China Telecom, NetEase JV Challenges WeChat

China Telecom, NetEase JV takes on WeChat

The headlines are buzzing about a new joint venture between wireless carrier China Telecom (HKEx: 728) and Internet company NetEase (Nasdaq: NTES), in one of the bigger media frenzies I’ve seen in quite a while for this kind of tie-up. But everyone loves a good contest, and this particular joint venture offers just that with a major new challenge to Tencent’s (HKEx: 700) hugely popular WeChat mobile instant messaging service, known in Chinese as Weixin. Just to make sure everyone understands what this story is about, China Telecom and NetEase have even given their new service the name of YiChat or Yixin in Chinese, which both sound quite similar to the English and Chinese names Tencent’s service.

Word of this new joint venture doesn’t come as a surprise, since media first reported that the 2 sides were forming such a tie-up in late July. (previous post) But the new announcement and press conference launch included quite a few details about the joint venture, which will have 200 million yuan in registered capital and be controlled by China Telecom. (company announcement; Chinese article)

Executives from both companies were on hand for the press briefing, including NetEase’s media-shy founder William Ding, who made the astute observation that the mobile instant messaging market needs more competition. Now we know why Ding doesn’t make too many media appearances! But another former NetEase executive who will head the new venture gave some more concrete targets, saying YiChat is aiming to have more than 100 million registered users within 6 months, with an active user base of more than 50 million.

Those figures look relatively achievable, since China Telecom already has more than 170 million mobile users and can aggressively market the service to them by offering free data packages for new subscribers. WeChat, by comparison, currently has more than 300 million registered users, including 236 million of whom use their service at least once a month. WeChat formed its own alliance earlier this month with China Unicom (HKEx: 762; NYSE: CHU), China’s second largest mobile carrier, with the pair offering special SIM cards and data packages to users of their new service. (previous post)

So, what chances do I give the new China Telecom-NetEase service for success? As I’ve said above, it should be fairly easy for China Telecom to get many of its existing subscribers to sign up for YiChat, using the data packages as a strong incentive. But it could be much harder to convince other carriers’ customers to sign up for the service. China Telecom and NetEase seem to realize this could be a challenge, and have added a feature that addresses this problem by letting YiChat users send messages to non-users of the service.

NetEase shareholders seemed to like the news, bidding up the company’s stock 5.5 percent after the announcement. China Telecom shareholders were less enthusiastic, with the telco’s shares up slightly on Monday. I personally think NetEase is one of the more innovative Chinese Internet firms in terms of social networking, which could help it find to develop and operate a solid new product in YiChat.

But the field of mobile instant messaging firms is quickly becoming crowded, not only with domestic players like WeChat but also with foreign ones like Line and Whatsapp. China Mobile (HKEx: 941; NYSE: CHL) is also developing its own mobile instant messaging service, and could have a huge advantage due to its control of two-thirds of China’s mobile market.All of that said, I do think that YiChat could enjoy some initial success due to its China Telecom connections and innovative partner in NetEase. But over the longer term I suspect the service will ultimately fail as it gets overtaken by better products with better connected backers.

Bottom line: China Telecom and NetEase’s new YiChat service could enjoy some initial success, but will ultimately be overtaken by better products.

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