iResearch Analysis on YY's IPO and Its Business

On the evening of Oct. 15th, 2012, YY Inc.submitted prospectus to US Securities and Exchange Commission and officially IPO in NASDAQ.

iResearch’s analysis:

Operation of YY Inc.: 

It core business are advertisement, game and YY Inc. value-added services, inclining to value-added services.

iResearch analyzed its prospectus and revenue structure, and found that YY Inc.’s business is turning its advertising to value-added services and online game. In 2009, its online advertisement and game occupied 57.7% and 39.7% of its revenue respectively. In 2010, online game became its leading business with a share of 67.3%. After 2011, online game was the first choice for Duowan.com to monetize traffic, whose revenue occupied almost 50%. Besides, YY Inc. made the best of its giant user base and launched a series of value-added services, including YY Music which grew rapidly, to acquire nearly 50 million Yuan in 2011.YY Music has exceeded advertisement and became the second biggest business of YY Inc.

In 2012, YY Inc. officially made profits, while in 2011, 2010 and 2009, its losses were 80 million Yuan, 0.24 billion Yuan and 50 million Yuan. YY Inc. needs a higher product development cost to transit business to value-added services from advertisement business. According to the prospectus, in 2011, the research and development cost took 23.5%, and rose to nearly 36% in the first half of 2012. Hereinto, the biggest loss happened in 2010, which was caused by expenses in personnel expansion, product R&D and part of patent legal fees. In March, 2011, the official launch of YY Music demonstrated that YY Inc.’s value-added business was formed, some R&D money was needed before the new products were launched. YY mobile client R&D, virtual currency and voice and video function in social contact platform will bring more cost pressure. In addition, the staff number was 339 in 2009, and it rose to 600 in 2010, 854 in 2011, and up to September of 2012, the staff number had reached 1222, as a result, the personnel cost more. In financing aspect, YY INC. has gone through 5 financings: US $ 1 million Angel Investment in 2005, US $4 million from Morningside Ventures in 2007, US $ 5 million from Steamboat in 2008, US $23 million from GGV in 2009, and $US 100 million  from Tiger Fund in January, 2011. From the time period, we can see that in 2010 and 2011, YY INC. got financial support that helped it to expand, meanwhile, the investment cost also followed to rise.

Core success factors for YY Inc.

1.A high quality information site aim at users and serve for advertisers, which forms YY Inc.’s initial commercial model dominated by advertising revenue. Duowan.com is one of the earliest websites that entered vertical game information site industry, with the rise of World of Warcraft that popularized with users, Duowan.com provided professional game information that attracts deep game fanciers at first, and then it got public praise and developed fast. Depend on its high quality video and information, Duowan.com gradually took the lead of the industry and brought traffic. High traffic helps to serve advertisers better and generates revenue; this is the initial income source of YY Inc. relying on Duowan.com.

2.Mine the users attribute of Duowan.com, fully use its traffic to establish web game business and form the commercial model oriented by web game union operation income. Duowan.com which is dominated mainly by game users satisfies their appeal and these users have strong desire for games, so Duowan.com enjoys an innate advantage for union operation of web game.

3.YY Voice satisfies the communication appeal of game users, its core business serves for users, raise high advertising bargaining power and media value. YY Inc. binds many game users and produces high viscosity, which makes its media value prominent and raise YY Voice client advertisement bargaining power.

4.The diversified development strategy of YY Voice is a part of YY value-added services. On the basis of prospectus, the income of YY Music has exceeded advertisement and become the second biggest. With features like weak tie and single transmission, YY Inc.chooses music, education and video to satisfy its product feature.

iResearch holds that by summarizing the success factors of YY Inc., we can find that its successis attributed to the business which satisfy game users’ appeal, from advertisement and web game to YY Voice, all mined on the basis of the whole game service industry, are the key factors for YY Inc.’ success.

The present revenue of YY Inc. and its strategy

Present revenue: the unique visitor number of Duowan.com tends to be stable, the input money of game advertisers fluctuates in the whole and the developing space of advertisement and game is limited.

iResearch made clear of the advertisement and game revenue. In the first half of 2012, its game revenue reached 150 million Yuan, the annual revenue of 2011 was 170 million Yuan and its growth rate was 500% in 2010. As for advertisement, its advertisement revenue in 2010 was 40 million Yuan and 2011 90 million Yuan with a growth rate of 100%. Duowan.com is a core business of YY Inc., bringing in good income with the combined operation of advertisement and web game.
 


According to the latest data released by iUserTracker, a data base measuring Internet users’ online behaviors, among the China top 5 game information websites by monthly unique visitor from Aug. 2011 to Aug. 2012, the game channel of Tencent surpassed Duowan.com and became the leading corporate in the industry in the end of 2011, while Duowan.com increased steadily and became the second largest corporate.

According to the latest data released by iAdTracker, a monitoring system for online advertising, the input money of China online game advertisers shows a trend of steady upswing, reaching the peak of 240 million Yuan in Q3 2012, and the valley of 130 million Yuan in Q1 2008. 
 


iResearch analyses that revealed by the measurement data of iAdTracker, the overall input budget of online game advertisers gradually tends to be steady. In this background, it is unlikely to realize high profit through advertisement. The traffic of Duowan.com also tends to be steady, while the domestic web game develops rapidly, its online game revenue growing speed will be equal to that of the industry. Therefore, iResearch holds that the growing speed of advertisement and game of YY Inc. will slow down.

Strategy: YY Inc. realizes strategic transformation, and value-added business such as music, video and education get YY Inc. head for the diversified interactive entertainment community.

YY Voice is a product just for communication. The commercial models except for the membership can’t bring money directly, so like other instant messaging softwares, YY Inc. makes profits by value-added services. According to the prospectus, YY Voice has become the second largest business of the company and kept a high increasing speed.

iResearch analyses that YY value-added services will help YY Inc. gain more expectation in capital market. The reasons are as follows: Firstly, when YY Inc.’s advertisement and game business face a bottleneck, its value-added services will raise profit. Secondly, YY valued-added services can share risks and balance business structure. Thirdly, YY value-added services transfer YY Inc.from a game-relative service into an interactive and community business, making the capital market have more imaginary space.

Future competition risks:

On the basis of the latest data released by iUserTracker, iResearch finds that the monthly unique visitors of Duowan.com keep increasing while monthly unique visitors of Tencent Q Talk, rereleased in 2011, keeps a stable increasing speed. YY Inc. and Tencent Q Talk are two main voice tools for game with similar features. The data shows that the increasing speed of YY Inc.isn’t influenced by Q Talk. Brand awareness of voice software will form certain threshold.

iResearch analyses that the key advantage of YY Inc. lies in proper positioning. YY Inc. excavates the platform features of YY Voice and makes full use of giant user base to provide users with entertainment, education service based on weak social contact. Proper positioning is a key factor for the success of its value-added services. Compared to other instant messaging softwares, the development of YY product depends on web game and focuses on game users. Therefore, Duowan.com must consider how to attract other users besides game players, and stress the strategy of binding users and using value-added services to realize monetization.

Opportunity and crisis: penetration advantage of YY in game is prominent, so it’s difficult for Q Talk to defeat YY Inc.

iResearch chose games of different types to analyze the influence of YY Voice and Q Talk by their penetration rate in game players. We find that the user penetration of YY in each game is much higher than that of Q Talk, even for games produced by Tencent such as League of Legends, Cross Fire, QQ Speed and Dungeon and Fighters, YY also has overwhelming predominance.

iResearch analyzes that voice software is an additional product of game. After years of operation, YY has built its own mature brand. According to the present situation of YY Voice and Q Talk, YY Inc. has evident advantage in game penetration, while Tencent is still the champion of web game corporates and owns user desktop entrance. If Tencent continue to develop voice business, it will be the biggest competitor for YY Inc.

Above all, iResearch thinks that:

Game is the footstone for YY Inc. and its voice business help it head for diversification.

1)Advertisement, game and value-added services will be YY Inc.’s main business, hereinto, game is still the main channel for monetization. The media attribute of Duowan.com and YY Inc.determine that it has a born advantage for web game. As for advertisement, it is easy for Duowan.com to target ads precisely with its own traffic and good quality users, so pressure of realizing monetization through advertisement is not too much. YY value-added service will be an important strategic target, which will help YY Inc.transfer from vertical business to diversity.

2)YY Voice depends on games with a feature of weak contact. YY Inc. chooses music, education, which precisely holds the feature of single transmission.

3)From the user base of YY Voice, Q Talk, similar with YY hasn’t threatened it with a comparatively big user base. Tencent has already promoted Q Talk through other game businesses. We can see from the data that the penetration of Q Talk is much weaker than YY Voice. At present, YY Inc. holds a relative firm position in the industry, but Tencent hasn’t taken Q Talk as an important business yet. If Tencent assembles mature traffic products and lead them into Q Talk, YY will be threatened in some way.

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