What Could Be The Impact Of Recent Account Deletions On Chinese Internet Companies?

Sina (NYSE: SINA) and Baidu (NASDAQ:BIDU) recently deleted some user accounts to comply with new regulations in China. In this article we consider the consequences this could have for these companies’ active user bases and user engagement levels. We will also discuss the potential impact of these changes on the valuations of these companies.

See our complete analysis of Sina here | See our complete analysis of Baidu here

Why Account Deletions?

Over 60,000 accounts were deleted by several Chinese Internet companies recently to comply with new regulations in China. ^[1] Of these, 23,000 accounts were deleted by Baidu and another 5,500 by Sina Weibo. Other companies that have deleted user accounts include Sina’s larger rival, Tencent, and e-commerce giant Alibaba (NYSE: BABA). The key reason behind the deletion of these accounts was that they were using harmful or misleading names, which is prohibited under the new regulation. For instance, two of the deleted accounts carried the names: Come Shoot Guns and Buy License Plates. The Chinese government has mandated that users should use their real names in their accounts. ^[2]

Losing user accounts due to changes in government regulation is not a new challenge for Chinese internet companies. For example, Weibo’s user base fell 9% year-on-year in 2013, primarily due to censorship of content and increased competition from WeChat. ^[3] The key reason behind the challenging regulatory environment for these companies is the fact that in China, the onus on ensuring compliance of user generated content on their platforms is on them, and when the government feels that they are failing in this regard, it steps in. Companies like Sina are wary of the government’s intervention in this regard, and they therefore proactively censor user content on their website. Sina has a very efficient content censorship team. One study found that 5% of post deletions on Sina happen within the first 8 minutes, and 30% of the deletions are completed within 30 minutes of posting. Only 10% of the deleted posts are erased after a lag of 24 hours because many of them contain objectionable content in the form of code words, which are difficult to filter out automatically. ^[4]

The Potential Valuation Impact

We believe that there will very little impact of the new regulation on Baidu’s valuation. This is because firstly, the number of accounts deleted by the company is minuscule, compared to its total active user base; and secondly, the removal of fake accounts will actually enhance the overall quality of its user base, allowing advertising companies to more specifically target consumers. ^[1] An improvement in the quality of Baidu’s user base might actually work in its favor by improving its click through rate. This is because more real-name accounts mean that there can be more targeted advertising suited to individual profiles. For example, if the click through rate for Baidu increases to 12% by the end of our forecast period, slightly more than the 11% mark we currently forecast, there could be more than 5% upside to our current price estimate for the company.

However, increased censorship can make services like Sina’s Weibo less open, reducing the level of engagement of certain users. Before the Government decided to enforce real name restrictions, Weibo had evolved as a forum for frank debate and scrutiny of politics and society. Alarmed by the threat to political stability, the Government imposed severe restrictions on using such services. This will make users wary of posting freely and frankly on Weibo. This in turn will reduce the quality of Weibo’s user engagement and lead users to shift to other less censored sites. The impact on user engagement could lead to a decline in its market share in the online advertising space. Certain alternatives such as Zhihu, a Quora-like messaging board, are already snatching market share from Sina. The more politically charged discussions are shifting from Sina to such sites. ^[3] A sustained decline in market share would negatively impact Sina’s valuation. To give some perspective, if the company’s market share falls to 2% by the end of our forecast period, compared to our current forecast of 2.5%, there could be more than 5% downside to our current price estimate for the company.

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More Trefis Research

1. Chinese Firms Delete Accounts [↩] [↩]
2. Chinese Internet Giants Purge Accounts [↩]
3. Sina Weibo Just Lost 28 Million Users [↩] [↩]
4. Just How Fast are China’s Internet Censors? [↩]