Phoenix New Media (NYSE: FENG) is in some ways the darling of Chinese web portals, the fast-growing newcomer fresh off an IPO. In discussing Phoenix’s Q2 financial report, CFO Lily Liu disclosed that advertising rates on its iFeng.com portal site were up an industry-leading 70% year-over-year.
But to join the ranks of China’s internet giants, Phoenix must become a new media company. Its name is deceptive: at present, Phoenix New Media is essentially an online newspaper and TV channel that sells ads.
China’s largest portals have evolved from that early model to embrace a range of business models and become multi-billion dollar companies in the process (Phoenix New Media had a market capitalization of $502 million as of Aug. 29, 2011). The Chinese portal site, in other words, has become a customer acquisition channel for other business units, notably gaming, social media, and broader video content.
Netease (NASDAQ: NTES) makes the majority of its money in online gaming. Sohu (NASDAQ: SOHU) is likewise big in online gaming, as well as video, browsers, and search. Sina (NASDAQ: SINA), meanwhile has spawned a runaway success with its Sina Weibo microblog, which has 200 million registered users and accounts for approximately half of the firm’s $6 billion market cap. All started as news portals.
Phoenix New Media's iFeng.com portal site
Phoenix’s Dim Prospects in New Media
Phoenix New Media may be ‘new’ relative to its parent company and 52% stakeholder Phoenix TV, but it’s already a traditional or even ‘old’ model on the internet. The closest to success that Phoenix has come are its forums and expert blogs, which provide a modest amount of user-generated content. Deutsche Bank estimates, “Phoenix New Media had 3.3m registered blogs as on March-2011. The site seas 100,000 blog postings per day, and enjoys the involvement of an audience of roughly 1m participants (who comment on blog postings, etc.”
Phoenix has not shown that it can capitalize upon the new in a major way. When weibo (microblogging) was the trend, Phoenix New Media launched its own. But it’s gone nowhere.
Phoenix CEO Shuang Liu recently commented that, “Weibo is shit.” CFO Liu explained, ”Mr. Liu was definitely not negative about weibo. His point was that in terms of content, weibo has a lot of superfluous, or even fake things, whereas a quick blog has a higher quality of content.”
Now that lite-blogging is the trend, Phoenix New Media is trumpeting its Kuaibo (‘Quick Blog’) to lead the firm into social media. In an interview with iChinaStock, CFO Lily Liu stated, “We will connect our Kuaibo with [our microblog] and blogs in the future. But our focus will be on Kuaibo. Kuaibo will become our main social media product.” Phoenix intends to spend RMB 20 million (about USD 3 million) to develop Kuaibo in the second half of 2011.
But as was the case with weibo, Phoenix New Media is but one of many jumping on the buzz. In addition to hot startups like DianDian, many of China’s internet giants have their own entries in the market: Tuita by Shanda (NASDAQ: SNDA), Qing by Sina, and Lofter by Netease. As with weibo, it’s unclear what advantages Phoenix New Media’s “me-too” entry into lite-blogging holds over its competitors.
Investors are rightly unimpressed. In assessing Phoenix’s Q2 financial report, Deutsche Bank Asia writes, “Phoenix New Media’s shares pulled back sharply after results, likely due to the co’s ambitious investment in new product devpt. The company is launching a Tumblr-like SNS product “Kuaibo”. It expects to gather 2m registered users by year-end. PNM plans heavy investments in Kuaibo in the next 1-2 years.” Deutsche Bank cut its forecast for non-GAAP net profits in 2011 and 2012 by 15% and 9% due to the unexpected investment.
Building a social product is tough. Just ask Google or Baidu. Traffic or content is far from a guarantee that users will use your new social products to discuss their lives or interests. It will surely require more than jumping from trend to trend.
Two Paramount Relationships: Phoenix TV and China Mobile
Phoenix New Media is heavily dependent upon two of its stakeholders, Phoenix TV and China Mobile, for content and distribution. These two relationships are at once Phoenix New Media’s greatest strength and risk.
Phoenix Satellite Television Holdings Ltd ((2008.HK) holds a 52% stake in Phoenix New Media (see diagram). Phoenix New Media, in turn, has an exclusive contract to use Phoenix TV’s brand, video, text, and images on internet and mobile channels for a nominal fee of RMB 1.6 million. Phoenix TV, a Hong-Kong based media, holds a strong reputation among Chinese for providing comparatively independent and international content. It reported on 9/11, for example, while China’s state-owned media waited for official directions.
Phoenix TV is the portal’s top source of content. Deutsche Bank Asia estimates, “Roughly 50% of Phoenix New Media’s overall video content is from Phoenix TV. Phoenix TV contributes 70% of ifeng.com’s online free videos, 100% of its online paid videos, 70% of its mobile free videos and 50% of its mobile paid videos.” In May, Chun Liu, Phoenix TV’s executive station controller departed to join Sohu HDTV, which may signal he was not entirely sold on Phoenix New Media’s prospects in video.
About 40% of Phoenix’s total revenues go through the telecom China Mobile, which is a 20% stakeholder in Phoenix TV. In Q2, 90% of paid service revenues ($17.6 million) were MIVAS (mobile internet value-added services). Of MIVAS, 90% went through China Mobile, while China Unicom and China Telecom accounted for the remainder. While the relationship is bolstered by China Mobile’s 20% stake in Phoenix TV, but Phoenix New Media is still highly subject to detrimental policy changes by this one telecom operator.
Mobile Value-Added Services Are Not The Focus
Phoenix CEO hailed the ‘milestone’ of advertising ($17.6 million) reaching just over 50% of revenues in Q2. CFO Lily Liu said she expects advertising to exceed 70% of revenues in the future. But its also a sign that Phoenix New Media’s real business is still as a portal that sells advertising; its one other business, paid mobile services, is growing, but at a slower pace. CFO Liu is not concerned: “First, Although WVAS business accounts for a big portion of revenues now, the percentage will be lower in the future. Second, WVAS contributes a very low net profit margin, less than 5%. So it doesn’t affect our overall net profit to a large extent.”
Carrier relationships, such as Phoenix’s tie-up with China Mobile, will also lose value in the smartphone era. It’s likely that a lot of the paid services Phoenix provides to feature-phone users on 2G and 2.5G networks will not be paid for by smartphone users on 3G networks, who have far more autonomy and free content available to them. Phoenix’s current MIVAS moneymakers–newspaper subscriptions, mobile video, SMS, MMS, and ring tones all heavily promoted by China Mobile–will face open and fierce competition in the emerging smartphone market.
CFO Liu states, ”The reason we are still doing this is that most of our paid customers are China Mobile users. They use 2G, 2.5G and 3G services. We need to provide full-suite services to them. So we will do whatever we can in the business. But it is not our focus.”
Are Phoenix New Media’s User Really High-End?
Phoenix New Media touts the three “highs” of its users: high-education, high-income, and high-maturity. But the comparisons are all against Chinese internet users in general.
In reality, Phoenix New Media is known for both its high-quality news content, much from Phoenix TV, and its popular gossip content. iFeng.com features many pictures of scantily clad girls with sensational headlines: “Vacation photos of 22 year-old female star and 63 year-old tycoon (August 31).” Phoenix New Media is also known for its news and forums on military news, frequented by ‘fenqing,’ China’s angry youth.
iFeng famous not only for its business users, but also for gossip and military news that appeal to another audience
From the perspective of brand advertisers, while former news audience is desirable, the latter users reduce the premium they’re willing to pay. iFeng.com attracts a wide range of visitors, a mix that is likely not much different from other Chinese portals (with the exception of Tencent’s QQ.com, which is distinctly lower-end).
New Media Grows Old
America’s top portal sites, like AOL and Yahoo, are mere shadows of their former glory, as portal pageviews have failed to keep up pace with the rest of the net. Unlike China’s early web portals, those sites were able to evolve their business models beyond selling ads for pageviews. A sore disappointment to bright-eyed investors, they were not the ones to capitalize upon the internet rocketship in so many other realms, from gaming and video, to search and e-commerce.
Phoenix New Media’s portal still has room to grow via advertising revenues. But if it wants to grow multi-billion dollar big, it needs to evolve its business model as China’s other portals have done. Phoenix needs to find the ‘new’ in its media empire.
By Kai Lukoff, iChinaStock.com
Source:businessinsider