First Group Buying And Now Online Video: RenRen Sells Off Its Businesses To Rivals

Renren (NYSE: RENN), often referred to as the Facebook of China,  has reportedly sold its video hosting website 56.com to internet search provider Sohu (NASDAQ: SOHU). This is the second among a series of steps aimed at streamlining the revenue model of Renren to help it improve its operating margin. Earlier, we had written on how Renren sold its group buying business Nuomi to China’s largest search provider, Baidu (NASDAQ: BIDU). (See How Can Baidu Grow Its Group Buying Business) In this article we analyze the reasons that led to this move by Renren.

See our complete analysis of Renren here

Management’s Optimism Hid Troubles

During the Renren 2014  Q2 earnings conference call, the company’s CEO had expressed his pleasure at the rising internet traffic to the site 56.com. Average daily video viewership had exceeded 80 billion. There was also improvement in the User Generated Content (UGC). Apparently the UGC had  doubled on a year on year basis. There was also an increase in the percentage of users from mobile devices from 10% to 45%. ^[1]

The company, however, had several problems. Its operating losses had widened from $26 billion to $30 billion on a year on year basis. Renren could not expand its user base beyond college students. This led to low advertisement revenues, since the user base was narrower, and advertisers needed to market to a broader set  of consumers. Neither the group buying business nor the video sharing business led to an enhancement of user base or improvements in revenue. It introduced clones of many popular U.S. websites such as a tumblr-like blog, a professional networking site, video streaming and music streaming. These have been described as being poorly designed and failed at gaining traction among users. ^[2]

Net profit was $31.3 million in second quarter of 2014, on operating revenues of $25 million. This was mostly on account of investment income, gained due to equity investment in various other companies, amounting to $86 million. ^[3] Renren’s ownership of 56.com had invited criticism that it did not have the scale to compete with Baidu and Youku (NYSE: YOKU). Even its core business of social networking was facing pressure from WeChat and Weibo(NASDAQ: WB). ^[3]

Why Did Sohu Buy 56.com

Analysts have suggested, that Sohu had paid only $13 million for the website. Renren had originally purchased 56.com for $80 million, which means that Sohu got a really good deal by buying 56.com at a discount of ~84%. ^[4] It is believed that buying 56.com will give Sohu the scale to compete with Baidu in the online video category. ^[5] In Q2 2014, Sohu reported that its video hosting site experienced a 40% mobile traffic increase when compared to Q1 2014. The site offer 80% of the top 30 domestic TV shows in China. ^[6]

Apart from consolidating its market share of the Chinese online video market, there are two additional possible causes for Sohu’s purchase of 56.com. The first of these is the crackdown by the Chinese Government that cast a shadow on the future of Chinese internet companies. We had written earlier on how Sina Corp (NYSE: SINA) was fined for hosting content considered inappropriate by the Chinese Government (See Our Earlier Weekly Chinese Internet Note).

The Government has renewed its vows of keeping this campaign alive. It has identified five areas to be monitored rigorously. They are micro-blogging websites, online storage, video streaming, smart TVs and video terminals. These crackdowns can have serious consequences for the user base. For instance, in January 2014, Sina lost 28 million users to censorship. ^[7] While the future impact of such censorship on the popularity of these websites is a concern, the fines associated with the breach of regulations does not bode well for anyone either. ^[8]

Then again, almost all Chinese stocks took a beating in these months because of pessimism about China’s economic future. In the face of sluggish growth, economists were looking forward to stimulus measures to revive the economy of China. However, one Chinese official made a statement ruling these out, leading to pessimism about the revival of China’s economic growth. This led many Chinese internet stocks to fall. Many are yet to recover from this fall, including Sohu. ^[9] One of the motives for this purchase could also be a signalling to the stock market that it can overcome the challenge posed by the negative outlook on China’s economy, by claiming a larger market share.

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1. Renren  Q2 2014 earnings report trancsript [↩]
2. The Failed Facebook Of China [↩]
3. Time To Pull The  Plug [↩] [↩]
4. Renren Acquired 56.com [↩]
5. Sohu To Acquire 56.com [↩]
6. Sohu Q3 Earnings Call Transcript [↩]
7. Sina Lost 28 Million Users To Censorship [↩]
8. China Vows To Crack Down On Internet [↩]
9. China’s Economic Growth Woes Bring Down Stocks [↩]