Renren’s initial public offering yesterday

Renren Faces Uphill Fight To Join Oligarchs Of Chinese Internet

Renren Faces Uphill Fight To Join Oligarchs Of Chinese Internet

Renren’s initial public offering yesterday 

Gady Epstein

BEIJING DISPATCH

May. 5 2011 - 9:56 am

 http://blogs.forbes.com/gadyepstein/2011/05/05/renren-faces-uphill-fight-to-join-oligarchs-of-chinese-internet/

Chinese Facebook clone Renren’s initial public offering yesterday was a George Tenet-level slam dunk: China plus Internet plus Facebook equals investor salivation. Early investors can make some money playing the stock in the short run, as money-losing Youku.com showed by rising to the stratosphere after its IPO. Renren even looks like it will eventually be profitable, which is a nice bonus.

But will Renren grow to become one of the titans of the Chinese Web? Will Youku.com? Both are absurdly overvalued at around $6 billion (Renren slightly more after its nearly 30% first-day rise, Youku slightly less). I think only one, Renren, has a fighting chance of ever justifying its valuation, and it will be an uphill battle to do so, requiring a smart deployment of the hundreds of millions of dollars the company now has at its disposal. The Chinese Web is becoming an oligarchy of conglomerates: Renren must try to join that oligarchy, while Youku seems destined to be swallowed up by it (once its price goes down).

There has been a lot of talk, including in this space, about a Chinese Internet bubble to rival the American dot-com bubble of the late 1990’s. There are definitely some ridiculous valuations out there, but (as with the American bubble) there are also some highly profitable companies that will last. For a clue as to how the Chinese Web will soon look — and is already looking — see what Facebook has been doing outside of China, leveraging its gigantic network to push into various lines of business. Beyond its extremely effective core of socially targeted advertising, it offers gaming, location-based services, group buying, virtual currency and, eventually, any other socially driven business it wants to enter. If Facebook has any trouble starting a service that a standalone company offers, it can just pay to swallow up the company.

The Chinese Web will play out similarly, with the social networks wielding tremendous market power — the difference being that it is such a large market that multiple behemoths can coexist profitably. Billionaire Ma Huateng’s Tencent, the second-most valuable Chinese Internet company, has been adding social services to its huge network for years, and has become incredibly profitable on the strength of its gaming business. Sina Corp. has a good chance of becoming Tencent’s long-term social rival, having transformed its best-of-breed microblog,Sina Weibo, into a dynamic, Facebook-like social platform far superior to Twitter. Sina, too, is layering on services like group buying — as is the portal Sohu, which also has a strong gaming component in its listed spinoff company, Changyou, plus its own entry in the microblog market. Billionaire William Ding’s Netease is a gaming giant with yet another microblog entrant.

All four — Tencent, Sina, Sohu and Netease — also all have online video businesses. So does billionaire Robin Li’s search engine Baidu with Qiyi, and Baidu, already monopolizing search, is rumored to be working on a joint venture to bring Facebook into China. Billionaire Jack Ma’s Alibaba Group has the dominant e-commerce company in Taobao, with a popular instant messaging service built in, along with the most-used group buying service in Juhuasuan.

See a pattern here? China’s largest Internet businesses are in a race to build large, horizontally integrated social networks. That is a scary environment for standalone companies like Youku, which has plenty of well-funded competitors already, and for the many Groupon clones like Lashou and Meituan (whose founder, Wang Xing, also founded what is now Renren). These companies lead their sectors for now, but have spent a lot of money to get there. The Chinese Web oligarchs — especially cash-rich Tencent and Baidu but also potentially Sina — can either defeat the standalone companies or buy them out if the price is right. In that environment, I wouldn’t be surprised if Youku’s stock price dips and it becomes an acquisition target for a conglomerate that is dissatisfied with its own video service.

What of Renren? Its revenues from quarter to quarter over the last yearwere basically flat, and its active user base was relatively small as a percentage of the large Chinese market, and recently it has been losing traffic to Sina Weibo. But of the $743 million raised yesterday, about $600 million was raised by the company (CEO Joe Chen, with his wife now worth more than $1 billion on paper, cashed out some $50 million for himself yesterday). That is a nice war chest, but the company will need to use it wisely if it hopes to become one of the oligarchs. It successfully IPO’d ahead of the other Facebook clones like Kaixin001, but the competition in China is bigger than that — much, much bigger. 

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