Twitter Blinks At China, As IPO Draws Sina’s Gaze

Twitter blinks at China

Much is being written about Twitter’s upcoming IPO, including what the mega-offering by one of the world’s top social networking services (SNS) might mean for China. The early consensus seems to be that Twitter won’t find much business in China, where its site is currently blocked due to sensitive content. At the same time, leading Chinese web portal Sina (Nasdaq: SINA) is most likely following the IPO very cosely, as it could help to boost the valuation of its own Weibo service, often called the Twitter of China.

Let’s start this quick Twitter overview with a look at the actual company and its prospects in China. Some might say that this is a non-story, since Twitter’s main site has been blocked in China since 2009, presumably because it has no China offices, which means it is not subject to Beijing’s tough self-censorship rules. Rival social networking giant Facebook (Nasdaq: FB) has also been blocked in China since 2009 for similar reasons, though that company has insisted it wants to establish an eventual presence in the country.

To successfully placate Beijing, both Twitter and Facebook would most likely need to incorporate locally in China, open offices here and form joint ventures with local partners, which would then force them to abide by Beijing’s censorship rules. Those rules stipulate that Internet companies must self-police themselves for users-generated content on sensitive subjects, and then delete such content when it is posted.

While Facebook has shown at least an initial willingness to consider such steps, Twitter seems to be ignoring China for the moment and focusing on its main user base in the US and other western markets. According to the latest reports, Twitter made only passing references to China in its early IPO filings. Most of the discussion centered on China as an an example of political risk the company could face in places where governments closely monitor SNS sites like Twitter and Facebook. (English article)

All that seems to indicate that Twitter won’t be entering China anytime soon, and indeed CEO Dick Costolo has previously said the market isn’t a place where his company can operate. Of course, that’s just the company’s view for now and it could come under pressure to change its course if investors feel the China market is too large to ignore. But I wouldn’t expect any changes for at least 2-3 years.

Meantime, reports that Twitter’s IPO could value the company at $10 billion or more must look appealing to Sina, whose own Weibo could get a boost from a strong Twitter valuation. Sina Weibo was valued at $3.3 billion in April, following a $586 million investment for 18 percent of the service from leading Chinese e-commerce firm Alibaba. (previous post) Chinese media are saying that Weibo’s potential valuation was once much higher, perhaps as high as $8 billion, at the height of its popularity. (Chinese article)

In fact, Sina Weibo is still quite popular, even as it faces a strong recent challenge from WeChat, a mobile instant messaging SNS service from rival Tencent (HKEx: 700). Sina reported that Weibo’s revenue tripled in its latest reporting quarter, even though the site’s advertising income, its main revenue source, was relatively modest at $30 million for the 3 month period. By comparison, Twitter was earning about 4 times that amount of revenue each quarter in the first half of this year. Both companies are still losing money, though Sina has never publicly commented on the size of Weibo’s losses.

So what are we likely to see for Sina Weibo’s valuation when Twitter’s IPO finally comes? My guess is that Sina Weibo is probably worth one-third to perhaps as much as half of what Twitter is, based on the size of its revenue. That would mean a $10 billion valuation for Twitter would value Weibo at $3.3 billion to $5 billion, giving it a slight boost from its current levels. At the end of the day, Sina could look forward to a slight rise in Weibo’s value from the Twitter IPO; but such good news could be short lived as Weibo contends with slowing growth and growing competition from WeChat and other rival operators.

Bottom line: Twitter is unlikely to enter China anytime soon, while its IPO could help to slightly boost the valuation of Sina Weibo.

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