Blog Post

How One Social Net In China Is Making A Lot Of Money

While U.S. social networks and portals watch their profits shrivel along with the online market advertising market, one of their Chinese counterparts is doing just fine with a different revenue stream: the sale of virtual goods. Chinese web portal and social-network operator Tencent announced in its fourth-quarter 2008 earnings release that it had increased both revenue and gross profits over the previous year in the 80-percent range — and mostly from selling virtual goods around its social network and portal. Most of the revenue came form users of its QQ gaming platform, but also included instant-messaging upgrades and wallpaper that users of its social network, Q-Zone, must pay for.

Unlike its U.S. counterparts Tencent makes money by relying on users to spend money within its networks, not on brands to advertise on it. For example, online advertising is a small part of Tencent’s overall revenue, or only 10 percent, while e-commerce represents about 70 percent of the company’s overall revenue (mobile makes up the rest). In all, it sells about $750 million in virtual goods a year. The company said the Chinese New Year and winter college break should help the sale of virtual goods in the first quarter of 2009.

As for advertising, the news is not as good. The company expects ad revenue to continue to be weak this year as brands cut their marketing budgets. Tencent is making a larger bet on virtual goods than its Chinese portal competitors: Sina (NSDQ: SINA), Baidu (NSDQ: BIDU) and Sohu (NSDQ: SOHU) all make at least 70 percent of their revenue from advertising.