Chinese micro-blog “Weibo” users will likely face strict scrutiny, as SINA Corp. (SINA) is mulling certain measures aimed at filtering contents that goes against the dictates of the Chinese Government, according to a recent report from news agency Bloomberg.
SINA’s weibo has gained massive popularity over the last couple of years. As of June 30, 2011, registered users totaled more than 200 million. SINA has been continuously adding consumer centric features such as apps, games and virtual currency to weibo, which has transformed the micro-blog platform to a full fledged social network website.
However, over the last few months, SINA has been under pressure from the Chinese government to impose restrictions on user content. Weibo users post approximately 75 million comments and messages every day and till now, SINA has been somewhat lenient with weibo content compared to some other websites. The company deletes some of the more inflammatory posts but allows the majority to stay on the site.
Some time back, SINA and host of other Internet companies were reprimanded by communist party leader Liu Qi, who called for them to tighten control over online material, particularly sensitive information that spreads dissent among the general public. The Beijing Internet Media Association, a government-sanctioned industry group, also called on its 104 member companies to filter Internet content.
The Chinese government argued that micro-blogs are the epicenter of baseless rumors and false news, which are tarnishing the government’s image in the public. China has been very sensitive regarding the Internet over the years and has imposed significant restrictions on online search and other social-networking activities. The Chinese government has already blocked Twitter, Google Inc.’s (GOOG) YouTube and social-networking website FaceBook.
An overzealous government censorship has been held responsible for the shrinking Chinese social network market (despite being the world’s biggest online population), as the number of social network users decreased to 5.16 million in the first half of 2011.
According to the Chinese Academy of Social Sciences, there has been a 41% drop in the number of websites operating in China over the last year, with 1.91 million websites closing operations by the end of last year. Tighter regulations and the blocking of sensitive forums have contributed to the decline.
On the other hand, these tough regulations did not deter the micro-blog market, which soared 208.9% year over year and accumulated 195 million users (40.2% of the total Chinese Internet population) at the end of the first half of 2011. Analysts believe the strict Chinese government censorship has helped Internet companies like SINA and Sohu.com Inc. (SOHU) as the closure of a number of websites have significantly reduced domestic competition, thereby leading to higher traffic and soaring revenues.
However, the situation is now likely to change, as stricter government regulations start making life difficult for Chinese micro-blog companies to operate. We expect the strict controls to hurt subscriber growth, thereby hurting SINA’s weibo monetization efforts and resulting in lower advertising revenue going forward.
In August this year, Baidu Inc. (BIDU), China’s largest search engine was forced to shut down its micro-blog platform Shuoba, as it failed to gain market share in the highly competitive Chinese social-networking market. Analysts believe that Shuoba's stringent real name verification criterion was the primary reason behind this failure. We believe increasing restrictions will make weibo less attractive for users, thereby hurting SINA’s subscriber growth over the long term.
Moreover, the competition within the Chinese advertising market is fierce, as popular Internet search companies such as Baidu Inc. and AirMedia Group have attracted a lot of advertising clients. SINA is a relatively small company compared to its peers and hence, encounters numerous hurdles in the advertising market. A censored weibo will further reduce its competitive prowess going forward, in our view.
We believe SINA remains a premier company due to its strong product pipeline, continuous investment in product development and marketing and a large user base for its E-Commerce and weibo offerings. Moreover, the imminent launch of an English version of Weibo by the end of 2011 will boost international growth going forward.
However, we also note that SINA will face significant competition from Twitter and Facebook in the international market and it will be difficult to gain significant market share in the near term. Further, increasing competition in the domestic market from Baidu, Sohu, Tencent and Alibaba will hurt profitability over the long term.
We maintain our Neutral rating over the long term (6-12 months). Currently, SINA has a Zacks #4 Rank, which implies a Sell rating in the short term (next 1-3 months).