Weibo IPO a test of character(s)

China’s internet industry has huge growth potential but it is treacherous, as highlighted by the US listing prospectus from the country's version of Twitter.

What is the difference between Twitter and Weibo, two microblogging services from the US and China, respectively?

In broad terms, one is a massively popular social media tool with near-global appeal that is rapidly defining a generation; the other is comparatively unknown outside its home country.

A more timely response, though, is that Twitter launched an initial public offering of shares in November 2013 while Weibo is about to take that plunge.

Weibo on Friday filed with the US Securities and Exchange Commission for an IPO that could net the company US$500 million, becoming the latest internet group to tap public markets following Twitter, Facebook and a host of Chinese companies. 

And Sina Corp, the New York-listed parent company behind China’s version of Twitter, will be hoping the 140-character message limit isn't the only thing they have in common.

Since listing on November 7, 2013, Twitter’s shares have risen about 15% – not a stellar performance but one that proves the company’s business model has enough legs to carry investors.

But while China’s internet industry has huge growth potential, it is going through something of a transformation. Competition is also intensifying.

According to Weibo's listing prospectus, lodged with the SEC, the number of internet users in China has increased from 298 million at the end of 2008 to nearly 618 million at the end of 2013.

The number of mobile internet users, meanwhile, has surged to 500 million from 117 million over the same period.

Current internet penetration rates are enticing too at just 45.8%, the prospectus states, compared with 78.3% in the US, according to Internet World Stats.

This still-untapped potential is a vital selling point because Weibo remains loss-making.


Weibo, which started operations in 2009, is effectively free to users and derives most of its revenues from advertising.

Revenues increased from $65.9 million in 2012 to $188.3 million in 2013, while its net loss shrunk to $38.1 million from $102.5 million.

According to its prospectus, Weibo generated 77.4% and 78.8% of its revenues from advertising and marketing services in 2012 and 2013. A further 19.3% and 12.2% came from game-related services, respectively, while 3.3% and 5.9% came from VIP membership services.

Weibo's advertising revenue rocketed 163% during the final three months of 2013.

Reliance on advertising affects most – if not all – media groups. But here, at least, the data appear to be encouraging.

Online advertising spending in China increased to an estimated US$9.5 billion last year from US$7 billion in 2012 and is expected to jump further to US$15.9 billion by 2015, the prospectus claims, citing research from ZenithOptimedia.

However, competition is intensifying, and this is where the emoticons turn from a smiley to a worried face.

Tencent’s WeChat is Weibo’s closest competitor and offers a wider array of services, including group chat and voice messaging, but it shares some of the features offered by Weibo.

According to its prospectus, Weibo has 129.1 million monthly active users, while WeChat says it has 272 million and Twitter 241 million.

A report by the China Internet Network Information Center states that Weibo’s user base dropped by 9% to 280.8 million as of December 2013, from 308.6 million the year before. More importantly, the report states that 37% of the users who said they now used Weibo less often also began using WeChat. 

Internet users can be fickle and this is a problem when trying to convince advertisers to shop with you.

Furthermore, the industry is being transformed.


Huge growth

source: Weibo IPO prospectus


The country’s internet groups are diversifying in an effort to broaden appeal and decrease the reliance on a notoriously fickle user base and even more fickle advertisers.

Shareholder Alibaba is a case in point. The company, which itself is planning a US IPO, began life as an ecommerce shopping website but has branched out into financial services and social media.

This grey area of overlapping business models could end up putting pressure on Weibo as a result of its alliance with Alibaba, which saw the ecommerce group take an 18% stake in 2013. 

Their cooperation allows Alibaba’s e-commerce users to connect with Weibo’s user base; but Alibaba’s own continued evolution could in theory jeopardise this.

Weibo warns in its prospectus that it expects to generate a “significant proportion” of its advertising revenues from this relationship and that, should the relationship break down, Weibo’s growth prospects may “be materially adversely affected”.

This and other risks are outlined in its prospectus, which makes interesting reading as it offers a concrete glimpse of an industry that is still taking shape.

The prospectus states that “a number of factors could potentially negatively affect user growth and engagement, including if:”

  1. we are unable to attract new users to our platform or retain existing ones.
  2. users engage with other platforms or activities instead of ours.
  3. there are adverse changes in our products or services that are mandated by, or that we elect to make to address, legislation, regulations or government policies.
  4. Regulation and censorship of information disseminated over the internet in China may adversely affect our business and subject us to liability for information displayed on our platform.

Of course every company filing for an IPO in the US must list the potential risks involved for investors. Twitter itself listed some of the same risks in its own prospectus.

But those highlighted by Weibo evoke a domestic industry finding its feet in terms of business models, regulation and – crucially – censorship.


It is no secret that Beijing has a grip on all its sectors; but it is the internet that appears to vex it the most.

Weibo became embroiled in a very public censorship dispute last year when it emerged that the group had a team of censors working to clean up content deemed unsuitable by the Chinese government.

The prospectus goes further.

“In March 2012, we had to disable the Comment feature on our platform for three days to clean up feeds related to certain rumours. To the extent that [the] PRC regulatory authorities find any content displayed on our platform objectionable, they may require us to limit or eliminate the dissemination of such information on our platform. Failure to do so may subject us to liabilities and penalties and may even result in the temporary blockage or complete shutdown of our online operations.”

Of course Weibo is not alone in this respect, as media censorship by Beijing is a much broader issue. WeChat itself has also been hit by censorship. But the comments speak volumes of an industry not free to do as it pleases.

That said, Beijing is on a roll. It is liberalising its financial services industry and markets and easing restrictions on foreign involvement in its industries.

And the fact there is a social media industry in China at all is proof of the government’s willingness to let things develop; albeit at a pace it is comfortable with.

There is, therefore, much food for thought for investors seeking to take a slice of Weibo’s US listing.

Ultimately, the bottom line will be, well, the bottom line. If Weibo survives the shakeout in the industry and continues to ride the social media wave by engaging users, its IPO should be the proof of its success rather than the ceiling. 

A notoriously fickle social media audience – watched closely by advertisers – will ultimately be the facilitators of that bottom line.  

Perhaps a risk factor from Weibo’s IPO prospectus best sums up the industry. A potential negative effect on user growth and engagement, includes the risk that:

“Influential users, such as celebrities and other public figures, media outlets, brands, government agencies and charities, switch to alternative platforms or use other products or services more frequently.”

So the solution is easy after all: just keep all these people happy.

¬ Haymarket Media Limited. All rights reserved.
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