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					Inside QQ
Learning from China’s leading online community                                                             Plus Eight Star Ltd
                                                                                                  Mobile & Internet Innovation Arbitrage
                                                                                                           China, Japan & South Korea


January 2008                                                                                                www.plus8star.com




 This is a free sample of the full report, including about one fourth of the total content
 This document is released under the Creative Commons Attribute License (CC-BY)
 To order the full version (US$3,000), visit www.plus8star.com or email us at info@insideqq.com
                      Congratulations!

You have looked beyond the hype, press releases and sensational
 reporting to dive into China‟s most astonishing Internet success.

This report will confirm your intuition by exploring the details of the
       service, strategy, business models and actual usage.

It will also highlight the key catalysts, best practices and milestones
   that led to QQ‟s success and its overwhelming presence in the
                   Internet life of an entire generation.




Mobile & Internet        CC-BY +8* | Plus Eight Star 2008 | www.plus8star.com
Business Consulting
    Why should I read this report?

 Whether you are an Internet company, a SNS startup, a telecom or media
  group, an investor, or simply interested in knowing more, here are more
  reasons that will support your intuition:
      First, Tencent is the world‟s largest IM service (270 million accounts vs. MSN‟s
       250 million) and casual gaming portal.
         • How can you gather such a large user base?
         • How to keep them interested?
      Second, Tencent‟s revenues will be in excess of 400 million USD in 2007, most
       of it coming from non-advertising services.
         • What are those services?
         • How can they make users pay for Internet services?
         • What are the successful business models at work to achieve such results?
      Third, for numerous Chinese users, QQ is synonymous with Internet
         • What is the social impact of QQ?
         • What kind of economy & ecosystem are being created around the service?
      Last, Tencent is considered China‟s greatest Internet success
         • What are Tencent‟s recent strategic moves?
         • What is their ambition for overseas markets?

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    Why should I read this report?

 Now the next step is to dive into this report and spread its knowledge to
  your key people – a client of our Inside Cyworld report translated it into
  Chinese for his management team!

 We encourage you to look beyond numbers and focus on what are the
  proven concepts and great ideas that Tencent implemented in QQ and gain
  a broader understanding of what online communities are about. Themselves
  got inspired by ideas from outside, such as ICQ (US IM), Cyworld (Korean
  SNS) or Hangame (Korean casual game portal) and more.

 Last, we wish you to successfully adapt the best of them to create special
  business models and feelings about your service.

 The editors
      Benjamin Joffe | Managing Director | +8*
      Yiqun Bo | Consulting & Research Manager | +8*



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    Disclaimer

 Opinions
      Opinionated views are expressed in several chapters, those should be seen as
       our opinion or the interviewee’s opinion according to the case.


 Claims
      Due to the nature of this product, all our sales are final.
      We recommend that you study the information, table of content and sample
       pages provided on our website to determine whether this report fits your needs.


 We are interested in your feedback!
      Tell us your opinion and what you would like to see in the next version
      info@insideqq.com




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    About the Authors

 Benjamin JOFFE, Managing Director, +8*
           For the past 8 years, Benjamin has been involved with telecom, mobile and Internet
            companies in China, Japan and South Korea.
           In 2005, he founded +8* | Plus Eight Star to provide „innovation arbitrage‟ between advanced
            markets and companies in the mobile and Internet space around the world. The company
            now regularly works with Asian and Western players as a bridge to bring innovative service
            ideas and business models, helping them anticipate markets and accelerate their business
           Benjamin is a regular speaker at Internet and telecom events and a contributing expert to the
            European Commission Delegation in China for mobile VAS and e-commerce regulation.
           He is also the co-founder and organizer of Mobile Monday Beijing, the leading monthly forum
            and networking event in Beijing on mobile services and technologies part of the Mobile
            Monday global organization
           Benjamin speaks fluent English, Japanese and French, and practical Mandarin, Korean and
            Spanish


 Yiqun BO, Consulting & Research Manager, +8*
           Yiqun has been working in China‟s IT industry for the past 9 years, and he was notably
            involved in research on B2B e-commerce, as well as Beijing Eleventh Five-Year (2006-1010)
            Plan on infomatization.
           He has been the lead consultant in numerous projects ranging from Web 2.0, evaluation of
            MVNO opportunities in China, mobile innovation and ecosystem assessment, etc.
           Yiqun speaks fluent Mandarin, English and French

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    Acknowledgements

 We would like to thank for their contribution and support at Tencent
      Mrs. Catherine CHAN, General Manager, Investors Relations, Tencent/QQ
      Tencent executives who regularly contribute their views to the local media at
       various conferences and seminars
      Unnamed executives and friends who gracefully enlightened us during informal
       discussions


 Expert interviewees were a great balance to Tencent‟s views
      Mr. Tangos CHAN, Editor-at-large, China Web 2.0 Review
      Mr. Kaiser KUO, Group Director, Digital Strategy, Ogilvy China
                        Chief Editor, Ogilvy China Digital Watch
      Dr. Song LI, CEO, SinoFriends
      Mr. A, CEO, Company A (competitor to QQ)
      Mrs. B, Partner, Company B (China-focused VC)
      Mr. C, CEO, Company C (UGC company in China)


 Last, thanks to the numerous users of QQ – you made it what it is!

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    Methodology

 A service as enormous as QQ is unlikely to be covered in its entirety. To
  make the best use of your time reading this research, we provided views
  from different angles to help grasp as much as possible of QQ‟s richness.

 This research was conducted over a year relying on
           First-hand trial and analysis of QQ‟s various services
           Online and print media reviews
           Analysis of Tencent and other key players‟ financial reports
           Interviews and discussions with Tencent executives
           Interviews of experts involved in China‟s Internet and mobile scene
           Interviews of users
           Identification of QQ‟s best practices and catalysts for success


 We hope you will enjoy your reading and encourage you to apply QQ‟s
  numerous proven ideas to your own context. China has jumped onto the
  Web 2.0 bandwagon and is now an innovation powerhouse for Internet
  services, it is time for the rest of us to learn from it!

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    Table of content

   Foreword                                     10

   Executive summary                            13

1. Market overview                              15       3. QQ key services                                     79
           General figures                                             Instant messaging
           Why do global giants fail in China?                         QQ pet
           Dispelling misconceptions: Internet and                     Additional services
            Media censorship                                            Boosting online ads: MIND
           Key players                                                 Access solutions
           Internet creates heroes!                                    Payment systems
                                                                        Economic value of virtual assets
2. QQ facts and figures                         63
           General figures                              4. Strategy                                            152
           Key milestones and results
           Legal stories                                5. Users interviews                                    157

                                                         6. Expert insights                                     165

   Appendix                                     181

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    Foreword




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    Foreword

 Internet business models are stuck in Internet 1.0
      In most advanced Internet markets, the only way to gather revenues on the
       Internet seem to be by using online advertising, in the form of banners, paid
       search or paid listings (houses, cars, personals, etc.).

 After studying dozens of key players in cutting-edge markets, we came to
  the conclusion that the main reasons for this situation were the following
      Content is still in silos
      Measurement and advertisers are lagging behind new usage patterns and
       technologies
      Online payment mechanisms are too few and inefficient to provide hassle-free 1-
       click macro or micro-payment
      Online communities need sociologists, not engineers
          • As technology is becoming more and more a commodity, the real issue lies
            today in the assessment of trust, social links and privacy.
      Our words are poor to describe the reality of the social fabric
          • What are the differences between a “good friend”, a “business friend”, a
            “best friend”?. Who would you lend your car keys to? Who can see the
            pictures from your latest cross-dressing party or fishing trip? Also, how can
            you differentiate a MySpace from a Facebook only with the word “SNS”?
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    Foreword

 Online communities and social networking services face very similar
  challenges in their development
      How to build a community? How to monetize it?
      What is it users value in the service? How to keep them interested?

 As we worked closely with Chinese innovative companies, we realized that
      Ideas from the West are readily available but how to differentiate when a handful
       of companies start a very similar service?
      Many services do not work well in markets where the online advertising market is
       too small, or online payment systems are not developed.
      As a result, while the first wave of Internet successes needed strong execution
       skills, the second wave requires numerous adaptations to the local environment
       and improvements leveraging local characteristics.

 Chinese models provide today innovative business models and services
  ideas that can help develop Internet services worldwide.
      Just as US powered the first Internet wave, Asia is now proving an innovation
       powerhouse in business models and service designs
      This report demonstrates how QQ, not only triggered a social phenomenon, but
       also proved numerous business models that can be adapted globally
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    Executive summary




Mobile & Internet     CC-BY +8* | Plus Eight Star 2008 | www.plus8star.com
Business Consulting
    Executive summary

 In China, QQ is Internet
      QQ is China‟s largest online community with over 270 million accounts. Many
       users connect to Internet solely for using QQ.
      Starting with a simple IM for Chinese users, QQ evolved into an array of services
       ranging from blogs, avatars, virtual items and pets and online games.

 And users pay for it
      Tencent managed to monetize its service directly from users in an environment
       with poor payment systems, low trust and moderate network speed.
      Revenues for the third quarter of 2007 alone amounted to 140 million USD. This
       is close to four times those of Facebook over 2007.

 And there is more to come
      Despite its incredible Internet influence, Tencent derives only a minor share of its
       revenues from online advertising.
      Recognizing this untapped potential, Tencent is now beefing up its team and
       working on building a higher trust in their capacity as an advertising platform.
      This requires notably to improve the understanding of it with advertisers, as
       those start timidly to shift ad dollars to Internet and embrace online communities.
      Mobile is still a tough market as mobile carriers‟ control is tight, but growth can
       be expected from this sector as well in the future.
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1. Overview of China’s Internet & Mobile Markets




 Mobile & Internet     CC-BY +8* | Plus Eight Star 2008 | www.plus8star.com
 Business Consulting
1. Overview of China’s Internet & Mobile Markets
    General figures




 Mobile & Internet     CC-BY +8* | Plus Eight Star 2008 | www.plus8star.com
 Business Consulting
    Foundation of the market: huge user base

 Million users           2002        2003                  2004              2005   2006

 Internet users          59          79                    94                111    137

 (Broadband subs)        -           7.2                   13.8              37.5   51.9

 (ADSL subs)             -           -                     -                 26.4   37.1

 Fixed-line subs         214         263                   312               350    368

 Mobile subs             206         268                   334               393    461
Sources: CNNIC, MII


 Since 2005, mobile subs have exceeded fixed-line users
      China is the #2 largest Internet country in the world
      Penetration is still ~10%


 Broadband grows strongly
      Driven by ADSL (70% of broadband connections)
      Cable, LAN, FTTX, PLC share the rest of market.


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    Service revenues

 Million US$             2002       2003                  2004              2005   2006

 Internet Ad             83         183                   320               489    710

 E-commerce              126        233                   481               760    1190

 Online game             146        195                   394               662    839

 WVAS                    157        566                   852               915    995
 Source: Deutsche Bank

 Online Payment & e-Commerce
      Emergence of payment systems like Tenpay (from Tencent/QQ) and AliPay
       (from Alibaba.com), and billing by mobile operators make online payment easier
      As a result, the volume of online payments is projected to rapidly increase.
 Online advertising
      Online advertising includes both brand advertising and paid search.
      Online advertising has been a proven model in developed markets as well as in
       China. Although paid search is a relatively new concept, it has achieved rapid
       growth in recent years in China.
 Online game
      70% of Internet users in China are <30 y.o., fueling the online gaming market
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      Internet Portals and local players




                                                                       Local players won the top spot in all
                                                                        the main Internet sectors.

Sector                      Local player        Global player          Baidu (search engine) and QQ (IM)
Portal                      #1, QQ              #7, Yahoo               enjoy a strong lead in their sectors in
Search                      #1, Baidu           #2, Google              terms of market share
E-commerce                  #1, Taobao          #2, Ebay China
IM                          #1, QQ              #2, MSN                No foreign company operates directly
Online game                 #1, NetEase         --                      in the online game sector (mostly due
                                                                        to Chinese regulation)
                           Source: Plus Eight Star


                                                                       eBay China lost its #1 position in C2C
                                                                        auctions to Taobao since 2005 and is
                                                                        unlikely to bounce back in the near
                                                                        future




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 Chinese Web 2.0 scene might be the world’s #2
 most active

                                                  China has turned into a Web 2.0
                                                   powerhouse.

                                                  Environment for Web 2.0
                                                      Large influx of venture capital
                                                      Overseas-educated returning talent
                                                      Low entry barriers in the Internet
                                                       and mobile fields
                                                      Many copycats from overseas
                                                       („Copy-2-China‟)

                                                  Several hundred Internet startups
                                                   joined the “China Web 2.0
                                                   Conference” in 2007.




Chinese Web 2.0 Companies Logotype

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    Other pages in this section

 Four telecom operators in China
 Internet Portals and local players




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1. Overview of China’s Internet & Mobile Markets
    Why do global giants fail in China?




 Mobile & Internet      CC-BY +8* | Plus Eight Star 2008 | www.plus8star.com
 Business Consulting
      Why do global giants fail in China?

                 Foreign company                                                                   Local company
People             Team leader often coming from HK, Taiwan; Employees are                           They cover not only white-collar,
                 educated white-collar staying in high-class buildings in Shanghai                 but „small potatoes‟
                   Field of vision is limited to high-class buildings in Shanghai, and               Target regular people and SMEs,
                 Fortune 500 Companies                                                             do not care about having good taste
                   Know Gmail, but not 163. They use MSN Messenger, but not
                 QQ, considered to be „less professional‟
                   Look down on netizens from Internet cafés, fans of Super Girl,
                 because of their education.
                   Would prefer to close their website rather than run one with no
                 taste or differentiation
                 Comment: Without attention to the masses, it is difficult to be a Top 3 website

Attitude           Earning a salary 8 or 10 times higher than local competitors,                     Prefer to be hated than to be
                 they worry about negative news. They prefer „no achievement‟                      forgotten
                 than to take a risk which could bring a mistake.                                    Always ready to make mistakes
                   Cautious, conservative, polite, educated, but little fighting spirit.
                 Comment: Local players don‟t care about sounding good or making mistakes. The worst for them is to be
                 forgotten. Jack Ma, CEO of Alibaba, and Zhou Hongyi, CEO of 3721 are representative of this philosophy.
Efficiency          Long term strategy, spend a lot of money on market research                      React fast
                    May have to wait one month for HQ‟s answer on the purchase                       Numerous small steps, and correct
                 of a laptop if it is out of budget.                                               quickly when making a mistake.
                 Comment: As the Chinese saying goes, ‘Eagerness for quick success and instant benefit should not be
                 encouraged’. But in the ICT sector, efficiency and speed are of the essence.


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    Other pages in this section

 Why do global giants fail in China?
      Results or means?, Localization, design
      Communication, Advertising strategy
 Comments from industry insiders: Jack Ma (CEO, Alibaba)
 Comments from industry insiders: Zhou Hongyi (ex-CEO, Yahoo China)




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1. Overview of China’s Internet & Mobile Markets
    Dispelling Misconceptions: Internet & Media Censorship




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     Media and Internet Censorship in China

   China has the world‟s largest population in a territory
    similar in size to the United States. Unlike its Western
    counterpart, China has extreme gaps between haves
    and have-nots, East and West, cities and countryside

   Within this context, the key objectives of the Chinese
    Government is stability and “avoid chaos” whatever
    the cost. The consequence on the Internet is that
    websites are required to get a license (Internet
    Content Provider or “ICP” license) and to filter some
    politically-sensitive and illegal keywords
                                                                                                     ICP license of
            Sensitive issues: Falung Gong, Tibet Independence,
                                                                                                     Google China
             Tian‟anmen, Taiwan…
            Illegal content: adult, drug and gambling
            Those issues are treated more or less like Nazi groups or
             pedophilia in Western countries

   Intimidation power?
            The Shenzhen Public Security Bureau created two anime-
             style "Internet Police" characters named "Jingjing" and
             "Chacha“ (“Jingcha” means “police” in Chinese); each
             cybercop has a blog and a chat window where Chinese                                  Chacha
             citizens can talk to them.
            The main function of Jingjing and Chacha is to intimidate
             all Netizens to be conscious of “safe and healthy use of
             the Internet, self-regulate their online behavior and help
             support a healthy Internet.“
            That being said, Western media are much more aware                        Jingjing
             than local netizens of the existence of those mascots.
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    Other pages in this section

 Media and Internet censorship in China
           Misconception 1: The Chinese government is furtive about censorship
           Misconception 2: Censorship is only a political issue
           Misconception 3: The government checks everything
           Misconception 4: Regulations are too numerous and unclear
           Misconception 5: Chinese people suffer from the limit of information
 Comments from industry insiders
      Charles Chao, CEO, Sina.com
      Jack Ma, CEO, Alibaba




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1. Overview of China’s Internet & Mobile Markets
    Key players




 Mobile & Internet     CC-BY +8* | Plus Eight Star 2008 | www.plus8star.com
 Business Consulting
    The struggle of mobile and Internet companies

 Internet is a low-trust and crowded place
      While China‟s Internet has seen an overflow of content, portals and Web 2.0
       companies, Internet remains a low-trust environment due to poor measurement.
      Alexa ranking? This has been the key measure to raise venture capital in the
       Internet space, making pageviews a critical metric, above actual service quality
       (we say China follows the “Alexa School of Investment”).
      In addition, many companies have used self-installing “hooligan software” to beat
       competitors, gain subscribers and boost their Alexa ranking.
      As a result, advertisers have been very cautious and unwilling to switch from
       traditional media to online media. Today, less than 5% of China‟s advertising
       spending goes to Internet. The prevalent ad sales format is a antiquated CPD
       “cost-per-day”, rather than CDM (per thousand) or CPA (per action).
 Mobile content providers are under tremendous pressure
      Due to operators‟ policies working in a self-serving mode, mobile CPs have been
       declining steadily since 2005, undergoing major changes of strategy.
      China Mobile and China Unicom are more or less using content providers as free
       research centers: once a CP achieves some success with a service, operators
       will replicate it and launch their own version.
      The trend today for CPs is to find new distribution channels and business models
       independent from operators, working with manufacturers and media companies.
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          Leaders the WVAS market
          WVAS revenues of key CPs in 2006

                      Top 8 = $630 million in 2006 from WVAS (45% of the total)
Million USD




                                                                       (estimate)




              WVAS             WVAS   Web      IM      WVAS              WVAS        Web      Online
                                      Portal                                         Portal   games
  Source: Plus8Star
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     Performance of leading Internet and mobile companies


                                                                                     1st day: Baidu‟s share price shoots
                                                                                       at 5 times its introduction price




     Tencent enjoys amazingly good karma since its                  Getting NASDAQ‟s attention was easy for “China‟s
     introduction on the Hong Kong Stock Exchange                     Google”, Baidu, also enjoying a healthy curve


                                             New policy
                                             introduced



                                                                                End of the “Internet Winter”.
                                                                               Investors come back to China




Along with other mobile content players, KongZhong has       As the leading Internet portal, Sina has enjoyed sustained
   suffered from government and operators‟ policies.              growth along with the online advertising market

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     Other pages in this section

   Company snapshot: Tom Online
   Company snapshot: KongZhong
   Company snapshot: Sina
   Company snapshot: Tencent
   Company snapshot: Linktone
   Company snapshot: Hurray
   Company snapshot: Sohu
   Company snapshot: Netease




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1. Overview of China’s Internet & Mobile Markets
    Internet creates heroes!




 Mobile & Internet      CC-BY +8* | Plus Eight Star 2008 | www.plus8star.com
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    Digital entertainment is booming

 In China, there are not many alternatives for affordable
  entertainment
      The media/music/cinema industries are still in their infancy and tightly controlled.
      Internet is thus filling a gap.

 Consequences
      Social networks, digital creations, interactive TV are all booming in China
      Online advertising is also taking off
      Digital music sells more than “offline” music, most of it via mobile phones


 Among recent Internet phenomenon, the following provide a glimpse
  of the current Chinese Internet pop culture. All are whether “user-
  generated” or “interactive” content
           “Mice Love Rice” | Internet-originated national hit song
           Backdorm Boys | Lip-synch artists
           Furong Jiejie | Self-proclaimed Internet beauty
           Mu Zimei | Sex blogger
           SuperGirls | China‟s “American Idol” leverages mobiles


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“Mice Love Rice”




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      “Mice Love Rice”


 In October 2004 the song ''Mice Love Rice'' is released on the Internet
        The author, Yang Chengang, is a 26-year-old music teacher by day and lounge
         singer by night in central China's Hubei province

 The song became an instant hit online and its popularity quickly spread to
  traditional media
        Over 100 million Internet downloads (mostly free)
        At peak, it sold 6 mln RBT in one month (sales equivalent to 700,000 CDs)
        #1 in RT, RBT and real tones over mobile phones and Internet and made it to
         iTunes Top 10 World list in 2005

 The rights holder and SP Hurray Freeland generated $21.5 million in
  licensing fees (170 million RMB, mostly coming from RBT)




Sources: Hurray, 2006.9; Chongqing Evening News, 2006.10
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     Other pages in this section

   Comments from industry insiders: Universal Music
   The Backdorm Boys case
   Comments from industry insiders: Ogilvy
   The Furong Jiejie (Sister Hibiscus) case
   The Muzi Mei case
   The SuperGirls case
   So why dealing with Net stars?




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Backdorm Boys




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Sister Hibiscus




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Muzi Mei




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SuperGirls




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    2. QQ Facts and Figures




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Business Consulting
    2. QQ Facts and Figures
                 General figures




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Business Consulting
     What is QQ?
     Key Ideas
   QQ is the main service brand of Tencent, founded in November 1998 and located in Shenzhen
    (South of China, near Hong Kong)

   Tencent is the #1 Instant Messaging (IM) service provider in China, and a leading provider for
    Internet and mobile value-added services.

   Tencent‟s IM community counts over 270 million active accounts and is said to be covering
    95% of Chinese Internet users and 70% of China’s IM market. The IM platform allows users to
    communicate in real-time across the Internet, and mobile and fixed line telecom networks using
    various terminal devices.

   Tencent‟s is operating of 4 lines of business:
      1.     Internet and mobile value-added service
      2.     Mobile and telecommunications value-added service
      3.     Advertising service
      4.     Trademark licensing business
   The former two made up 90% of Tencent‟s revenues in 2006.

   Its IM tools include Tencent QQ, Tencent Messenger and RTX. Though these services are free,
    they are the core of Tencent‟s business and are the foundation for VAS products.

   Tencent is reinforcing its portal QQ.com to activate its huge IM user base and introduces all kinds
    of WVAS and IVAS.

   QQ uses a penguin as its brand mascot. The brand commands
    very strong awareness thanks to its early entry and its „cute‟ factor.


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    Other pages in this section

 Key figures: users and page views
 Key figures: users growth and ranking among competitors
 Why is QQ so successful in China?




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    2. QQ Facts and Figures
                 Key milestones and results




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Business Consulting
          QQ History
          Rise of a Star

          Largely inspired by ICQ, an IM tool originally developed by two Israeli,
           Tencent launched OICQ in China in 1999.
                     OICQ means: “Oh, I seek you!”
                                                                                                               Paipai.com launched

                                                                                                  QQ Pet launched

                                                                                          Q Zone launched

                                                               IPO at HK Stock Exchange
                                                                                                                                         Sep. 2005
                                                            QQ.Com launched                                                  Jun. 2005
                                                             30
                                           QQ Game/ RTX launched                                                                     24.5
                                                             25                                                       Mar. 2005
                                                                                                              Jun. 2004
                                       Internet VAS launched
                                                             20
                                   Mobile QQ launched                                                Dec. 2003               16
                                                             15                            Sep. 2003
Oh, I seek you                 OICQ launched
                                                             10                  Jun. 2001                            9
                 Company founded in                                Aug. 2000
                     Shenzhen                                 5                                           4
                                                           Feb. 1999                          2
                                                                                  1
                                                                       0.1
                                               Nov. 1998      0
                                                                   2000         2001        2002        2003       2004     2005     2006

                                                                                                   IM PCU (million)


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    Other pages in this section

 QQ bloomed with China‟s Internet industry
 Shareholding and revenue breakdown




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 Business models


   Free services to attract user to come and to keep them stay in the community
                    (QQ IM, QQ.com, WAP portal, QQ Group…)

                         Personalization, value-added                                        Interactivity

                             Fee-based revenue                                           Traffic-based revenue


                      IVAS                         WVAS                                      Advertising
(Internet value-added service)           (Wireless value-added service)


          Fee-based IM                         Fee-based IM                                 IM Client-end
      Premium QQ, QQ Xing                          Mobile QQ


        Online identities                  Content-based SMS                                   QQ.com
   QQ Show, Qzone, QQ Pet..


             QQ Games                               2.5 G                                      Search
          Casual, MMORPG                         MMS, WAP…


                  Others                     Mobile Voice VAS
 Dating, e-card, e-magazine…                      IVR+CRBT

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    2. QQ Facts and Figures
                 Legal stories




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Business Consulting
     Other pages in this section

   Domain name
   QQ and Chery (car manufacturer)
   QQ and Pica (mobile & PC IM service provider)
   Embezzled QQ accounts




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    3. Key services
                From Instant Messaging to instant noodles




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   Other pages in this section

 QQ service map




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    3. Key services
                Instant Messaging




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Business Consulting
  Instant Messaging

                       QQ
                             QQ is Tencent‟s IM software for common users.
                             Simplified Chinese, traditional Chinese, and English versions (with
                             less functions) are available.
                             The core is entertainment and to have fun.
                             Free to use
                       TM

                             TM stands for Tencent Messenger. Compare to QQ, TM looks more
                             professional, and provides more business applications such as
                             contacts management, business card, agenda, and so on.
                             Free to use

                       RTX
                             RTX is Tencent‟s professional IM version dedicated to internal
                             communication for companies.
                             The software interface can connect to internal management tools
                             and information systems
                             Not free to use

Tencent tries to cover several market segments. However, TM and RTX are not as popular as QQ

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 Typical QQ IM interface




                       Take a group photo with
                             Cathy‟s QQ Show




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   Other pages in this section

 QQ lingo




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        QQ Show
        Chinese avatar

  Largely inspired by South Korea‟s Cyworld, QQ Show is a personalized
   avatar service.
          Users can buy various items (clothes, background image, decoration) with QQ‟s
           cybercash called „Q Bi‟ to create their „QQ Show‟. 1 Q Bi = 1RMB (0.14 USD)
          This „QQ Show‟ is then used within the IM client, QQ.com‟s online community
           and QQ game portal.
  Users have various ways to obtain a QQ Show
          Buy in QQ Show Mall
          Buy in C2C e-market
          Gift from friend




Initial female and
 male characters             Simple QQ Shows                         Richer QQ Shows
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 QQ Show use case




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     Other pages in this section

   Selection of standard items
   Selection of branded items
   Change your QQ portrait in QQ Show
   Where is the “QQ Show” visible?
   Generating revenues from QQ Show




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    QQ Show Mall

 QQ Show is not free, and should be paid by Q Bi




Starting
 avatar




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     Other pages in this section

   Buy a QQ Show online
   Online auction for QQ Show
   Q Zone, a blog-like & Cyworld-like service
   Q Zone without decoration
   Q Zone decorated
   Customizing page style and content modules
   Generating revenues from Q Zone
   Performance and key factors of virtual items




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    3. Key services
                QQ Pet




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Business Consulting
    QQ Pet
    Virtual pet community

 QQ Pet is a virtual pet community game. If you users like, the pet can stay
  on the desktop and accompany its host

 The host feeds the pet, showers it, takes it to see a doctor. The pet
  expresses its emotions, studies, takes medicine, works, makes friends,
  travels, marries. In short, does everything a person does in a human society.

 Main features
      Nurture and educate: study, feed, take shower, take medicine, see doctor, get
       married, …
      Outdoor activities: travel, make friends, see friends, drive a car. Reactive
       functions enable QQ Pet to go to desktops of its host‟s QQ buddy, and to be feed
       and canoodled by them.
      Entertainment: play toy, send to buddy active emotions related to pet
      Pet status: desktop or hiding, customize pet‟s dress, house, etc
      Pet levels: like the age, some activities are accessible according to the age, such
       like getting married, go to university, work as a lawyer or an artist, etc




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 QQ Pet Internet portal



 Promotions

            Log in




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    Other pages in this section

 Breeding a pet
 Packages for pets
 Use case: a pet‟s life
           QQ pet from 1 to 4 years old
           QQ pet from 5 to 8 years old
           QQ pet from 9 to 12 years old
           QQ pet from 13 to 16 years old
           QQ pet from 17 to 20 years old
           QQ pet above 20 years old
 QQ pet community
 Performance and key factors




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  Use case: QQ life step by step, from 1 to 4 years old
  Illustration explains QQ Pet functions



                                                                        I was offered 300
One day, a new QQ                                                       Yuanbao. With this
pet was born                                                            money, I can enjoy life for
                                                                        a while




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    3. Key services
                Additional services




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Business Consulting
     Other pages in this section

   Voice QQ: calling other users via QQ number
   Voice QQ service fees
   Little Q IM chat robot
   QQ.com Internet portal main page
   QQ.com details
   QQ levels
   QQ Group
   QQ Group‟s stickiness




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                Internet portal details

                                       Upper half                                        Lower half

                                     Content Channels
Paipai Ad
                                         Search

QQ services




 News center




                                                                       Woman/fashi
                                                                        on/health
                                                                          news




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    3. Key services
                Boosting online advertising: MIND




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Business Consulting
    Tencent MIND: online marketing/advertising

 In the last quarter of 2007, Tencent launched its MIND strategy to
  accelerate its online marketing/advertising service.

 Until then, Tencent‟s has been relatively weak in terms of internal skills,
  solutions offered to advertisers and advertising revenues (10% of total)
  compared to other large Internet players like Sina, Sohu or Baidu.

 Tencent MIND is the online branding and advertising philosophy of the
  solutions provided by Tencent
           M: Measurability, measurable effect of online marketing/advertising
           I: Interactive Experience, improve end-user‟s experience by interactivity
           N: Navigation, ensure the precision of selected targeting end-user
           D: Differentiation, customize online marketing solution for different advertisers




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     Other pages in this section

   Tencent‟s MIND is based on its interactive platforms
   QQ Skin
   QQ Skin examples
   In-IM advertising example
   Q Zone interactive online marketing example




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    Tencent MIND: QQ Skin
    in-IM advertising cases: Samsung, KFC, Lenovo

 Ad element is naturally integrated in the skin design.




                  Samsung                   KFC                         Lenovo
                    MP3                     Juice                         PC
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    3. Key services
                Access solutions




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Business Consulting
    PC – client software

 The registration is quite simple, and not restricted.
      No personal ID check
      One person may register different QQ accounts.




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     Other pages in this section

   Browser-based IM
   Mobile IM: SMS version
   Mobile IM: WAP version
   Mobile IM: client software




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    3. Key services
                Payment systems




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     Other pages in this section

   System structure
   Wireless value-added services (WVAS)
   Tenpay
   Internet value-added services (IVAS)
   What can we do with Q Bi?
   How can we get Q Bi?
   How many monetary functions has Q Bi?
   Benefits and issues brought by the usage of Q Bi as an online currency




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    3. Key services
                Economic value of QQ virtual assets
                What kinds of QQ numbers are considered the best?
                How is the value of numbers calculated?



Mobile & Internet               CC-BY +8* | Plus Eight Star 2008 | www.plus8star.com
Business Consulting
    Other pages in this section

 Value analysis of QQ numbers
 Value analysis of users‟ online history, rank and gaming levels within QQ




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    4. SWOT Analysis




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     Other pages in this section

   Strengths
   Weaknesses
   Opportunities
   Threats




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    5. User interviews




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Business Consulting
    Methodology

 A good way way to understanding a service‟s reality is to ask its users.

 With this in mind, we conducted interviews over QQ chat with six different
  users to get a sense of what QQ is about for them.
      Interviewees were selected to represent a reasonable variety of profiles (age,
       gender, activity, experience with QQ).
      Questions revolved about their general usage and their feeling and social links
       within QQ.


 Illustrating the social impact of QQ
      Among other things, we could verify how strong was QQ‟s influence on Chinese
       netizen‟s lives: from maintaining social ties, to creating new ones, sometimes
       even leading to marriage!


 Interviewees were rewarded for their time with Q Bi.




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      User interviews



                           Chen Tingting

                            Female, 21

                            University
                             student

                           QQ number:
                           12507XXXX




Note: the last four QQ numbers are masked for privacy reasons
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     User interviews




Why did you
register to QQ?




How about your
contacts list?

Do you know all
of them offline?




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     Other pages in this section

   Usage of Q Bi
   QQ and you
   Pros and Cons of QQ
   Perception of QQ‟s values
   Other Internet usage
   Image of QQ




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    6. Experts insights




Mobile & Internet     CC-BY +8* | Plus Eight Star 2008 | www.plus8star.com
Business Consulting
 Experts interviewed in this section


                  Name        Title              Company             Description
                  Catherine   GM, Investors      Tencent             Tencent is the company operating
                  CHAN        Relations                              QQ

                  Tangos      Chief Editor       China Web           Leading English website covering
                  CHAN                           2.0 Review          Internet innovation in China

                  Kaiser      Group Director,    Ogilvy              Leading advertising agency.
                  KUO         Digital Strategy   China               Editor of the “Ogilvy Digital Watch”
                                                                     blog on digital media in China.

                  Mr. A       CEO                A                   Competitor to QQ

                  Song LI     CEO                SinoFriends         Founder of the leading mobile
                                                                     content provider, sold to Sina in
                                                                     2003. Now operating both mobile
                                                                     and Internet community services

                  Mrs. B      Partner            B                   China-focused Venture Capital firm

                  Mr. C       CEO                C                   One of the leading Chinese user-
                                                                     generated content community sites


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     Exclusive interview with Catherine Chan
     General Manager for IR at Tencent
•   Q. How would you define Tencent/QQ's core competence?
      •      Large user base and sticky community experiences
      •      Better understanding of user needs, continual innovation and focus on R&D and
             long term development
      •      Ability to develop diversified products based on core IM platform to cater to user
             needs.

•   Q. What were the strategies to reach the "tipping point"?
      •      We launched QQ in February 1999 for users to free download on the website, it
             gained popularity soon and registered users grew to millions quickly. In April
             2000, QQ registered user accounts reached 5 million.
      •      By July 2007, QQ peak simultaneous online user accounts reached 30 million

•   Q. How would you describe the influence of QQ on the Chinese society?
      •      As of July, 2007, Tencent‟s active IM user accounts reached 273 million,
             covering most of Chinese internet users.
      •      In June 2007, Tencent was awarded the “Best Chinese Lifestyle Brand” which
             shows QQ has become a part of people‟s lives. Through its various online
             platforms, Tencent fulfills the user‟s different needs for communication,
             information, entertainment and e-Commerce on the Internet.
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    Other pages in this section

 Exclusive interview with Tencent
           QQ global?
           Next steps of QQ
           View on policies on virtual money
           View on policies for WVAS
           Social responsibility
           What about the penguin?




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    How would you define the characteristics of China’s
    Internet industry?
• Low penetration (12%) indicates great growth potential
• Still in early stage of development, reflected by the fact that wireless and
online games have well developed but online advertising and e-Commerce
are still in their infancy.
• Unique Chinese culture. For the time being, major internet companies like
portals, game operators, ecommerce services are local companies.



                           1. Lack of innovation
                           2. Entertainment-oriented
                           3. Internet is still mainly a channel for getting information, rather than a
                           tool to use in their daily life and work.
                           4. Big Internet companies still dominate the market.
    Tangos Chan
China Web 2.0 Review


• Entertainment-focused to the point of distraction; both more- and less-
regulated than the industry in the U.S. (more in terms of acceptable content; less in
terms of things like P2P and pirated media)
• Ferociously competitive because of the relatively low level of disposable income
• Plagued with very bad and unreliable metrics
• Less obsessed with privacy issues.                                                          Kaiser Kuo
                                                                                                Ogilvy


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     How would you define the characteristics of China’s
     Internet industry?
 • The Chinese Internet industry is by and large an online media industry at
 the moment, online commerce (which generates transaction-based
 revenues) for real goods is not here yet
 • Online commerce for virtual goods, on the other hand, is well proven
 (QQZone, or those online games that are free to pay but sell virtual items).
 • C2C ecommerce sites for real goods are essentially free thanks to
 Taobao.com and B2B sites for real goods do not really exist (Alibaba,
 despite its marketing itself as a B2B ecommerce site, is really a B2B online              Song Li
 media for classifieds because it does not generate revenues from                       CEO, SinoFriends
 transactions)
 • B2C sites are in a very tough business in general because margin is
 usually very low after taking care of warehousing and delivery logistics.

                          Focused on young people and entertainment. Few business models and still in
                          a growing stage, and having huge potential.



    Mr. A                                   • Early stage with an entertainment focus
  Company A                                 • Low monetization
                                            • I see a future in user behavior-based
                                            lead generation, RIA, AJAX and
It is large but in                          ubiquitous video services
a chaotic state.              Mr. C                                                           Mrs. B
                            Company C                                                       Company B

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        How would you describe the influence of QQ on the Chinese
        society?
    The 1980s and 1990s generations grew up together with QQ, the
    style of entertainment in QQ has significant influence on them.

    They developed a QQ lifestyle and a new kind of language,
    which is called Words from Mars (火星文), it is mainly used in
    QQ chatting and QQ‟s Qzone.
                                                                                           Tangos Chan
                                                                                       China Web 2.0 Review


                              QQ has has largely defined the way that young Chinese people
                              communicate with one another online, creating by its convenience and its
                              sheer ubiquity a preference for IM over email.

                              Young Chinese people don’t ask one another for email addresses;
        Kaiser Kuo            they ask for QQ numbers. It has created a powerful channel for the viral
      Group Director,         spread of news and information, of entertainment, and even of brand
Ogilvy & Mather Advertising   messages.


          QQ brought the                                       Young people
          entire young                                         think that “QQ”
          generation to                                        has the same
          Internet, i.e.,                                      meaning as “IM”.
          millions of users           Mrs. B                                                Song Li
                                    Company B                                            CEO, SinoFriends
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     Other pages in this section

   What made QQ so successful?
   Professional opinion of QQ services
   Weaknesses
   Competitors and their advantages
   What is needed to make QQ global?
   Influence on society
   Favorite Internet services
   Next steps in China‟s Internet




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                                      www.plus8star.com
    Appendix




Mobile & Internet     CC-BY +8* | Plus Eight Star 2008 | www.plus8star.com
Business Consulting
      Glossary and Links

                            Glossary                                                                Links
Services and technologies                                           Tencent                    www.tencent.com
2G services       SMS, IVR, CRBT and others                         QQ                         www.qq.com
2.5G services     WAP, MMS and Java/brew
CP                Content Provider                                  Telecom operators
SP                Service Provider                                  China Mobile               www.chinamobilehk.com
SMS               Short Message Service                             China Unicom               www.chinaunicom.com.hk
MMS               Multimedia Message Service                        China Telecom              www.chinatelecom.com.cn
IVR               Interactive Voice Response                        China Netcom               www.china-netcom.com
RBT/CRBT          Ring Back Tone / Color Ring Back Tone
Monternet         China Mobile‟s WAP portal                         Internet and mobile companies
Uni               China Unicom‟s WAP portal
MMOG              Massively Multiplayer Game                        Hurray!                    www.hurray.com
MMORPG            Massively Multiplayer Online RPG                  KongZhong                  www.kongzhong.com
PCU               Peak Concurrent User                              Linktone                   www.linktone.com
PHS               Personal Handyphone System                        Netease                    www.163.com
VAS               Value Added Services                              Pica                       www.pica.com
WVAS              Wireless Value Added Services                     Sina                       www.sina.com
WAP               Wireless Application Protocol                     Sohu                       www.sohu.com
UCC               User-Created Content                              Tom Online                 www.tom.com
UGC               User-Generated Content                            WangYou                    www.wangyou.com

Operators and Authorities                                           Government and Associations
CMCC              China Mobile                                      MII                                www.mii.gov.cn
CNC               China Netcom                                      VASC                               www.vaschina.org
CU                China Unicom                                      MCSC                               www.mcsc.com.cn
CT                China Telecom                                     Mobile Monday Beijing              www.mobilemonday.cn
CNNIC             China Internet Network Information Center
MII               Ministry of Information Industry
MCSC              Music Copyright Society of China

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     About +8*

                          The future has already arrived. It is just not evenly distributed yet.
                                                                                                                William Gibson
                                                                         Science fiction author & father of the cyberpunk genre
                                                                                          Coined the term "cyberspace" in 1982

                           The company                                                           Our focus
• [+8*] (Plus Eight Star Ltd.) is a consulting boutique              • „Innovation Arbitrage‟: bridging differences in market
operating from Beijing, China                                        maturity worldwide, using Asia as a source
• To learn more about us, please visit www.plus8star.com!            • Strategic consulting on best practices in mobile and
                                                                     Internet services in China, Japan and South Korea

                            Our services                                       Local expertise and global perspective
• Provide strategic analysis to operators & content providers        • Multicultural team covering the 3 markets
to anticipate their markets                                          • Hands-on experience with local companies
• Bring best practices in business models, service design            • Large network of contacts
and marketing to Internet and mobile companies to                    • Hands-on experience with local companies
accelerate their business                                            • Cross-market & cross-cultural awareness
• Other services range from M&A advisory, market entry,
partners identification to negotiation support

 Co-Founder & Organizer | Mobile Monday Beijing                                   Founder and CEO | Benjamin Joffe
• Leading Information and networking event related to mobile         • 8 years in Japan, Korea and China
services in China                                                    • Tel: +86 1371 880 3321
• 16 sessions since March 2006                                       • Skype: benjamin0123
• 2000+ members, 50+ presentations                                   • Email: benjamin@plus8star.com
• www.mobilemonday.cn



    Mobile & Internet                                               +8* | Plus Eight Star 2008
    Business Consulting                                                                                                     99 | 184
                                                                www.plus8star.com
    There is more to know that QQ!

 Cyworld is also very relevant to you
      A broadband country since the late 90s, South Korea is today enjoying super-
       high speed broadband and its society has evolved accordingly, making Korea
       today the most „Internet literate‟ country on the planet and a perfect laboratory for
       new broadband Internet services.
      Among Korea‟s success stories, the online community Cyworld has been the
       shiniest star: over 30% of South Korea‟s population, and 90% of Korean netizens
       in their 20s have a personal page on the service.




 What you will learn
      The critical elements that made Cyworld a success
      The money-making services and payment systems generating 200 million USD
      Original services that could help differentiate and plan some great innovations!


 Pricing
      Company license | USD 2,000 (PDF report)

   Mobile & Internet                             +8* | Plus Eight Star 2008
   Business Consulting                                                              100 | 184
                                             www.plus8star.com

				
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