Radio Free Mobile presents input from a guest author. Cyrus Mewawalla from CM Research on the Chinese Social Media Sector.
China’s social media: Great potential but there are political risks
CM Research has teamed up with Trusted Sources, an emerging markets macro-economic research house, to provide you an informed view of the future of China’s social media sector. We have married our expertise in the global technology, media and telecom sectors with Trusted Sources’ expertise in China’s macro and political outlook in an effort to guide investors through what could be a difficult time for Chinese internet companies. We expect to publish a series of co-authored reports on emerging market TMT themes on a quarterly basis for our clients.
China’s social media has great potential
- Mobile, Social, Cloud and Big Data are the big investment themes across the global technology sector.
- China’s social networks operate in protected markets – Facebook, Twitter and Google are not allowed in.
- China’s social media industry dynamics are conducive to growth – social network penetration, smartphone penetration and 3G penetration are all at around 30 per cent, the point in the technology cycle at which growth typically accelerates.
- Western social networks generate the bulk of their revenues from internet display advertising. But social media is moving to the mobile internet. Smaller screen sizes and shorter customer attention spans make it difficult to monetise. China’s social networks have a more diversified revenue model, with online games playing an important role. This positions them well for the difficult transition of social media from the PC to the mobile internet.
- But internet statistics released by China’s leading social networks do not face sufficient third party scrutiny. For the time being, investors therefore run the risk of basing investment decisions on highly questionable data.
- China’s internet companies are not as skilled as converting internet traffic into internet advertising revenues as their Western peers
But there are political risks
- Changes to China’s leadership team will be announced over the next two to three weeks.
- China’s leaders are interested in the social media sector for two reasons: it is a high growth sector, whose profits largely flow to the private sector rather than the state-controlled telecom sector; and it potentially represents a challenge to the Communist Party’s monopoly hold on political power and to the authority of the state.
- Social networks profit from information flows, but in China’s case those flows may present a challenge to the existing political order.
- The risk of stronger political repression of social networks – by means of banning, cramping, or undermining certain social media business models – although imponderable, is credible. It will certainly not be shrinking during the present period of relative political fluidity when the authorities will focus on establishing control after getting through the leadership transition.
- Over the next six to nine months, Chinese internet companies whose businesses and cash flows are directly linked to social media activity – such as Renren, Sina and Tencent – appear the most vulnerable. By contrast telecom operators such as China Mobile may offer investors a more hedged exposure to the high-growth Chinese internet sector.