INTERNET: Adjusting NetEase Eyes Cloud, Has BAT Potential

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Bottom line: NetEase’s move into cloud computing and closure of its forum service are part of an overhaul positioning it for future growth, and could propel it into China’s top 3 Internet companies in the next 5 years.

NetEase launches cloud service

China’s lowest-key Internet giant NetEase is making some more new adjustments, extending reports last week that it was planning to spin off or sell its old but stagnating web portal business. One of the new moves includes word that the company has shuttered its equally slow-growth web forum business. The other has the company launching a new cloud service, with plans to pump hundreds of millions of dollars into the business over the next few years.

Taken collectively, this latest series of announcements appears to show a company in transition, as founder and chief William Ding tries to position NetEase for future growth. That strategy includes jettisoning NetEase’s original portal-based news and information services and replacing them with newer offerings to complement the company’s core online gaming business.

I’m personally a big fan of Ding, whose low-key and wonky nature are quite similar to Pony Ma, the better-known founder of Tencent (HKEx: 700), China’s largest Internet company. Like Ma, Ding is a true Internet junkie who seems to understand what web users like and want. That compares with a more salesman-like and entrepreneurial style of the chief executives at many of China’s other big Internet companies.

While everyone closely watches China’s Internet “Big 3” of Baidu (Nasdaq: BIDU), Alibaba (NYSE: BABA) and Tencent, sometimes collectively called the BAT, I would argue that NetEase may soon enter that club. It could even overtake the smallest of the trio, Baidu, which has a market value of $65 billion. By comparison, NetEase is now worth about $32 billion, following a run-up that has seen its shares surge 80 percent since mid April.

All that said, let’s review the latest headlines that show why NetEase may finally be breaking away from China’s crowded field of smaller Internet companies and entering the big leagues. The company made its fortune by switching its focus to gaming from its original portal business about a decade ago, and has remained the nation’s second largest player in the highly competitive space since then, behind only Tencent.

Late Arrival

In one of its biggest expansions in years, the company has just formally launched a cloud service business, with Ding saying he will invest billions of yuan in the business over the next few years. (Chinese article) The reports point out that NetEase is coming to the business relatively late. Tencent was the first BAT firm to enter the area in 2010, followed a year later by Alibaba and then Baidu in 2015.

I would tend to agree that NetEase’s arrival is rather late, and that it will face not only competition from the other Internet leaders but also the likes of local telecoms giant Huawei and global e-commerce leader Amazon (Nasdaq: AMZN). But that said, I also have a lot more confidence in Ding’s understanding of the Internet than many of China’s other company chiefs, and would give his initiative a relatively strong chance of success despite its late start.

At the same time as he enters the cloud, Ding is clearly trying to clean up his company by getting rid of its older portal-based assets that have little growth potential and are becoming a distraction. The latest reports that NetEase will shutter its online forum service seem like an extension of the bigger news last week that the company was looking to spin off its original news portal business. (Chinese article; previous post)

NetEase announced the closure in an online message earlier this week, marking the end for one of the oldest services of its kind in China dating back to 1999. The reports point out that the service was designed in a far different era when desktop PCs were the main access point for web surfers. I doubt too many people will miss the service, since most people now access the Internet with their smartphones. More broadly I also applaud NetEase for becoming more active about getting rid of its older portal-based businesses.

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