Informa Telecoms & Media Shop - China Internet Services Provider Profiles report
 

China Internet Services Provider Profiles report

In depth profiles of Sina Corporation and NetEase.com Inc

3 profiles

NetEase Exec Summary

NetEase.com Executive Summary

NetEase.com, Inc. (NetEase) is a fascinating rags-to-riches-to-rags-to-riches-to-controversy tale. It was originally founded in 1997 as an Internet applications software developer by Ding Lei (William Ding), now one of China’s richest individuals. The company’s original vision was to bring “Power to the People” through easier Internet access and use. The company’s stock has been the darling of the NASDAQ exchange in 2003, at one point increasing over 100 times its late-2001 low, and is China’s largest Internet portal with 133 million users.

NetEase has not had an easy, nor a steady, history. In 1998, after several failed forays into divergent business lines, the company finally became a Chinese Internet portal, deriving its revenues from Internet advertising. After very limited rounds of venture capital funding, the company pursued an IPO right after the NASDAQ’s peak in 2000 and its stock price began sliding almost immediately. The company was nearly de-listed in 2001, had trading in its shares halted for several months due to late and erroneous financial reporting, and was nearly bought by Hong Kong’s i-Cable. Management changes were frequent and controversial, with the founder at one point assuming three C-level offices along with the Chairman of the Board position.

However, the company has since famously re-invented itself – and ahead of its rivals, perhaps by necessity. In order to instill confidence in the company, in 2001 the company publicly announced a move away from the Internet advertising business into wireless value-added services; in 2002 it began offering online games. Since then, the company has become the China market leader in SMS services and online games, commanding leading market shares in both highly-fragmented markets. In Q2 2002, the company posted its first profit, albeit a tiny one. For the year 2002, it posted a nearly seven-fold increase in revenues, and a net profit margin of 7 percent. That profit margin has since increased to over 50 percent in Q3 FY2003.

NetEase is continuing to advance on the two pillars – SMS and games – that have brought it to profitability, and is making refinements that add further focus to its strategy. Unlike its two main competitors SINA and Sohu, the company is almost purely focused on consumer customers, generally avoiding enterprises with the exception of a very recent foray into the online search engine business. Within consumers it is increasingly focusing on younger users, who the company has recognized as being the real drivers of value in the SMS market. It is introducing foreign SMS content, and is working to become a leader in the nascent MMS market. It has a popular PC-to-phone and now phone-to-phone instant messenger service, PoPo. And interestingly, despite raising USD75 million in zero-coupon convertible debt in July 2003, it continues to do most of its development in-house, or through its users, relying less on joint ventures and acquisitions than its competitors. The company has, however, relied on a complex network of thousands of smaller websites to provide it with SMS content.

Now NetEase again is facing challenges – with the biggest being hits to its SMS revenues from actions taken against SMS Alliances by China Mobile. In July 2003, China Mobile announced it would stop collecting certain types of SMS revenue and would cease accepting SMS Alliance content on its networks. NetEase’s Q3 FY2003 revenues were hit, growing only 7 percent, as its SMS revenues fell 21 percent. While overall the company’s strategy is more focused and detailed than its competitors, they are also far from unique.

Additionally, while Ding Lei no longer holds any management posts, he continues to hold a majority of the company’s stock and exercises considerable influence – influence which has previously seen him advance relatives to key posts in the company. With its large user base, ability to innovate and stabilizing management team, NetEase is likely to remain a leader among China’s portals, but will continue to be challenged.