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China's Web Firms Face Tough Times
Read: 2082 Publish: 2012/5/22 15:24:45

China's biggest Internet companies are posting mixed results despite the addition of millions of online users each year, as efforts to tap the promise of the world's largest online market are complicated by tougher government content restrictions, higher costs and a shift to mobile devices.

On Wednesday, Tencent Holdings Ltd. reported a 2.8% rise in first-quarter profit amid rising game and online-advertising revenue. But it said it would continue to invest in platforms such as mobile chat and e-commerce that have yet to generate significant revenue. Its profit growth trailed the 15% rise recorded for the fourth quarter.

The results followed a first-quarter loss from Sina Corp., owner of popular Twitter-like microblogging service Sina Weibo. The loss was primarily the result of rising costs as Sina spent more to expand its microblogging service, the company said. But analysts said Sina's hiring of censors to help it delete posts deemed too sensitive for China's tightly controlled Internet was also a factor.

Meanwhile, Facebook-like Renren Inc. said earlier this week its net loss widened in the first quarter amid weaker-than-expected advertising revenue, and it forecast continued uncertainty in advertising revenue growth in its second quarter.

China's Internet sector has more than 500 million users. While growth has slowed in recent years, it still added 55.8 million users in 2011, according to the China Internet Network Information Center, a research group with ties to the government. Online-advertising revenue is projected to more than double from $4.6 billion in 2011 to $9.5 billion in 2014, according to estimates from eMarketer, a digital-marketing research firm.

But China's Internet companies also face intensifying challenges as they look for ways to profit in a quick-moving market with tight restrictions and intensifying competition. It is also a market where companies have struggled to turn users into reliable generators of revenue.

'A lot of these problems are coming from the fact that most of these firms are still figuring out what the ultimate business model is going to be,' said David Wolf, chief of marketing-strategy firm Wolf Group Asia.

Citing the slowdown in new-user growth, he added, 'It will be about who has the deeper pockets and who is going to be able to evolve their service to keep users. We are looking at more spending before we see more revenue.'

For Tencent, a 52% rise in revenue was outstripped by a 75% increase in the cost of revenue as it seeks to expand beyond its core games business. Though it has been growing quickly in the mobile space with its mobile-chat service, the company says it is unclear when it will begin to earn money from the service.

The company also has invested heavily in its e-commerce business, leasing warehouses and spending to develop its ability to sell online and deliver electronics. It says it is uncertain when its investment would yield significant profit.

Though Tencent's rivals generally reported weak advertisement-revenue growth in the first quarter, Tencent's advertising revenue rose 41% from a year earlier to 540.1 million yuan ($85.5 million). While it acknowledged the economic slowdown in China had affected advertisers, it pointed to growing market share in brand and targeted-social-network ads as the reason for the growth.

Similarly Sina said it would continue to invest heavily in its Weibo microblog, though a timeline for profitability remains unclear. Chief Executive Charles Chao said the company expects to earn revenue from the site by the second half of the year, but added it would take several quarters to judge advertiser interest in the platform.

Revenue increased 6% from a year earlier to $106.2 million, but operating expenses jumped 61% to $67.2 million. Sina attributed the rise primarily to personnel and infrastructure costs associated with Weibo.

The company didn't elaborate, but analysts also say the company is hiring censors to help it delete posts. China has cracked down on Internet content ahead of a once-a-decade leadership transition that begins later this year.

'I don't think anyone should be surprised that personnel costs are up, because the regulatory burden has increased dramatically for Sina,' said social-media analyst Bill Bishop. Sina and Tencent, which runs its own microblogging service called Tencent Weibo, were forced to shut down user comments on posts on their websites for several days in early April.

Mr. Chao also said recently enacted government requirements that customers must register under their real names and offer formal proof to register for Weibo had slowed user uptake.

Tencent also said the new policy led to flat growth in daily active users on its microblogging site. The active user tally remained at 67 million in the first quarter.

Mr. Chao said only 60% of the users registering for the service since the company began implementing the identification policy at the end of December meet the government's new identification requirements, meaning 40% of new users cannot actively post to Weibo.

'Real identity conversion needs to take place gradually with product innovation and with a reasonable pace. However, we aren't in a position to control such pace. Any new tightening of policies may result in a negative impact on Weibo user activities,' he added.

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