Facebook listed in May 2012, with an IPO price of $38 a share. Now it hovers around $26. But its stock performance is still a lot better than that of its Chinese clone Renren, which went public in May 2011. Granted Renren initially saw its stock rise as high as $21.93 – or almost 57% above its $14 IPO price. But the website couldn’t sustain those dizzy heights, and investors soon bailed out of the social networking stock: it now trades near its all-time low of $2.80.
Not surprisingly, there was a lot of hype surrounding Renren when it went public (it raised over $743 million from eager fund managers). Investors saw it as a way to buy a Facebook-like company, and in a double-whammy potentially get access to the more than half a billion Chinese internet users off limits to Mark Zuckerberg.
But two years on and the business looks to have taken a different direction from its US role model.
Entrepreneur, a magazine, says that Renren calls itself a social networking site but that, in reality, it offers little social networking. The company now generates the majority of its revenue from online games, which reached $90 million in sales last year, an increase of 113% from a year ago. That’s a sharp contrast to Facebook where online games have become less important in overall revenue terms.
Meanwhile Renren’s revenue from advertising actually went down last year, falling 9.7% to $53.8 million. Renren’s chief financial officer Huang Hui explains that’s partly because marketers cut back spending amid uncertainty over China’s economic outlook. But industry observers say a bigger challenge for Renren is the intense competition from Sina Weibo, China’s Twitter-equivalent. While the number of weibo users has kept growing, Renren’s new sign-up rate has been much slower. Though it gained 31 million new users in 2012, Sina Weibo added more than 150 million users in the same period.
Renren has other problems too. Its daily-deal site Nuomi continues to bleed cash. The Groupon-like offering took in $16.1 million in revenue last year, not enough to offset its $25.2 million in operating costs. Worse, the company has a stake in lossmaking video-sharing site 56.com. So while Renren’s revenues were up a little under half to $176.1 million last year, costs increased faster. That meant operating losses widened to $91.7 million from $30.2 million in 2011.
Renren is now betting more of its future on online gaming. Sina Tech, a portal, reported that it is planning a major push into mobile gaming in particular by developing titles that run on Google’s Android operating system, which powers the majority of Chinese smartphones. A Renren executive also told reporters that the company will sign up more partners to help promote its titles rather than doing everything itself, a strategy aimed at growing the business more quickly.
Renren wouldn’t be the first Chinese internet firm to seek to transform itself through online gaming. NetEase underwent a similar transformation in the mid-2000s after its original SMS and portal businesses faltered. Internet portal Sohu now derives the majority of its revenue from online games too.
But analysts say the gaming industry has its dangers. As the US gamemaker Zynga has discovered, gaming hits now experience much shorter life cycles as fans race off to try the latest craze. To retain users, Renren will have to come up with new offerings much more frequently. And it will also have to work out how to monetise its users more aggressively on their mobile platform. Renren reckons 80% of its users will log in from their mobile device this year.
But while Renren seems to want to become less like Facebook, Chinese internet titan Tencent is making the opposite move. Its social networking product Qzone saw its own number of active users increase by 9% year-on-year to 603 million (as of the end of 2012). Weixin Moments, a new feature within Tencent’s hugely popular mobile messaging application Weixin (see WiC188) is also enjoying rapid user adoption rates.
Yet Renren’s decision to switch more of its focus to online gaming could still turn out to be the right call: Tencent generates half of its own revenue through similar products, after all.
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