Decrypted is brought to you by red hat, whose broad portfolio of open source technologies for the enterprise helps you get from where you are to where you want to be. Red Hat the open technology to help you realize your vision. Learn more at red hat dot com. Slash open Tech at four p m. On January nine, two thousand and fourteen, as New York shivered through a sub zero chill, Sena, a Chinese internet company, ended a day of trading on the NAS deck, down four point five percent. Initially, that
didn't seem so bad. One of seen As subsidiaries, as social messaging service called wheep Or, was actually growing quite rapidly, and seen as ches had recently hit a six month high. Nobody predicted the horror to come over the next fifteen months. Seen As stock nose dived. At one point, Ches fell sixty two percent to just thirty dollars apiece. The company lost more than half of its value. Around this time, the Chinese government was clamping down on social networks and
investors were selling Chinese tech stocks. Investors were worried about an overall slowdown in the Chinese economy, and a new messaging service called which Hat was taking the market by storm. Here's how Charles Chow, the chairman, have seen and remembers it. And of course you feel disappointed that your fear set a little bit, but the necessary reality he had to deal with it. You have to deal with it well. Charles certainly dealt with it. In fact, he put everything
on the line. He took out a loan for a quarter billion dollars and he combined that with almost everything he had, putting much of his personal wealth at stake. With that money, he bought up nearly half a billion dollars have seen as shares right as their price was hitting rock bottom, and he engineered a pretty remarkable turnaround for his company. Today, Charles Chow is on track to
be come one of China's newest billionaires. Hi, I'm Brad Stone and I'm David Rambling and this week I'm decrypted. Will hear China's biggest technology comeback story direct from Weibo CEO Charles Chow, man who pulled it off. Will also look at plans we boll has her internet video streaming and the online finance sector, and whether it holds any lessons to Twitter, us social messaging platform, which is struggling
to turn a profit. It's difficult to understate the popularity of Weibo and China, a place where Internet giants like Facebook and Twitter are literally non existent, and yet despite its position of strength and it's incredible stuff market rebound, there's still big questions about where the we' boll can keep its growth story going and for how long stay with us. So we just compared way abou to Twitter.
That may be a good comparison in terms of what the product does, but in reality Weibo is much more popular in China than Twitter is in the US. That's right. Wey boar uses are concentrated in China, where three and forty million people use the app at least once a month, but Twitter, which is used all over the world, has a slightly smaller user base. And Charles webo ceo David how did you meet him? Well, he's a member of the China Entrepreneurs Club, which is a sort of billionaires playground.
Every year on Earth Day they hold what's called the China Green Company Summit, where members like Charles and Jack mar who's the billionaire who co founded the online retailer Ali Baba, they get together and they talk about pretty much anything except for green issues. I'm at Childs and the tallest tower of the exhibition complex and song So the city hosting the summit this year near the top of the tower as an Australian steakhouse known simply as
the Grill. What's Charles like in person? The word I'd use is measured. Despite being a former reporter, Charles is incredibly media shy. He does less than three interviews a year, and I've been chasing him for almost a year just to line up this chat. Once you set him down, though, he's quite polite and generous with this time, but he talks as though he could just stand up at any moment. It's possibly a holder from his days as an amateur boxer. Wow.
So a former reporter and an amateur boxer. So if you're an American investor, it's it sounds like there's plenty of to like about Charles. He graduated from two U s universities, worked as an auditor at Price Waterhouse Cooper's, and he's a true veteran of the industry. He's been at Sena since nine, when a friend convinced him to join the finance team. I have been experienced older major I think periods up internet market in China. And I've
been with this company for eighteen years already. Yeah, so it's a long time back. Then Sina was like an early Yahoo, what we used to call an Internet portal. You went there for hyperlinks to interesting websites and to look up the news. Also, like Yahoo, it had a big profile in China during those PC heavy early years. Charles arrived at Sena just as the company was preparing for its I p O. And that's the reason joint company. They need somebody whould help to do the I p
O from professional saying. It was a career defining move for Charles. Sina went public in April two thousand and six. Years later, Charles took over a CEO. As a young public company, Sena suffered a few setbacks. It had tried to launch an auctions business with Yahoo in two thousand and four, but the online retailer Ali Baba was growing so fast that competing efforts really got crowded out by the market. Then Sena branched into search engines, only to
it beaten by bay Do. Incidentally, Sina wasn't the only loser in search. Google tried to establish itself in China, but pulled out in two thousand ten before getting blocked by the Chinese government, effectively leaving bai Do with a monopoly in the search space. Then in two thousand nine, three years after Twitter first launched, Sina created we Bow.
Twitter stint in China didn't last long either. In the same year that we Will launched two thousand and nine, the Chinese government blocked Twitter because it refused to go
along with censorship guidelines. It left we bore an open market, although Childs will tell you that we Will also had a better product, like for example, which is much better in many ways on Facebook, right, And I think I'll product is much better than Twitter, and I think it fits local market much better, and so that's the difference. Initially things went fairly well for we Bow. Fourteen months after waunching, we both had fifteen million registered users. It
took three years to hit that milestone. By fall of two thousand and eleven, it had two hundred and twenty seven million uses, and this became four hundred and twenty four million just a year later. But by two thousand and fourteen things were going awrve. What has really been an unprecedented widespread public protests from Alexandrians. The Arab spring was taking off, galvanized by social networks like Twitter. Margaret,
we heard this again and again. They wanted to make Tunisia happen here, and a big question was the Chinese government facing its own sort of Jasmine revolution. Online was prompted to track down as well, and there were economic worries at home. China's gross domestic product growth was starting to slump to levels not seen since the nineteen nineties, and tech companies, even Mighty Ali Baba, we're seeing their
share prices falter. But the biggest problem was actually we Chat has been going through some difficulties in the challenging market, especially with ours. Say that they that the introduction of we Chat, I mean that has a big impact on the usage and under gross of way board. We Chat started out as the WhatsApp of China, but it has quickly become the Swiss Army Knife of apps in the sense that you can do so many more things than just messaging inside this one app. Perhaps because of that,
we Chat has spread through China like wildfire. Today it's the undisputed king of the country social messaging market. We Chad's launched coincided with China's seismic shift to mobile. By contrast, seen it was more oriented towards desktop browsers. And also we've we were starting to see its growth rate slow down. It's a significant impacted gross rate of way board and also the mentality and the momentum how I say, we
boss growths. The combination of mobile we chat and the slowing Chinese on we came at the worst possible time for childs, you know, the internet product. If once you have lost momentum, it's very hard to come back. You see, Charles was trying to spin off weep Or from Sina and floated on the NASDAC as a separate company. Charles was trying to reduce risk because Sena had pumped huge
amounts of money into making wee boar success. Charles was betting that if you could just convince rural Chinese and people living in provincial cities and industrial towns to start using webor, he'd be able to unlock a huge new customer base for his company. But now the numbers were trending the wrong way. If the attempt to I p O had come a year or even a few months earlier,
it may have gone off without a hitch. I would say that's major reasons for people had a pret d pessimistic view about Webor and for that fact, I mean because we Bo was the major gross area for Sena. That also em passiness start price investors started hitting the cell button on Sena shares. Charles City was kind of blindsided by the reason why foreign investors were feeling so nervous about his stock. Usually they have a Chinese anrist.
They were earlier users and the strong users, very heavy users, and way by saying I alway don't use that anymore. But actually they wanted to present a part of elite users. I have to say, David, I've also heard from my Chinese friends and colleagues too that they're migrating from way Aboard to whet chat. So that's why investors didn't want
to buy seen A stock. Yeah. Put simply, yes, a lot of investors were very excited about China, but they simply didn't have any local no. How So when deals came up, they did what most of us would probably do if we're planning a holiday. They asked a colleague with a connection to China. I mean, they did not really know that. You know, Okay, these people actually more using more weak chat now, but we actually have a lot more new users not from group and she from
lautier cities, younger generations, and so that's the market. They did not understand how that's Charles's rural strategy again, lower tier cities, younger generations. Basically, he's saying that he was sure his product would still grow. It's just that financial analysts went picking up on that in the highly educated, urban social circles. The result, to hear Charles tell it, was absolutely brutal. The rest of its story is coming up right after this word from our sponsor. You know
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red Hat the open technology to help you realize your vision. Okay, we're back and things are about to get rocky for we both CEO Charles Chow. Chinese internet users are switching to mobile a dangerous new competitor. Wee Chat is taking off, and the national economy as a whole is slowing down. Sena shares are starting to take a beating in the markets, and Charles is trying to take his company public at
what turns out to be the worst possible time. I mean, if you're looking our presentation for i PO three years ago, we out land our state intense. Nobody believed does okay, it was totally disaster. I mean intense to I p O show, I can tell you I never experienced anything like that. Weibo eventually listed with an initial share price that was at the bottom of the proposed range at seventeen dollars a share. The I p O raised half
of what it was supposed to. Instead of five hundred million dollars, the float raised only two hundred and eighty six million dollars. To make matters worse, Sena became unprofitable as users shifted their attention to we chat and now the platforms like video streaming services. Right China went through a really dramatic shift to mobile. Many people never had desktop computers in the first place, and had been accessing
the web via Internet cafes. Now the smartphone became their first personal internet device, and Sina started to rely more and more heavily on Weibo to generate revenue. It was the only part of Sina's business that really tapped into mobile. Charles did try a number of other experiments to get growth going again. I mean, he partnered with Ali Bomber and a digital wallet that that didn't work out. I'm trying to imagine the stress Charles was under at the time.
By the end of two dozen fourteen, after a lackluster weebo ip O, equity analysts were downgrading the reading some Sina. Speculation was actually building that a big rival like Ali Baba would actually come along and buy out the business, and that could lead to Charles basically getting kicked to the curb. But it was at the height of this turmoil that Childs did something really remarkable. Child says he always felt the market didn't understand how good his companies were.
Investors were treating Sena as if we Bore was the only business in its portfolio with any value. So Charles made the bet of a lifetime. He scrounged, he saved. He went to Credit Sweet to take out a two hundred and thirty million dollar loan. That's nearly a quarter of a billion dollars. Then in June two thousand and fifteen, Senior announced to the market that Charles had bought four hundred and fifty six million dollars worth of Senor shares
right when it's stopped. Price was near rock bottom. This new stern traders in the financial world who are following the company. One of those people was Brendan A. Hearne, the chief investment officer at Crane Fund Advisors living in New York. Imagine him going into see his bankers and saying he wants to borrow several hundred million dollars in order to invest in his company. He's he's become so frustrated with the lack of market recognition that the true
value of of sena know. It's almost like a poker player where he's pushing the chips out into the center of the table. In other words, Charles was going all in. Here's why Charles's decision to buy so much company stock is such a big deal. Apart from the fact that Charles was taking quite a massive personal risk by taking on all the debt and putting his entire fortunate stake. It gave Charles a lot more influence over the company,
and then I sa big shareholder. I'm more I was sitting position to making to make long term decisions for the company. And that's the difference. I think. If you're not a pictureholder, part of you are not your interests not related to the company for long run. For CEO puppet company, you tend to make short decisions based on the profitability, based on stop price, based on the people's expectation. But for our business, if you cannot bet on something
big for the future, you don't have future. Yeah, the people like Brendan the trader in New York, Charles's move made him sit up and pay attention to what was happening at CENA. When when have you seen a CEO put such a large bet monetarily m on on on his on their company. I think that's, you know, not not many comparisons come to mind. It was just such an unusually bold thing to do. For his part, Child insists, it's not a gamble when you're sure of the odds.
I mean, my experience has also been quite unique in a way that not only I become that that that that's U and Cherm of the company. But also I've become an ages shareholder of that company, and a part of because I love the company, part of because I believe in the company's future. Back at the steakhouse, Child and I had a great view of Junctrol's hazy skyline. It's one of those countless Chinese cities that people from outside the country would really struggle to name, and yet
it has a population around ten million people. Cities like this were essential to Charles plan. Yes, the idea was to go big on provincial cities like Jountrol. People had long ignored the slice of the market for very good reasons. Actually, salaries were very low and people frankly didn't have that much extra cash to spend. So David, how exactly does we bow make money? Essentially in much the same way
that Twitter does, mostly through targeted online ads. From the moment you download the app, you're being tracked as an individual, and we Bore serves up ads based on the profile
they collect about you. You know what your interests are, your gender, and your tasting clothes, whether you'd potentially be a buyer of designer brands, and this is why many Chinese companies have ignored lower tier cities, right, Well, yeah, the average Chinese person already makes just a fraction of your average American or European and the Gulf just gets even wider as you move away from the biggest cities
like Beijing or Shanghai. But we bore pushed on and its smartest move is actually getting we bore pre installed on low cost smartphones. I see. So suddenly you have hundreds of millions of new smartphone users who have no idea what to do with them. They open their phone and what do you know, there's we bow Yeah, that's right. Boredom ultimately was one of the biggest drivers of weyboards
adoption out in these regional areas. You know, there's a lot of Tier four cities that don't have shopping models or movie theaters. Right, So what do people do when they get off work? This is Kirk Bowdrey and analysts who track Scena for New Street Research. He's based in Singapore.
It's actually, you know, engaging on on you know, social platforms has become a very popular UM activity and monetization on the back of that actually shouldn't be too surprising, especially um you know, if if you're brand advertising, David was we Bow alone and targeting these regional areas. Other services tried the same strategy, but Charles understood the power of media. Sites like Twitter and we board depend on
user generated content. But they soon learned that while big city dwellers like the sound of their own tweets, uses out in the provincial cities they prefer to watch, So we Bore targeted local TV stations and signed up journalists around the country. In the first half of two thousand and fifteen, we Bore apartment with a hundred different TV shows and eighty six movies. It worked directly with TV
shows like The Voice of China to boost interaction. Even police departments were signing up, producing low cost content that was relevant to the new rule users. Charles realized that some users just had no idea how to use the app, so it also launched a service that offers news and feeds based on your interests. The more you use it, the better it gets guessing what you want to see.
All the while, China's mobile internet speeds were improving, so we Bo integrated pictures and video into its feed faster than Twitter. Charles turnaround strategy was working the monthly active US account has been up by at least for quarter after quarter, but did it actually make any money. We board did manage to win over advertisers. Revenue growth soon recovered,
and so did profits. For one thing, expenses are also lower outs out of the main city, so it turned out that many Chinese customers had more disposable income than people had initially expected, but not everyone. As a fan. To survive in this market, we boar had to clap down hard on any comments or posts seemed to be against the wishes of the government. In Beijing, thousands of people are employed just to delete posts on sensitive topics. Users are always trying to game the system and get
around censorship rules. The Tenement Square demonstrations happened on June four, which is a blocked search term on we bow, so people started using May thirty five instead, and this worked for a while until the sensors caught on. More recently,
things have become much more serious. The Chinese government pointedly threatened people who posted defamatory room is on we bol with jail time, but Chat was unapologetic and even points to seen his ability to adapt to the government's wishes as a key reason it will thrive as other players might fall. China is different. You had to put things in Chinese perspective. But look at I was a generous before, like like in eighties in China at that time, there
was nothing right. There was no media. It was only like propaganda right, even with censorship on weyboard. Ordinary people can complain about some things that may seem small to Western audience, but in China it's actually really big deal, and Charles is quite proud of that. I think it's a it's a huge sense of success for us to say we have this platform that allow people to freely talk and to discuss and to make the society much
more transparent. Basically, it's a huge I think progress. For now, Cinia gets to take a moment to enjoy its success against the odds. At the very least, it's proven to be more than just a Twitter knockoff. Twitter would love to be wi Bo, not the other way around. Here's bending again. You're going and look at Wibo for the first time, and this is not Twitter. This is this is much further along. And the utilization video technology uh mobile is huge, and then the monetization of ad revenue.
We Boars investment in video is a great case in point. It owns a substantial stake in Yeesha Technology, which is valued at three billion dollars and has a service for short web videos called meal Pack. But unlike Vine, which had fifteen second videos, these companies aren't religious about enforcing the short lengths, and so they both work symbiotically to build users. So Churnles has managed to pull off this
incredibly daring turnaround. We both plans to keep going burnt into increasingly rural parts of China, the fourth and fifth tier cities. But will this be enough to keep growing the company, particularly as we chat becomes more and more dominant. But fundamentally the answer is no. China's smartphone market is becoming mature and it needs to find new ways to grow.
We Boor has thought about offering a Netflix style streaming video service, but it really got bullied out of the market years ago by bigger players like bay Do and Ali Baba with bigger budgets. So instead it's banking on things like live streaming and short video services to generate more traffic. It's also getting into financial services like online loans. That's right, Charles is a little reticent on the details in light of fierce competition, and the program is not
going as quickly as Scena would like. You know, licenses are taking longer than expected to get but there's a separate subsidiary company dedicated to making it work. David. That's also a space in which scene as competing with multibillion dollar companies like ten Cent and Financial Right. That's true, but I will say Charles has heard naysayers before. For now there's a mix of quiet satisfaction and also excitement
at the company. It's a moment to breathe. As we finished up our time together with a restaurant staff packing up, I asked him if he felt vindicated, No question about that, or your very delighted. And I think is somewhere fulfill in terse our success, and then I think it's it's and then no question, it's a it's a demonstration of ability, achievement, vision, everything. And that's it for this week's DECRYPTO. Thanks for listening. We'd love to hear what you thought of this episode.
It's a report a voice message and send it to Decrypted at Bloomberg dot net or I'm on Twitter at at David Randling and I'm at Bradstone. If you haven't already, please subscribe to our show on iTunes or wherever you get your podcast. While you're there, please leave us a rating in a review. It really helps more listeners find the show. This episode was produced by Pierre Gadkari, Liz Smith,
and Magnus Hendrickson. A big thank you, guys, to Taylor Hole and Nico Grant they work on the story, and to Jeff Muscus who edited my article in Bloomberg Business Week about the same issue. Alec McCay is the head of Bloomberg Podcasts and we will see you next week. Decrypted is brought to you by red Hat, whose broad portfolio of open source technologies for the enterprise helps you get from where you are to where you want to be. Red Hat the open technology to help you realize your vision.
Learn more at red hat dot com, slash opent tech