Not All Online Communities Are Born Equal78 pages

Summary
In search of online community winners: Among hinese online community leaders, NetEase and encent are on our OW list, thanks to their cheaper aluation (at low-teens to low-20x 2012e earnings), new atalysts (e.g., new title or expansion pack launches), nd strong growth (with likely 20-40% annual sales rowth for next 2 years). For Renren and Sina (Weibo), s they are still in an investment mode for Nuomi groupuying services and Weibo microblogging services, were waiting for an inflection point (i.e., margin tabilization) before revisiting our recommendations.

Oline communities – proliferating in Digital China:Over the past five years, China’s social network services SNS) users jumped 10 times. Yet SNS users only ccount for half of the online population in China (vs. 0%+ in the US), implying ample upside. More
interestingly, online community growth is accelerating in hina – it only took Sina Weibo 1.5 years to hit 100mn ctive users, vs. 8 years for NetEase’s email services and 3-5 years for QQ IM and Renren. These online community leaders are building high entry barriers, via their network effect and extensive user-generated contents (UGC) – for instance, Renren boasts an average of ~120 online friends for each Renren user and has accumulated 3bn photos to date.

What are the keys for online communities? We often track the following drivers for online community growth: 1) Customer acquisition costs – Online communities enjoy lower customer acquisition costs due to viral marketing effect. On our calculation, Tencent’s marketing costs have shrunk to only 5% of sales, down 5ppts in the past 5 years. 2) Demographics – It is clear that the better educated consumers often spend more online. Over 60% of Renren’s users have college degrees, vs. only a quarter for general Chinese online population. 3) User activity level (or “user stickiness”) – Sina’s Weibo users spend an average of 1 hour each day on Weibo. 4) Paying user penetration – To date, only ~11% of the QQ IM users are paying, with modest average daily spending of below Rmb1.