INTERNET: Internet Sees Messaging Surge, Microblog Retreat

Bottom line: China’s overall Internet growth will continue to slow as the market starts to become saturated, with messaging and other mobile services continuing to steal share from microblogging and video operators.

Microblogging decline bites Weibo

A newly released annual government report on China’s Internet is full of good news for the online business community, with most sectors posting double-digit growth as overall penetration neared the 50 percent mark. But a few sectors stood out as distinctive losers in the report from the China Internet Network Information Center (CNNIC), led by the microblogging space that saw a sharp decline in users.

That’s not too surprising due to departures or pull-backs in the space last year by big names like NetEase (Nasdaq: NTES) and Tencent (HKEx: 700), though it certainly doesn’t bode too well for sector giant Sina Weibo (Nasdaq: WB). Another relative loser was online video, which posted only tiny growth last year as the sector came under regulatory assault aimed at reining in companies like Youku Tudou (NYSE: YOKU) and Baidu’s (Nasdaq: BIDU) iQiyi.

The 2 biggest trends in the latest CNNIC report won’t surprise anyone, since they’ve been regular features in the headlines for the past year. The biggest of those is the huge move to mobile devices among Chinese web surfers. The second is a surge in popularity among mobile messaging services like industry giant WeChat and also up-and-comers like Momo (Nasdaq: MOMO), which are rapidly stealing users from Sina Weibo and other microblogging services.

Let’s begin with the headline figure of 649 million, which was the total number of Chinese Internet users at the end of last year, according to CNNIC. (English article) The figure represented a penetration rate of nearly 48 percent, which was up about 2 percentage points from the end of 2013. People who accessed the Internet over mobile devices totaled 557 million, meaning a hefty 86 percent of Chinese do their surfing on the mobile web.

The total user number was up just 5 percent this year, which was about half of last year’s growth rate, meaning China’s Internet is starting to become saturated after years of explosive growth. The 86 percent of total users who access the Internet over mobile devices was up from last year’s 80 percent figure, and I expect we’ll see the figure approach the 90 percent mark next year.

Among individual Internet sectors, messaging services now has the single biggest user base of 588 million, a figure that was up 10.4 percent from a year earlier. But the distinction for biggest gains went to online travel and group buying, which both saw their user bases expand by 22.7 percent to 222 million and 173 million users, respectively.

That sounds like good news for online travel sites like industry leader Ctrip (Nasdaq: CTRP), as well as challengers Qunar (Nasdaq: QUNR) and Tuniu (Nasdaq: TOUR). But the same trend in online travel shoppers has also fueled a concurrent jump in online service providers, and now most of those companies are locked in a fierce price war that shows no sign of slowing anytime soon.

The big gains for group buying look slightly better, since that sector is just emerging from its own recent consolidation after an intense period of competition for much of the last 3 years. The big gains could help attract more interest in 55Tuan, which has filed to make a New York IPO to become the first listed company from the space. (previous post) The strong potential could also help industry leaders Meituan and Dianping if either decides to make a listing this year.

Finally there are online video and microblogging, which were the big losers in this year’s report. Online video sites managed to post gains of just 1.1 percent to 433 million users in 2014. Microblogging users were the only major group to post a decline, falling 11.4 percent to 249 million users, an acceleration of the previous year’s 9.4 percent decline. Those trends certainly don’t look good for either group, and I expect the weakness for both will continue throughout this year.

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