Sina (NASDAQ:SINA) has announced the launch of a new Internet television service for the users of its Weibo.com microblogging platform. The service will be offered in collaboration with BesTV New Media, which is a Shanghai-based provider of video services and a unit of state-owned Shanghai Media Group. The move is a part of Sina’s larger strategy to add more multimedia content in order to win more social networking users and retain existing ones in face of stiff competition from rivals led by Tencent Holdings Ltd. The company described the new service as a “social television” viewing experience which will let users chat about programs as they are being aired. ((Sina Offers Web TV Service To Win China Social Networkers, Bloomberg))
Sina is almost completely dependent on online advertising sales for its revenues. Internet advertising in China has shown phenomenal growth in the last few years and now constitutes 15% of the total advertising spend. However, economic growth has been slowing down this year and it is believed that corporate spending on advertising will show an overall decline. On the other hand, the jury is still out on whether an overall reduction in advertising budgets will mean a decrease in Internet advertising spend as well. ((Should You Buy Sina, The Chinese Twitter?, Seeking Alpha))
In the U.S. there is a clear trend toward moving TV content online and marketers are increasingly adjusting their advertising budgets in favor of the latter. We believe this is happening in China also. Also, Internet penetration is rising at a rapid rate and increasing the overall user base. So the prospects for online advertising may not turn out to be so bleak after all. We believe that the battle here will be fought over maximizing one’s share of the increase in the market size, which is what Sina is seeking to achieve.
Online advertising revenues are a function of the number of users and user engagement hours. We believe that the Internet TV service is aimed at boosting both in order to earn higher advertising revenues. Sina also expects this service to attract other partners in the television industry and application developers to offer content on Weibo, thereby further driving user base growth.
The impact of this strategy will take some time to be reflected in the company’s earnings and valuations. Sina has already warned investors that due to a planned increase in investment spending on the Weibo platform, it is likely to post operating losses this year. ((Sina results beat view, warns Weibo to eat into second quarter, Reuters))
In light of the above, there is no change to our $66 Trefis price estimate for Sina which is nearly 30% above its market price