so Yahoo would own 29.6%. According to Alibaba.com’s IR Report, both Yahoo and Softbank, directly or indirectly through its wholly-owned subsidiaries, own more than one-third of the shares in Alibaba Group (p.52). This cross-ownership omplexifies a bit the story.

Let’s do some simple maths:

• Share in Yahoo Japan = 42.2 x 34.79% = 14.7 billion USD
• Share in Alibaba Group = 11 x 5 (if Alibaba.com is only 20% value) x 40% = 22 billion USD
• Total = 36.7 billion USD

If only counting Yahoo Japan and Alibaba.com (update: and considering Alibaba Group owns only 74% of Alibaba.com), the total is still 14.7 + 3.3 = 18 billion USD

Are Yahoo US and other international operations such liabilities that they are worth between 3.5 billion USD and MINUS 15 billion USD? I might be mistaking but if not, I might buy some Yahoo stocks.

Note: I don’t know shares in Yahoo at the time of writing and this does not constitute financial advice – ask your usual supplier for this.

–
+8* | Plus Eight Star calculates that Asia’s Internet might be worth more than the US (ok, Google and Microsoft excluded). Any idea why? Let us tell you more! @plus8star

As mentioned in our quote on today’s Forbes’ column on VinaGame, Vietnam’s largest online gaming company, I believe some are already on their way.

Are there any clues? Here are three reasons to believe so:

• VinaGame already operates IM, portal, SNS and music services
• VinaGame has operational ties with Tencent
• Last, VinaGame purchased our researches on both Tencent and Cyworld from the first edition!

Surely, I am not the first one to suggest that – one commenter on this blog did that in October 2007. There are other companies on this track outside Asia: Mail.ru, the largest Internet portal in Russia, is also studying Tencent closely (and also bought our research). Mail.ru also has MIH as a major investor. If you don’t know MIH, it is a large South-African media group also known as NASPERS. It is the single largest investor in Tencent – they control 35.5% of Tencent, a share worth about 13.5 billion USD.

Another question ask by Rebecca Fannin, author of Silicon Dragon who wrote the column for Forbes, was the evaluation of the Vietnamese online gaming market. I did not have figures at hand but taking hints from an old interview exercise (a Google or Microsoft one I think) that was asking “How many gas stations are there in the US?” with no other information available (I heard another version about dentists), there is always a way to find an rough estimate based on a macroscopic view rather than go with a bottom-up measurement. If you ever wondered how research firms come up with estimates, this is as good a guess as many – and at least there is a methodology to it.

Here is how it goes:

Instead of looking at companies, you can look at market structure:

• Vietnam has similar structure as China in terms of income, GDP/capita, rich/poor (developing market).
• Around 20 million Internet users, so about 25% of the population (similar ratio to China).
• Several years behind China in terms of market maturity (2 or 3? IDG says 10 in the interview but that sounds exaggerated according to some conversations I had with various execs).

So doing just a very rough estimate:

• The China market was ~2 billion 2 years ago
• Vietnam has about 20 times less Internet users

Hence, I would say that Vietnam’s market is probably around $100 million, but has the potential to double or triple within 3 years as Internet spreads (note: this is confirmed by Vinagame’ growth rate of 50%). This number is surprisingly close to VinaGame’s own market estimate (since nobody seem to have a solid figure). The difference is: I know very little about the market and assumed nothing about VinaGame’s revenue. Is that cold reading?

Also, the market is heavily reliant on licenses from China and Korea, which cost quite a bit (also confirmed in the interview that only 5% of VinaGame revenue are from local games), so companies should be able to grow the capability to develop their own titles and potentially generate higher margins (cutting down on licensing + better cultural fit).

You can apply this method to any other developing market, then correct by a few factors like geographical barriers (Internet users don’t grow as fast in countries without densely populated areas), political instability (which harm business), etc.

So… is there a Tencent in your country? What is your market’s potential?

–
+8* | Plus Eight Star looks in Asia and picks the best ideas to support your business. Find us also on Twitter!

1. What’s the funding scene like in China and where are some of the incubators and resources Chinese entrepreneurs can look to?

Early stage and incubator funding is not great. This is probably why ex-Google China CEO Kai-Fu Lee saw an opportunity and started an incubator named Innovation Works. Also, there are not many successful serial entrepreneurs or old-timers, so the angel investment scene is also under-developed and the overall support system for entrepreneurs is far from being as developed as in Silicon Valley.

Like elsewhere, VCs that did not manage to raise a new fund or had to rebalance the PE/VC ratio are stranded, while those who did raise before the crisis or managed to do it after have less competition.
Overall, China remains the most attractive non-US destination for VC investment. Some more info on this Deloitte survey.

2. How did the technology scene in China emerge and who are the leaders?

For Internet, it followed the US in terms of service concepts – from portals (Sina, Sohu) to ecommerce (Eachnet then Taobao) to search (Baidu), then branched out to follow Korea for online games, then mutated some of the service and business models to eventually stumble upon very successful ones. The fact that many established industries in the West such as music, cinema are video games are in the making in China allows them to leapfrog to digital revenue models without being slowed down by heavy legacy models.

One way to look at this evolution is the successful process of mutation and natural selection, or “Techno-Darwinism“. More about this in our column on How China Innovates and Why Foreign Companies Fail.

Today’s leading Internet companies are without doubt:

(a) Tencent

China’s leading IM / community / games / all-around portal. It is like AOL done right. Revenue for 2009 will be North of $1.5 bln with 40% net profit. Its market cap over $38 bln makes it possibly the 3rd largest Internet company in the world (after Google and Amazon, but ahead of eBay, AOL, etc.).

It does not really have a Western equivalent, but several companies in developing markets such as Russia, Brazil, Vietnam aim at becoming the “Tencent” of their country. We published a detailed report on this company which sold to such clients worldwide. There is also a lot to learn for Western companies as Tencent mastered many aspects of managing a virtual goods economy.

(b) Alibaba Group

It is like eBay, Paypal, Skype and Amazon all in one – with a successful integration of all services.
It also have interesting indigenous innovations such as its Alimama ad exchange marketplace, its social commerce SNS called Taojianghu and the micro-retail service Taoker. The only market-listed asset so far is its B2B marketplace Alibaba.com. We will be releasing our new “Inside Alibaba” report in the coming weeks.

(c) The online gaming guys

The online gaming market is STILL booming despite being already very large. There are 9 such companies listed on NASDAQ and HK stock exchanges, including Tencent. The total market valuation is $52 bln, $38 bln of which is Tencent alone. See slide 103 on this presentation.

Several of those companies are eyeing or already entering overseas markets with huge operational experience,
though culturizing products and operating in foreign countries remains a challenge. Some social gaming companies are also doing well in China and abroad though on a different scale than the larger MMO guys. It shows how China-based development can serve the world – China makes already over 80% of the world’s offline toys, why not digital ones?

(d) The portals & search guys

Sina, Sohu, Baidu. Nothing much original there, though Baidu keeps adding interesting sub-features with Wikipedia+Q&A-style service, etc.

(e) The classic verticals

Jobs, Travel and real estate.
Several are already market-listed. Their model is sometimes different in terms of revenue model or service process. For instance, the travel site eLong sells mostly via its call center. Some other verticals are growing such as food & beverage, sports, finance, matchmaking, automotive.

3. In your opinion, who are the up and coming web-based startup companies in China to watch out for?

Several verticals will likely become viable.

One that is particularly interesting in the matchmaking space is Zhenai.com, which re-engineered the revenue model and service concept of Match.com and eHarmony and came up with its original blend – involving a service center with “account managers” for your matchmaking needs. It could now be re-adapted as an original service.

Several focused or vertical online communities might also work out:
P1 is a SNS focused on the affluent class with original recruiting processes and business models. The business SNS market is yet to take – Xing retreated and LinkedIn hasn’t made strong moves toward China. It is likely a similar service and business model re-engineering is needed for China.

Being in the social gaming space as well, I look closely at cross-border developments.
Some like Rekoo, 5 Minutes and ELEX are already doing well. A couple of others such as Vojo World and Cmune (largest FPS game on Facebook) are also growing nicely from their China HQ.

4. How have Chinese politics and culture scene shaped the types of startups emerging?

The government focus on the country’s social stability during those years of major economical changes has a strong impact on all media, including Internet. This is true for all sorts of services that involve public content.
That being said, most Internet content is rather a-political and focused on entertainment, since China’s netizens are mostly below 30 (versus US netizens, who are mostly above 30) and might be more concerned about their career than bringing more uncertainty in their life with major political changes.

As such, startups are focused on entertainment and communication, and include active content moderation as part of their service. Youth culture in music, arts, fashion, games is also influencing strongly the Internet – possibly (though measuring is probably hard to do) more so than on the comparatively more geek-focused US scene.

5. What government resources are available for entrepreneurs?

There is support for returning entrepreneurs with free office space, low or delayed tax, and a number of science tech parks offering such services. Other than that, the market is active enough and most companies do without other support.

6. Other than Mobile Monday Beijing, where can Chinese entrepreneurs go for China-specific events and news?

Mobile Monday Beijing is a good orientation camp for mobile entrepreneurs but there are a few Chinese language-only events, such as the events of the Mobile Internet Great Wall Club and the Mobile 2.0 Salon for mobile. For Internet, there are a number of conferences but not many grassroots events so far – BarCamps took place episodically. Among larger conferences are those done by consulting firms such as Analysys and iResearch, as well as the yearly ChinaICT, a bridge between Chinese and foreign IT businesses. Some more events take place occasionally.

7. Can you make a case for moving or keeping your startup in China?

If you have a global strategy, China is quite a good place to gather local and international talent, with so far a reasonable cost compared to running a startup in Silicon Valley.

The startup I am involved with, Cmune, is developing real-time 3D social apps in China for the rest of the world. It combines expertise the local expertise on gaming and virtual goods with advanced tech and Western distribution mechanisms via social networks, etc.

Some other social gaming companies, such as Playfish, are leveraging China for development but also operation base for foreign markets. So for both Playfish and Cmune, it’s “made from China“. In that case you don’t suffer much from the local regulations since your market is overseas.

+8* | Plus Eight Star gets you out of your echo chamber to see how Asian companies can be ahead of the curve. We are also on Twitter!

Can you make millions on Facebook? Can you make millions on iPhone? Despite the enthusiasm, it might not be so easy. Here are some surprises gathered from a recent trip to Silicon Valley organized by the Mobile Internet Great Wall Club, including insights from a surprisingly successful low-key service.

Making millions with iPhone games?

By now you have probably seen a game on an iPhone. You might even have friends who consider starting a mobile gaming company. Should you quit your job and join them? Should you invest in their venture? Here is some information to give you perspective on what is depicted in many places like a new gold rush.

Though Apple does not publish app store sales numbers, the “most official” figure I came across so far is $750 mln since start . This is spread across over 3 billion downloads of 130,000 applications serving 34 million iPhones. Apple keeping 30% this is about $500 mln left for developers to share via a single sales channel: the App Store.

I know several mobile developers who released iPhone applications but most seem unable to reach profitability, even for developers getting well over 500,000 downloads, as most are free. Life is tough for them and most are developing applications for corporate clients, which pays better.

I started to wonder if the quality of games made a difference. For instance, one 3D jet fighter game named F.A.S.T. by the company SGN seemed to do well. This was until I met an independent developer who had developed… another 3D jet fighter game in 3 months just by himself. He explained that after the initial spike on the iPhone store, revenue dried out and that he was now making more money selling the entire source code for $100 each time. Is it a commodity?

During a recent trip to San Francisco meeting the top-selling iPhone game developer, the myth that a developing a great game is enough do well took another blow, but also provided valuable insights.
The company Tapulous sells the most popular game on iPhone, a music game named “Tap Tap Revenge”, in the wake of older music games such as Rock Star and the venerable Dance Dance Revolution. Their sales represent a few million dollars per month. A great number for a 20-people operation but a small one by Internet business standards, and this is the best-selling game on iPhone!

Here is some of what I learned talking with them:

First, they benefited from the best timing. They were ready when the iPhone platform launched and got tons of free marketing from Apple who was eager to promote its platform with attractive content. Today, with over 100,000 applications available, a new application gets on the store and enjoys a short peak due to the increased visibility at launch, then vanishes quietly in the sea of apps.

Second, their greatest asset is their distribution: over 25 million applications were downloaded since start, which makes it possible to push any new content with reasonable chances – and surely more than a developer only relying on the initial push from the application launch. This is very much in agreement with the difficulties faced by small developers who don’t realize this marketing issue.

Last, the two founders of the company are not game industry guys! They even see this as an advantage when operating on a disruptive platform with evolving business models.

Making millions on Facebook?

Despite the success of some, it is still far from easy. I mentioned in a previous column the cut-throat competition which leads successful games to be copied in a matter of weeks – I counted at least 6 farming games on Facebook and the largest one today was not the first to launch.

In this context, the content seems to be almost a commodity compared to the ability to reach users and the skills in operating and measuring ROI. It looks like innovation is more concentrated within those two aspects than in original content. If you plan of starting today, the bar is definitely a lot higher than a year or two ago!

Another interesting learning from meeting with Facebook directly is the fact that they show no immediate intention to increase significantly their own virtual goods and mobile revenue. This is all the more surprising as, coming from Asia, virtual goods and mobile seem the way to go. As a quick reminder, Tencent is making 90% of its revenue from users vs. 10% from ads and in Japan three social networks are listed on the stock market, two of them making well over $100 mln from mobile virtual goods.

While Facebook was explaining that their main focus is growth and reach, it was a surprise to me and the group of Chinese and Japanese mobile executives who were attending the meeting. What kind of company decides not to catch low-hanging fruits? Facebook is not a non-profit and their main revenue source is already a rather interruptive form: advertising – more so than virtual goods which would turn users into real customers instead of eyeballs retailed to advertisers.

Finding a Fortune in Fortune Telling

The most flashy service is not necessarily the most profitable. While iPhone’s Tap Tap Revenge blasts music and colors, a much lower-key service with much less users if generating a lot more profit across the ocean. What could it be?

One of the companies part of this visit to Silicon Valley was a rather unusual mobile content provider. To introduce it, let’s start with a question: do you sometimes read your horoscope? When asked if they were reading theirs, only one member of the audience gathered at Stanford University raised her hand. Would there be no market for such service? Was it a gender or age bias? Are Stanford MBAs too rational? Did the audience have to look rational in front of others? This is left to speculation.

As a side note, I received the same response when asking Berkeley MBA students about their usage of online dating, but got half of them vote positively after I introduced an original matchmaking service from China and asked if it would work in the US too.

The reason for asking about horoscopes was because one of the speakers at that event was the President of a company providing mobile horoscopes. At that point most people smile. This company named Zappallas made close to $120 mln in 2009 with only 2.5 million paying subscribers in Japan. Even more interestingly, their President explained that they figured horoscopes were one of the three categories of daily information users don’t get tired of, the other two being news and weather forecast.

The difference with horoscopes is that users volunteer accurate personal information to get their horoscope, which helped the company build incredibly refined databases. Those can be used to cross-promote content or products for their mobile commerce service. Luckily, “stars are aligned” and their user base – mostly women between 20 and 35 – happen to have, in addition to interest in their fortune, a large disposable income.

People Love Heroes

While several companies are having amazing success with either Facebook or iPhone applications, the success story we read is generally setting aside many important points in order to build a heroic image of fantastic and visionary entrepreneurs. The reality is often much less of a straight story. Inversely, a few less glamorous services are quietly doing extremely well.

Why would a company who succeeds easily take time to talk to the media? It would only attract competitors! It seems to me that two categories of companies have a special position: the first are large ones who talk to scare off and distract competitors from the real difficulties, the second are small newcomers who are surprised by their success and give out, without realizing it, valuable know-how. Unfortunately you won’t find in mainstream media companies surprised by their failure, who would give out a more accurate picture of the challenges. Next time you read a “success story”, you might give a second thought about what they share and why.

Note: This is a guest column written for the Chinese business magazine “China Electronic Business”, invested by Jack Ma of Alibaba, and IT news site Interfax. Syndication inquiries are welcome!

–
Want to know more about the Asian companies and services mentioned? Contact us at info@plus8star.com.
You can also follow us on Twitter @plus8star