Why Renren Acquired Chinese Video Site 56.com

Yesterday Renren (NYSE: RENN) announced that it acquired 100% of video site 56.com for $80 million. 56.com is China’s 6th most popular video site, with 7.7% market share and approximately 6.7 million average monthly uniques, according to iResearch.

The acquisition will provide Renren with a badly-needed video strategy at a bargain price. Similar to Sina’s recent acquisition of 9% of Tudou (NASDAQ: TUDO), Renren is hoping to realise synergies between its social network and user-generated video.

Addressing a Weakness: Renren’s Video Strategy
Renren currently lacks support for direct video uploads. Instead, users first have to upload their video to a third-party site like Youku (NYSE: YOKU), Tudou, or 56.com. That’s not only inconvenient, but is also at odds with the concept of a real-name social network: if a user only wants to share with his friends, why should he first have to upload to a public site?

One could ask why Renren didn’t just build this critical video upload feature itself, as Facebook did.

First, Renren is likely overstretched as it attempts to grow its core site (renren.com), its social gaming platform, a group-buying site (nuomi.com), and a professional social network (jingwei.com). An experienced team that knows both video content and advertising is a welcome addition.

Second, video advertising, where 56.com also has the experience, is far more complicated than simple video uploads. Advertising appears to be Renren’s bread-and-butter, as gaming is fading and group-buying site Nuomi’s future is uncertain (CEO Joseph Chen said Renren is providing “way too much” of the investment in Nuomi). Renren is surely gunning for a slice of the growing video advertising market and is willing to go far further than Facebook in pushing ads.

Joe Chen, Bargain Hunter
Renren CEO Joseph Chen is a bargain hunter and 56.com fit the bill. He reportedly acquired Xiaonei.com (what is Renren.com today) for less than a million dollars.

Even more important than the $80 million acquisition price is that 56.com is only losing a small amount of money ($500,000 in Q2).

Before you laugh, consider that another video acquisition–Shanda Interactive’s (NASDAQ: SNDA) acquisition of video Ku6 (NASDAQ: KUTV)–went sour after requiring large cash infusions from the parent company. Youku and Tuodu are both years away from profitability.

By comparison, 56.com is low-risk. Ad rates are rising and bandwidth costs are falling. The content costs that are rising–professionally generated content–are largely irrelevant to 56.com, as it relies primarily on user-generated content (UGC). Deutsche Bank writes, “56.com is UGC, 20% in-house production and 20% others. 90% of the traffic on 56.com is watching UGC.”

As a note of caution, geographic expansion, one additional rationale for the 56.com acquisition proposed by Deutsche Bank and other analysts, seems an unlikely proposition. Renren users are concentrated in central and northern China, while 56.com’s userbase is primarily southern. But it’s unclear how use of a video site will drive registration for a social network.

Renren is flush with $1.1 billion cash-in-hand after its well-timed IPO (the stock is down by over 60% from its IPO price of $14 in May). The acquisition establishes a video strategy that’s key to user stickiness and the growth of its advertising revenues.

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