How Big Is Weibo’s Censorship Discount?

Leonid Bershidsky argues at Bloomberg View that the value of Weibo’s “less-than-stellar” lower end public offering ($3.46 billion compared to Twitter’s $25.2 billion) “provides a unique opportunity to quantify the elusive effect of freedom, or lack thereof, on the value of social networks”:

Weibo’s IPO prospectus says this in the risks section: “Regulation and censorship of information disseminated over the internet in China may adversely affect our business and subject us to liability for information displayed on our platform.” Weibo goes on to say it “cannot effectively control or restrict” content published by users despite the fact that censors — reportedly, 150 of them, aided by a system of software filters — work around the clock to remove forbidden material. In fact, censorship may be having an adverse effect on Weibo’s user base growth. In January, London’s Telegraph newspaper published the results of a study it commissioned, showing that Weibo usage dropped sharply after a 2013 campaign by the Chinese government to intimidate influential users. One of them, venture capitalist Charles Xue, was arrested and accused of soliciting prostitutes. Others got the message and either stopped using the platform or cut down on posting.

[…] Here’s the math. In the fourth quarter of 2013, Weibo reached 129.1 million monthly active users to Twitter’s 241 million, a ratio of 0.54. In the same period, the Chinese company made $71.4 million in revenue, or $0.55 per monthly active user, compared with Twitter’s $242 million, or $1 per user. Weibo’s appeal is limited to China, while Twitter’s is global, so the difference in growth potential also needs to be factored in. China’s population is 10.5 percent bigger than Weibo’s current audience, while the world’s population is 29 times the user base of Twitter, implying a discount ratio of 0.27. Multiplying Twitter’s market cap by the three discount ratios gives $2.02 billion — even less than Weibo’s IPO price.

This would imply that markets are too cynical to price in something as ephemeral as freedom. There is, however, a way in which it could still affect valuations: through revenue per user. This indicator is 45 percent lower for Weibo than for Twitter in part because the latter makes most of its money in the U.S., where the advertising market is stronger than in China. Another reason is the Chinese microblogger’s lower engagement, in which censorship and self-censorship undoubtedly play a role. On Weibo, about 5 percent of users account for almost all original content. Even counting all the reposts, Weibo registered about 100 million messages a day last year, while Twitter reported 500,000 million tweets a day, 2.7 times as many per monthly active user.  [Source]

At Reuters, Gerry Shih and Yimou Lee report that the coincidental timing of Big V Charles Xue’s release and Weibo Corp’s IPO highlights the transition from “being a microblogging phenomenon in China to becoming an entrenched member of the international social media industry”:

A study released in January by Britain’s Telegraph newspaper and East China Normal University in Shanghai claimed that the number of Weibo posts have fallen as much 70 percent since its peak in 2012, after the government required users to display their real names to post content.

However, the company’s regulatory filings said that monthly active users have grown for eight straight quarters, including a 34-percent gain to 144 million in the quarter ending last month.

Investors chasing growth aren’t fazed for now. Weibo shares rose 19 percent from its offered price of $17 on Thursday, the eighth-best debut for a U.S. listed tech stock this year.

“Weibo has to answer to two different bosses: one is the [Chinese Communist] Party and one is the stockholders,” said Min Jiang, a professor of communication studies at the University of North Carolina, Charlotte who studies Chinese Internet issues. [Source]

See also a Bloomberg video report on Weibo going public featuring an interview with Weibo Chairman Charles Chao, who explains what makes the social networking site unique from Twitter and what the company expects to see for future growth. Read more about Weibo’s recent challenges, via CDT.