It's game on for China's NetEase in the mobile arena.
The Web portal and game company has teamed up withChina
) to launch an instant messaging application for smartphones as
it moves to gain muscle in the country's fast-growing mobile
The news sentNetEase (
) shares up 5.5% after the venture was announced on Aug. 19, and
11% the day after. They've settled back just a bit, and are up
74% year to date through Wednesday.
Why the surge in the stock price on the announcement? "The
deal makes them a more credible player in the mobile Internet
space, which is where people believe the future of the Internet
is," said Oppenheimer & Co. analyst Andy Yeung.
"If they don't do anything on the mobile side, they have the
risk of becoming irrelevant in the future," he said. "Being able
to secure a beachhead in the mobile communication space is a key
to their future in the mobile Internet. That's why people are
excited about it."
One of the key features of the app, called YiChat, is that
users can send free text and voice messages to any mobile phone
or free voice messages to fixed lines, without the need for
YiChat to be installed on the receiving devices.
China Telecom customers also get free data promotional
packages with their use of YiChat.
China Telecom will hold 73% of Zhejiang Yixin Corp., which
will operate the new app, and its representatives will be the
joint venture's chairman and financial chief, according to the
Shanghai Daily. NetEase will hold the remaining stake and be
responsible for product design and operation. YiChat launched on
"This partnership signals the start of NetEase's entry into
the mobile instant messaging space, and is one of the key
components of our mobile Internet strategy," said CEO William
Ding in a statement.
The move comes on the heels of NetEase's introduction of its
first mobile game in early July.
NetEase declined to comment further on the venture. But the
Beijing-based company will face competition with its YiChat app,
particularly from Tencent Holdings, China's biggest Internet
company and developer of the WeChat app. WeChat is a popular
mobile instant text and voice communication app.
"NetEase will instantly have access to the wireless
subscribers of China Telecom," said Yeung. "This deal will allow
them to challenge Tencent's dominance by teaming up China
China Telecom has a total of 177 million mobile subscribers,
of which 90 million are 3G subscribers, he says.
But competing against a big player like Tencent won't be easy,
he adds. The WeChat app is very popular and it already has a very
large user base.
WeChat -- also known as Weixin in China -- has 300
million-plus registered users in China and 100 million-plus
registered international users, says Yeung.
"We're looking at a co-existence situation between YiChat and
WeChat," added T.H. Capital analyst Tian Hou.
The reason: The No. 1 advantage, says Hou, is that YiChat is
more user-friendly than WeChat and it's an "open
"YiChat is not an isolated and closed-end application," she
adds. "Users can reach out to their friends. So it has a
radiating effect. If you can communicate beyond YiChat, you could
be able to reach out to an audience much bigger than your own
YiChat registered users."
Another advantage to NetEase is China Telecom's financial
support. The data usage associated with YiChat and receiving
messages from YiChat are free for people who aren't registered
users of YiChat, adds Hou, since China Telecom will subsidize the
She says about one-fourth of mobile phones in China are sold
through mobile operators and China Telecom will have the YiChat
app pre-installed on their phones. That gives NetEase
"distribution power," says Hou.
She says with the three advantages of financial support,
distribution power and its open-application format, YiChat could
see a good adoption rate.
"But how much, we really don't know at this point," she
NetEase operates an interactive online community in China and
is a major provider of Chinese language content and services
through online games, its Internet portal and wireless
value-added services. It generates revenue on the fees it charges
users of its online games, which includes an exclusive license in
China forActivision Blizzard 's (
) popular "World of Warcraft" multiplayer game.
Most of NetEase's revenue comes from games developed in-house,
such as "Fantasy Westward Journey." It also integrates revenue
from selling ads on the NetEase websites.
To complement its online games, in July NetEase introduced
"Fantasy Westward Journey II," a comprehensive upgrade with an
accompanying pocket mobile version of "Fantasy Westward Journey,"
one of its longest operating and most popular games.
"Mobile devices present a terrific platform for us to extend
the reach of our games from PC to mobile players and enhance the
user experience," said CEO Ding in a statement.
He said he plans to release more mobile games that leverage
the company's research and development expertise in coming
"We find it encouraging that NetEase released its first mobile
game in the quarter leveraging the content of one of its most
popular PC games," wrote Morningstar analyst Dan Su in a report.
"We view mobile as an attractive growth area where NetEase can
tap incremental demand and achieve scale efficiency."
NetEase is the third largest company in IBD's Computer
Software-Gaming industry group, after Activision Blizzard
andNintendo Co. (
), beforeElectronic Arts (
By The Numbers
Overall, NetEase reported a strong second quarter. Earnings
rose 30% to $1.37 a share, handily beating estimates by analysts
polled by Thomson Reuters. Revenue leapt 27% to $393.2 million,
also topping views.
They were the best sales and earnings gains since the first
quarter of 2012. Sales growth accelerated for the third straight
Revenue from NetEase's online games was up 18.2%, while ad
services saw a 33.3% rise in sales. During the quarter, the
company commercially launched a new 3D real-time strategy game --
"Heroes of Three Kingdoms" -- and also introduced new expansion
packs for "Tianxia III," "Westward Journey Online II" and
"Westward Journey Online III."
"Recently released self-developed games, coupled with major
expansion packs of long-standing games, drove strong gamer
activities and spending in the quarter," wrote Su.
Price increases for flagship games such as "Fantasy Westward
Journey" and "Westward Journey II," which began in February, also
contributed to the favorable year-over-year comparison, she adds.
And efforts to "revive" the portal advertising business paid off
in the quarter, with NetEase attracting more ad dollars from
clients in the real estate, financial services and consumer goods
Analysts polled by Thomson Reuters see full-year earnings
rising 23% to $5.48 a share. They forecast a 10% increase in