After the News Business Faded, These 11 Charts Show How China's Three Old Portals Make Money Now

More than a decade on, they have become completely different companies.

"Our revenue passed a billion dollars last year — an important milestone. Our 2016 results relied heavily on Weibo's performance. There's no doubt Weibo is back at the center of China's internet market."

On Thursday morning, Charles Chao got on a call with investors to celebrate the company's past year, then spent a long stretch of it on the details of Weibo's performance.

These are lines that could be moved to a Weibo investor call without changing a word, and Sina CEO Charles Chao has been repeating them for more than two years, ever since Weibo was spun off and listed.

Revenue grew 17%, and profit came to $225 million. Sina's 2016 revenue hit a record $1.03 billion, but 64% of it came from Weibo. Sina's market value matched Baidu's as recently as 2006. Today its most valuable asset is the Weibo stock it holds.

Sina is currently worth $5.3 billion and owns 54% of Weibo. In other words, Wall Street thinks everything Sina owns apart from Weibo is worth –$1.1 billion.

Portal Advertising Is Only a Small Slice of Revenue at All Three Portals

Sina, which made its name during 9/11 by updating breaking news faster than anyone else, was once grouped with the older NetEase and Sohu as China's three big portals. All three listed in the U.S. as China concept stocks in the early 2000s.

But first came Baidu search and Sina Weibo, then WeChat and Toutiao. The three portals stopped being the main gateway to information for Chinese users a long time ago, and they have been trying to transform themselves for a decade or more.

While keeping its online advertising business, Sohu also built search, games, corporate email, the Sogou Input Method and Sohu Video. It launched a video-sharing platform, Sohu Podcast, as early as 2006. Long before Youku Tudou and iQiyi began buying film and TV rights in bulk, Sohu opened a high-definition film and TV channel in 2009 and hired Liu Chun away from Phoenix Television to run original programming for Sohu.com and Sohu Video.

Of all those attempts, almost nothing is left today but the Sogou Input Method and Sohu Video. Most of the rest has disappeared from view.

Sina launched Sina Iask, UC, Weibo, and even Weiliao, a WeChat clone. Apart from Weibo, not much of that is left either.

In 2000, not long after going public, NetEase ran into the dot-com bust, and portal advertising could not pay for the company's growth. From then on NetEase turned toward games, and four years later games were its core business. In 2013 NetEase and China Telecom jointly launched Yixin. Like WeChat, it let users send text and voice messages to friends, and it had its own version of Moments. This was before WeChat had taken over everyone's life. Today almost nobody remembers Yixin.

The three companies now look nothing like each other.

Advertising revenue at the old portals and their news apps is falling across the board. Even NetEase, the strongest of the three, has seen its growth nearly stall.

Sina has essentially become a holding company for Weibo. NetEase lives off games while steering its news and music services toward a new business, e-commerce. Only Sohu is hard to read, with no genuinely healthy business to point to.

Sohu May Be the First Portal to Give Up on News Entirely

On the most recent earnings call, Charles Zhang still said he "hopes more users in second-, third- and fourth-tier cities, along with small and medium-sized businesses, will use Sohu's news app."

But with revenue still falling, shrinking the news business is the inevitable result.

In early 2015 Sohu cut more than 2,000 jobs, 13% of its staff at the time. On this week's earnings call, Charles Zhang said "Sohu's headcount will come down by a certain amount again." The cuts will fall mainly on the news and video businesses.

In its latest quarterly report, Sohu no longer breaks out news and video as separate lines. Together the two brought in 460 million yuan last year, down 22% from a year earlier, and most of that drop came from video.

Sohu Video started spending on licensed content earlier than Baidu, Alibaba or Tencent, but it could not beat their video sites in the spending war over rights.

The 2016 Report on the Development of China's Online Audio-Visual Industry put iQiyi, Youku Tudou and Tencent Video together at more than 50% of the market in 2016, while Sohu Video and LeTV together held less than 25%.

For the past two years, the dramas and variety shows people actually watch have concentrated on iQiyi, Tencent Video and Youku Tudou.

Video is a business you win by spending. Stop spending and the users go too.

"[The price war] disgusts me, it makes me sick, but we're still out there fighting it every day, spending huge amounts of money on it," Gong Yu said at an industry forum in April this year.

This year iQiyi plans to spend even more on licensed and original content, with a budget expected to top 10 billion yuan. Baidu's latest earnings report shows iQiyi pulled Baidu's operating margin down by 9.8 percentage points this quarter. The good news is that iQiyi has just found new money: it raised $1.53 billion (about 10.5 billion yuan) in convertible notes from Baidu, Hillhouse Capital and other buyers.

After Alibaba took it private, Youku Tudou also said it would put 10 billion yuan into content. Tencent Video has not disclosed its content budget for this year, but Penguin Pictures CEO Sun Huaizhong said at the China Online Audio-Visual Conference late last year that Tencent's spending on original content in 2017 would be nine times what it was the year before.

Sohu does not plan to keep burning cash. In an interview, Charles Zhang said Sohu Video is being more "rational" about buying content this year, and that Sohu will follow Netflix's model from here on, putting more effort into cheaper original dramas and paid content.

Netflix lives on paying subscribers in the U.S., where users long ago got used to a credit card being charged every month. In China, paid memberships still bring in very little.

One reason Sohu has stopped burning cash on video is that its other businesses can offer only so much support.

Sogou is the business Charles Zhang calls second in market share, with room to grow. It is also the unit where Sohu's spending has risen most. But the distance between second and first is simply too great. Sogou recently said it would use artificial intelligence to challenge Baidu, and yet Baidu has a near-monopoly on Chinese search; Sogou probably has a long way to go before it can carry Sohu's revenue.

And as with Sina and Weibo, Sohu is not Sogou's only shareholder. Tencent paid $448 million for a strategic stake in Sogou in 2013.

Games, the other business Sohu hoped would bring in money, has shrunk for three years running. The gap with NetEase's games keeps widening.

Sina Has Basically Become a Weibo Holding Company

Thanks to Weibo, Sina's annual revenue growth has held at 15% over the past three years even as portal revenue and its other businesses shrank. And since listing on its own, Weibo has reached a market value of $12 billion, twice that of its parent.

Since 2015, Weibo has supplied the bulk of Sina's revenue. Last year Weibo took in $660 million, more than 60% of Sina's total.

Weibo is the only part of Sina that is growing. For four years its growth rate has run ahead of portal revenue.

Last May, Weibo and Miaopai launched a livestreaming product, Yizhibo. Early this year came word that Yixia Technology, Miaopai's parent, might go public; Weibo is its largest shareholder outside Miaopai's founding team. But that is Weibo's business, and it has little to do with Sina.

Today's Sina has no new business producing growth other than Weibo. Depending on Weibo this heavily is the problem it faces from here: the day Weibo stops growing, Sina stops growing.

Weibo currently makes an average of 0.5 yuan per user. That number has barely moved in two years. To keep growing, Weibo needs more users — but its daily active users have grown more slowly for three quarters running.

When Weibo first took off it was a platform for everything. Now it is a place to read entertainment news and shopping tips. Weibo's own executives say young people like to shop and follow influencers there mainly for advice on what to buy.

The era Weibo operates in has changed too. Beyond the narrowing of what people read on it, Weibo has to fight for attention with social networks like WeChat, with instant-news apps like Toutiao, and even with shopping apps.

All of it is a ceiling on Weibo's future growth, and on Sina's.

At a Sina event earlier this month, Charles Chao said in a speech that daily active users of Sina's news app had grown 220% over the past year.

On yesterday's earnings call, he said Sina would keep its focus on mobile this year and push the portal business back onto a growth track.

NetEase Is in the Best Shape, Closing In on JD.com on the Strength of Games and E-Commerce

In 2016 NetEase became China's fifth most valuable listed tech company.

Over the past year its market value nearly doubled, from $23.9 billion to almost $40 billion today, closing in on JD.com.

Of the 38.17 billion yuan NetEase took in over the past year, 73% came from online games. Across 2017 the company released more than 40 mobile games. Old PC franchises such as Tianxia, Datang Wushuang, Fantasy Westward Journey and Westward Journey were brought to phones. Onmyoji, an in-house title NetEase itself did not take seriously at first, also pulled in enormous sums.

Last October, the game broke into the top 10 across all App Store categories in the month's first 13 days. That same month NetEase became the world's highest-grossing game company, beating Tencent on mobile game revenue for the first time.

Among the top-grossing apps App Annie tracked last year, four of the top five were NetEase games.

On last year's third-quarter earnings call, William Ding said the success of Onmyoji would not hurt NetEase's existing games such as Fantasy Westward Journey and Westward Journey, and that new titles would keep coming. This year NetEase will release a second batch, including Blizzard's Overwatch.

E-commerce, the business NetEase cares most about, also did well last year.

In 2016, revenue from NetEase's e-commerce and email businesses reached 8.046 billion yuan, up 117.5% from 3.7 billion yuan in 2015.

At Kaola's first press conference last March, William Ding said, "I hope that in three to five years Kaola Haitao can reach a market size of 50 billion to 100 billion yuan, and build another NetEase inside e-commerce." At the time, Ding was spending 90% of his energy on Kaola.

On NetEase Kaola you can find something called "Sanshi's Personal Picks," a recommendation column William Ding insists on updating himself.

Analysys published its China Cross-Border Import Retail E-Commerce Market Quarterly Monitoring Report, Q2 2016 last year, showing NetEase Kaola Haitao first in market share among self-operated cross-border platforms, at 17.1%.

Cross-border e-commerce cooled after the government issued new rules on overseas shopping last year. During Black Friday, the cross-border sites made far less noise, but NetEase was one of the only companies other than JD.com and Alibaba still pushing cross-border commerce at scale; the other was Amazon.

E-commerce is now near the top of NetEase's internal priorities. Its other products — NetEase News, NetEase Cloud Music, email and the rest — all feed traffic to it.

E-commerce is the growth NetEase has found for itself outside games.

But Even for NetEase, the Best-Placed of the Three, the Decline of News Will Be Felt for Years

None of them treats the portal as its focus, and yet all three have talked repeatedly on the past two years' earnings calls about how important their mobile news apps are.

For years all three have spent freely on phone pre-installs and app-store advertising.

The portals also copied Toutiao's personalized recommendations and started subscription accounts of their own.

Beginning in 2015, Sohu and then NetEase launched the Sohu Public Platform and NetEase Subscription Accounts, inviting professional independent publishers to join in the hope of bringing traffic and revenue to their news businesses.

All three are imitating Toutiao, using personalized recommendations to get you to read news.

But even NetEase News, the strongest of the three, is now clearly behind Toutiao and Tencent.

Because news is such a small share of revenue, its decline will not do much to Sina's or NetEase's books. That does not mean it will leave their future businesses alone.

Last year NetEase separated its news business and filed a draft IPO prospectus with the U.S. Securities and Exchange Commission.

"We haven't burned much cash on e-commerce. We mostly promote it with NetEase's own resources, so our cost of acquiring a customer is lower than our rivals'," a NetEase employee close to William Ding said in an earlier interview.

NetEase's e-commerce rose quickly mainly on traffic sent to it from inside the company, from NetEase Cloud Music and NetEase News — much as NetEase's games got their start. NetEase News mattered most of all.

But once e-commerce grows past what NetEase News can feed it, the company will have to pay for users to keep growing.

The decline of news apps also means a shrinking source of traffic. Even Taobao and JD.com, companies that never used to touch news, are now producing content to keep users in their apps longer, trying to capture the content traffic tied to shopping.

Users are expensive. JD.com now does 900 billion yuan a year in gross merchandise volume, and 85% of its revenue goes to advertising, traffic and other spending meant to generate sales — and that is with JD.com holding a recommendation slot inside WeChat.

NetEase News has stopped climbing. Once Kaola and Yanxuan lose that cheap traffic, keeping up with JD.com and Alibaba could get much more expensive.

Losing the traffic news brings is not NetEase's problem alone. In the end, the users reached through news services are the base from which all three portals have launched every new business for more than a decade.

The most recent example is Yahoo. The one-time ruler of the internet sold its internet business to the U.S. carrier Verizon last July for $4.8 billion, a price later cut by more than $300 million after a data-breach scandal. Yahoo, with more than 20 years of history, was once the pride of Silicon Valley, and Sina, NetEase and Sohu were all built in its image.

By the time the deal closed, Yahoo was worth less than nothing, once you set aside the Alibaba and Yahoo Japan shares it held.

Cover image from Pixabay; charts by Feng Xiuxia.