When Kevin Wang joined Kingsoft Corporation as chief financial officer in February 2005, his main task was to prepare the China-based software company for a Nasdaq listing. By the end of that year, Wang had not only postponed the listing, but had also set about overhauling Kingsoft’s entire business model.
Established in 1989, Kingsoft quickly became a household name in the mainland thanks to its word processing office product written by co-founder, now also chairman and chief executive, Kau Pak Kwan.
During the first five years after its launch in 1989, Kingsoft’s word processing software became widely used by schools, institutions and by government bodies in the mainland.
But then came Microsoft.
Although Microsoft Office was officially introduced in 1990, a year after Kingsoft’s word processing software, it rapidly became the industry leader and is the most widely used office application in the world today. While Kingsoft’s original software was compatible with disc operating systems, the first widely used operating system for personal computers and the industry standard at the time, it was not compatible with Microsoft. This was crucial, as the latter was quickly establishing a stranglehold on the market.
Even when Kingsoft developed a newer, Microsoft-compatible version, taking on the Redmond-based behemoth was not a battle that Kingsoft could hope to win.
This situation was made worse by rampant piracy of Microsoft’s products, to the extent that by 1995, Kingsoft was almost driven out of business. As a result, during the mid-1990s Kingsoft diversified its software portfolio to include translation and anti-virus software, and computer games, while also continuing its line in word processing software.
“Kingsoft word processing software was very successful and became the national standard software in China for the first five years, but by the mid-1990s the Chinese market was saturated with pirated Microsoft software,” Wang explained. “Our company name means the ‘King of Software’ but piracy killed our dream of becoming so.”
Adjusting to a new environment
As the internet became more widely accessible in China, Kingsoft launched its first online game, JX1. That marked the start of a new era for Kingsoft.
“JX1 fundamentally changed the financial perspective of Kingsoft because the company started to become very profitable,” said Wang. “The internet paved a new road for Kingsoft. By leveraging the internet, we effectively shortened our value chain.”
That’s because it was able to distribute software direct to consumers and leapfrog the expensive and inefficient software distribution chain. Kingsoft could “reach out to the fingertips of our consumers,” said Wang. By contrast, the offline distribution model resulted in “very minimal” profits.
Riding on the success of JX1, Kingsoft hired Wang in 2005 with a view to prepare the company for a listing on the Nasdaq. Shortly thereafter, Wang convinced the board of directors to postpone the initial public offering (IPO). “The reason was simple. There were too many Chinese internet companies getting listed at the time and Kingsoft needed to streamline its business model.”
In 2004 two popular mainland online games operators listed on Nasdaq. First came Shanda, known for its online game Legend of Mir, which listed in May 2004. Then in December of that year The9, which held the mainland China license for Blizzard’s mega popular online game World of Warcraft, also listed.
Wang viewed this period as an “online gaming frenzy” in China, and after careful evaluation decided that the firm was not ready for a successful listing. The board of directors agreed to hold off on an IPO.
In the same year, Wang proposed an online subscription model for Kingsoft’s anti-virus software. With the internet playing an increasingly important role for Kingsoft, the firm rebranded its anti-virus software as Kingsoft internet security. However, there was a lot of internal resistance to move to an online subscription model for this particular product. “Internally, I was the only person who believed an online subscription business model would be a great success because, back in 2005, 95% of our anti-virus revenue was driven from offline packaged software sales,” said Wang. But during the next four years, the initial subscriber base of 100,000 grew exponentially to a peak of more than 9 million in 2009.
In the same four-year period, Wang completely restructured the finance team and prepared the company for an eventual listing on the Hong Kong Stock Exchange in 2007. This involved restructuring the finance team 15 times to make sure it was operating at maximum efficiency. “At the time of our listing, the market was talking about three new technology companies: Tencent, NetDragon, and of course Kingsoft,” said Wang.
Kingsoft raised HK$649.1 million ($83.5 million) from its IPO on October 9 2007. It closed at HK$5.00 at the end of its first day of trading up from its offering price of HK$3.60 and reached a record high price of HK$9.17 in August 2009. By the end of March this year it was trading at HK$4.67.
In November, Kingsoft’s internet security became freely available on the internet. Profits are derived from value-added services. The model is working well, said Wang. The latest edition of Kingsoft’s word processing software is in production, and the firm will also unveil two new online games in May of this year.
Kingsoft is not yet the Chinese Microsoft. But its lucrative mix of products is giving sleepless nights to a few internet software companies with ambitions in China.
This story was first published in the April 2011 issue of FinanceAsia magazine.
