Renren sells 56.com at a loss of 67.1 million US dollars, and Sohu's takeover is unlikely to change the situation

The money-burning model is still continuing and the elimination war in the video industry is not over yet.

As one of the earliest pioneers of domestic video websites, 56.com was once the most important chess piece for Sequoia Capital to dominate the domestic video industry.

Then in 2011, after the failure of its independent IPO, 56.com decided to "marry" Renren. What seemed to be a nearly perfect "marriage" at the time ended in failure again after a three-year run.

After selling Nuomi to Baidu last year , Renren Inc. is still continuing its asset divestiture. Recently, there was news that Renren Inc. will sell 56.com to Sohu for US$12.9 million .

From everyone's perspective, selling 56.com was a last resort.

According to Renren Inc. Chairman Chen Yizhou, the company's third-quarter financial performance may be even bleaker due to the impact from competitors, and it is difficult to make a profit with the current business model.

Regarding the takeover party Sohu, video industry analyst Zhao Rui told the reporter of Financial Weekly that "Sohu is good at long videos, and 56.com's advantage lies in UGC. The merger of the two can make up for Sohu's shortcomings in the industry."

A reporter from Financial Weekly learned from people close to the transaction that the two parties are indeed in negotiations, but the price has not been determined.

As of press time on October 31, 56.com, Renren.com and Sohu.com all said they would not respond to the rumors.

56.com's decline and valuation shrunk by nearly 6 times

56.com, which has always insisted on the UGC and PGC positioning of video sharing, was founded in 2005. After being closed down in 2008, it has been on the decline.

Let's freeze the time in the spring of 2008. Due to the chaos in the industry at that time, one or two hundred similar websites emerged overnight. The country began to centrally rectify the video industry, preparing to issue licenses and start an industry access system.

However, due to the lack of political sensitivity of the management and the lack of government public relations skills, 56.com not only failed to obtain a video license, but was also fined and closed for a month due to mistakes in video review.

The Internet economy is changing with each passing day. Although one month may not seem like a long time, it dealt a fatal blow to 56.com.

First, there was a large loss of existing user base.

According to video industry analyst Xu Hao, "Youku and Tudou divided up most of the user traffic lost to 56.com in a 60:40 ratio. Since then, Tudou and the up-and-coming Youku have firmly occupied the top group, far surpassing 56.com in popularity."

Secondly, after the brief closure of the site, PE/VC also became indifferent to 56.com. "This also directly led to the fact that 56.com did not attract any follow-up investment in the next four years," Xu Hao recalled.

56.com, which was on the road to decline, wanted to turn the tide. In early 2009, Wang Jianjun, a former executive of Sohu, officially joined 56.com as the company's CEO, hoping to revive 56.com's former glory.

However, a year and a half later, in May 2011, Wang Jianjun hastily resigned, once again casting a shadow over the company's future. In desperation, the burden of revitalizing 56.com once again fell on the shoulders of the company's founder, Zhou Juan.

In 2010, especially after Youku and Tudou went public, 56.com founder Zhou Juan realized that the capital market had few opportunities left for 56.com. Earlier, another competitor of 56.com, Ku6.com, was also acquired by Shanda.

In this situation, in September 2011, one month after Tudou went public, 56.com became a wholly-owned subsidiary of Renren for US$80 million.

Compared with the earlier price of US$44 million that Ku6 was sold to Shanda, the US$80 million that Renren offered to acquire 56.com was nearly twice as high, equivalent to 1/10 of Renren's market value at the time, revealing Renren's desire for the video field.

At that time, Renren CEO Chen Yizhou said that the main reason for the acquisition was that Renren users currently had a strong demand for sharing short videos, but previous investment in the original video field was seriously insufficient, and user demand had been suppressed. 56.com's positioning as mainly original videos was also more in line with Renren's demand for video content.

According to the financial situation of 56.com revealed by Renren's COO Liu Jian at the time, 56.com's cost pressure was concentrated in bandwidth, copyright costs were not high, and its annual loss was about 1 to 2 million US dollars, far less than Renren's group buying website Nuomi.com.

But over the past few years, the position of the first camp in the video field has been firmly locked by several giants. Among them, Youku and Tudou formed an alliance; LeTV was listed on the A-share market; iQiyi, which has not yet been listed, acquired PPS and has the support of Baidu; and Sohu Video has developed the characteristics of American TV series.

With Renren's investment and support over the years, 56.com, in addition to its main UGC/PGC business, also launched a reality show live broadcast platform - WoXiu in 2010. In fact, 56.com has only achieved a certain profit from WoXiu.

According to Renren’s second quarter financial report this year, the revenue of Woxiu’s business was only US$3.4 million, a decrease of 35.0% from the same period last year.

It is understood that the 56.com business has been operating independently since last year and has recently been officially spun off from 56.com. 56.com, which has completely lost its ability to generate revenue, is destined to be abandoned by everyone.

"Although 56.com saw a bright future for the show business, at that time, the show business was already dominated by giants."

Zhao Rui analyzed that this piece of cake has been basically divided up by 9158, YY Momo, and Liujianfang, and there are not many opportunities left for 56.com, which has also led to the fact that 56.com has never shown much outstanding performance to the outside world.

At the same time, Renren Inc. Chairman Chen Yizhuo also stated that due to the impact of competitors, the company's third-quarter financial performance may be even bleaker, and the current business model is difficult to make a profit. In the future, the company will stimulate its development by selling non-core businesses and investing in start-ups in the United States and Hong Kong.

"For Renren, which is still mired in losses, it is urgent to sell 56.com to realize cash," said Zhao Rui, the video industry analyst mentioned above.

Finally, the rumors came true.

On October 20, news broke that "56.com will be sold to Sohu for $12.9 million." Reporters called 56.com CEO Zhou Juan several times, but she hung up the phone saying she was in a meeting. Sohu has not confirmed the news yet.

However, industry insiders believe that this news is almost certain.

It is worth mentioning that compared with 56.com marrying Renren, the valuation of this hot potato is different from the past. Four years ago, Renren spent 500 million RMB to buy this video website. This time, Sohu acquired 56.com from Renren at a price of 12.9 million US dollars (about 79 million RMB), and the valuation has shrunk to 1/6 of the previous one.

Renren's market value plummeted by 3/4 in 3 years

Renren has not stopped divesting its non-core assets. In September 2013, a year before Renren decided to sell 56.com, it reluctantly sold Nuomi to Baidu for $160 million.

Previously, Renren CEO Chen Yizhuo said that Renren plans to sell some non-core businesses to improve profitability and is considering investing in the United States and Hong Kong, China.

According to Chen Yizhou, it is difficult for companies to make money with the current model. "We will carry out a thorough transformation and change our business model."

However, in the view of industry insiders, this transformation to mobile is a determination of great magnitude, but whether it will be successful remains to be tested by the market.

Once upon a time, Renren was regarded by the industry as "China's Facebook". When it was listed on the New York Stock Exchange in 2011, it attracted a lot of attention and aroused the attention of the industry.

However, with the advent of the mobile Internet, Renren has been complacent and its strategic transformation has been slow. Although Renren has also tried to move to the mobile side and launched a number of mobile application products, including Meitu and Mobile Chat, it has never been able to open up the market. These products have either been marginalized or died directly. As a result, Renren's business has continued to decline, and even losses have become the norm.

In May this year, Renren Inc. released its first quarterly report, showing that the company achieved operating income of US$24.9 million, a year-on-year decrease of 39.9%. Among them, Renren.com and Renren Games contributed operating income of US$12.2 million and US$12.7 million respectively, a year-on-year decrease of 17.3% and 52.5%.

Meanwhile, operating profit was a loss of $29.2 million, a further widening from a loss of $20.4 million in the same period last year, but its net profit was positive at $32.3 million.

On August 26, Renren Inc. released its second quarter financial report showing that Renren Inc.'s total net revenue in the second quarter was US$25 million, down 42.4% from the same period last year; net profit attributable to Renren Inc. was US$31.3 million, while net profit attributable to Renren Inc. in the same period last year was US$-9.3 million.

Regarding the expectations for Renren's third-quarter financial report, Chen Yizhou previously said, "Affected by competition from the same industry, the third quarter may be even bleaker."

Indeed, everyone is facing extremely fierce competition in all aspects.

Looking through the business structure of Renren, it is not difficult to find that in the social field, it has to face WeChat, mobile QQ, Sina Weibo, Momo, etc.; its online game competitors include Tencent, Qihoo 360, Kunlun; in the online video field, there are not only comprehensive video websites such as Youku Tudou and iQiyi, but also YY and 9158 that provide online entertainment; as for Renren's newly launched Jingwei.com to develop professional social networking, its competitors here include LinkedIn, which just announced its entry into China, and 51job.com, which has infiltrated from traditional recruitment websites.

In Zhao Rui's opinion, Renren's positioning was unclear and its multi-pronged approach harmed itself.

The unsatisfactory fundamentals directly led to the plummeting share price of Renren.

Since its IPO in 2011, Renren's stock market value has fallen by more than three-quarters.

Three years ago, Renren went public on the New York Stock Exchange at an issue price of $14. As of October 31 this year, Renren's share price was $3.33, a drop of more than three-quarters. In terms of market value, when Renren went public in 2011, its market value was $5.53 billion. Today, its market value has dropped by about 75% to only $1.25 billion.

According to Bloomberg analysts’ estimates, Renren’s stock price will fall by 18% to $2.74 per share in the next year, which is the worst estimate among all Chinese companies listed in the United States by Bloomberg.

In fact, the decline of Renren has also plunged its major shareholder, SoftBank's Masayoshi Son, into a quagmire where he cannot extricate himself.

In 2008, SoftBank invested in Renren, and Renren went public in 2011, with its stock price and reputation reaching their peak. However, Renren's major shareholder SoftBank seemed unmoved. From the investment in 2008 to the listing in 2011, SoftBank has not sold a single Renren share.

DCM also has not sold a single share. Compared with after the IPO, its shareholding ratio has also increased slightly, reaching 8.2% as of the end of 2013.

Sohu's Business

According to the iResearch report, the advertising revenue of China's online video market in the second quarter of 2014 was RMB 4.1 billion, up 38.3% from the first quarter of 2014 and up 42.6% from the same period last year. In terms of overall market share, Youku Tudou, iQiyi PPS and Sohu Video ranked the top three in advertising revenue in China's online video market in the second quarter of 2014.

The rumors that Sohu will acquire 56.com, a subsidiary of Renren, did not come as too much of a surprise to the outside world.

According to a person close to the news, after the transaction is completed, Sohu Video and 56.com may adopt a dual-brand operation model. In addition, the person also revealed that 56.com founder Zhou Juan will also leave, and the new management of 56.com has not yet been determined.

Regarding the acquisition of 56.com, some industry insiders believe that this transaction is more of a helpless choice made by the two companies that are facing difficulties in the fierce market competition.

However, Xu Hao believes that Sohu's move at this time is a bit late. "The Internet video industry has basically taken shape. Youku Tudou and iQiyi are in the first camp and will not change in the next three to four years. There are not many opportunities left for second-tier video websites such as Sohu and Tencent."

Xu Hao said he couldn't understand Zhang Chaoyang, CEO of Sohu. The reason is simple: "Sohu Video is still mired in losses and can't extricate itself. Besides, the industry structure has been determined and it is still difficult to change the situation through mergers and acquisitions."

On July 28 this year, Sohu Inc. released its unaudited financial report for the second quarter of 2014, showing that based on US Generally Accepted Accounting Principles (GAAP), Sohu's net loss was US$45 million, with a diluted loss per share of US$1.16. Based on non-GAAP, Sohu's net loss was US$34 million, with a diluted net loss per share of US$0.88.

It is understood that this is Sohu's second consecutive quarter of net losses. In the first quarter of this year, Sohu's total revenue was US$365 million, a year-on-year increase of 38%; the net loss attributable to Sohu in the first quarter was US$79 million.

As for the reasons for the losses, Zhang Chaoyang once clearly stated: "In addition to the short-term disadvantages brought about by the Changyou platform and portal reforms, Sohu Video's investment in copyright and bandwidth is an important reason for the losses."

Despite the uncertain industry outlook, the money-burning model continues, but it still can't stop Zhang Chaoyang's enthusiasm for the video industry.

Previously, Sohu CEO Zhang Chaoyang has repeatedly stated that self-production will be Sohu Video's key investment area in recent years, and it is the category second only to TV dramas in Sohu Video's layout.

According to industry insiders, video is considered to be the next business of Sohu to be listed independently. According to Zhang Chaoyang, Sohu has invested nearly 1 billion yuan in bandwidth investment in the past year.

Although the investment is huge, in this field, Youku Tudou, iQiyi, and Sohu Video are in fierce competition. If Sohu wants to take the lead, it must increase its investment. Sohu's investment includes two aspects, namely copyright and IT infrastructure investment.

The move on 56.com is based on the company's confidence in its advantages in the UGC field.

iResearch analyst Xu Hao told the reporter of Financial Weekly that "Investing in UGC is a way to invest in upstream industry content, which can not only increase user stickiness. In addition, Sohu is good at accumulating users in the long video field. Investing in UGC can also enrich its profit model."

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.