Just this past week, two major China Internet deals happened. First, there was Softbank Japan’s massive Series D investment of US$250 million in PPLive, a video streaming site, and Tencent’s US$400 million purchase of a majority share in Riot Media, a US game publisher.
Most interesting from an investor’s point of view was the Softbank Japan investment in PPLive. Western institutional investors looking at China, especially in the runup to Youku’s going public on Nasdaq late last year, have been looking for the Chinese YouTube.
Because of Tudou’s inability to go public in a timely manner (reportedly this is because of the CEO’s pending divorce), instead of the online video market moving towards consolidation as one would expect, the Softbank Japan/PPLive deal shows that the market is heading towards greater fragmentation. In contrast to Youku and Tudou, PPLive uses P2P technology which requires users to first download a player, then download the streaming video.
From a business point of view, the P2P protocol offers an added advantage: PPLive can insert ads directly because it owns the downloaded player. This is in contrast to Youku and Tudou who broadcast in the browser and who have traditionally worked with ad agencies. Because there are no ad standards organisations in China promoting online advertising formats, all online video companies have largely had to go along with advertisers, designing custom formats to suit their requirements.
Along with Shenzhen-based Xunlei, in which Google owns a minority investment, PPLive are the two leading users of P2P streaming technology in China.
Through this move, Softbank Japan has helped the fragmentation and further segmentation of this video market. Qiyi, owned and backed by Baidu, and the Chinese state-owned online video sites, led by CNTV.com, will all offer the current players a run for their money when they IPO. In fact, the Chinese government is more strictly enforcing online broadcast licenses for all companies, which means that their costs are going up, while the advertising revenue pie is getting cut up into ever smaller slices.
Softbank Japan has been a shrewd investor in Asia, and has helped to build the market out by leveraging smart investments. In Japan, it has been able to profit nicely from its distribution rights for iPhone in 2008, stealing the thunder from KDDI and putting the former leading mobile operator on the defensive. Just like in China, the iPhone has been a major hit in Japan, largely replacing other leading brands. It’s likely that a significant part of the money going to PPLive comes from Softbank Japan’s distribution rights for the iPhone in Japan.
Since Google is the most cash-rich US Internet company, it would be wise for it to follow Softbank Japan’s example by investing in Chinese companies and helping to build out the Internet ecosystem in that flourishing market. Most of the VC funds now operating in China are also cash-rich, and are investing in the late stage of the market at the Series C and D levels. Google could speed up the development of the Internet and mobile space by investing in companies at amounts in the US$5-50 million range, a gap which is a deep abyss and major challenge for many Chinese startups. Assuming that Google goes for 20% ownership in each investment round, this would give the companies a post-money valuation of US$25 – 250 million, which would be a major help for many Chinese companies to reach a liquidity event.
This would help Google overcome its image problems following its confrontation with the Chinese government last year, and would help it to win new friends in the world’s single largest national market.