YY Growth Fueled by Virtual Teddy Bears Lures Tiger Funds: Tech

Ni Linlin has made a career out of convincing men to send her virtual teddy bears, necklaces and blue roses.

Using a laptop in her 10-square-meter (110-square-foot) room in Qingdao, China, the 25-year-old entertains as many as 2,000 fans a day as a DJ and singer on YY Inc., a Chinese entertainment website with nearly half a billion users. She earns five times more than two years ago when she quit her job as an office secretary.

Part American Idol, part online hostess club, the platform allows freelance entertainers to charge fans a fee for playing games with them or earn a revenue cut from virtual gifts sold online. Racy jokes and low-slung tops are allowed, nudity is not. Guangzhou-based YY has surged 50 percent since its November listing on the Nasdaq and counts Temasek Holdings Pte. and Tiger Global Management LLC as investors.

“Very often in second- and third-tier cities and rural areas their only places for entertainment are Internet bars,” said Jenny Lee, a partner at Menlo Park, California-based GGV Capital, which has invested $17 million in the startup.

China’s online-games market is expected to almost double to 84.6 billion yuan ($13.6 billion) in 2016 from 43.4 billion yuan in 2011, according to the Shanghai-based iResearch.

YY is “capturing peoples’ desires,” said Lee.

First Encounter

Ni joins about 70 million active users spending more than an average of 52 hours a month on YY for its entertainment functions, including karaoke and gaming. The company has 457 million registered user accounts.

What separates YY from rival services like Tencent Holdings Ltd’s QQ voice software, or the live broadcasting service 9158.com, is better audio quality and more stringent monitoring of content, said Eric Qiu, an analyst at Guosen Securities Co.

“YY’s product is more stable and there’s no lag in voice,” said the Hong Kong-based Qiu. The company “usually shuts down users who go over the line.”

Since YY Music began allowing users to purchase virtual gifts such as roses and candies in March 2011, the music business generated 339 million yuan in 21 months.

A basic YY membership is 20 yuan -- about $3.20 -- a month and provides access to expression icons, ring tones and eliminates the wait-time for chat rooms if they are at capacity. A premium-level account costs more and allows users to own a virtual Rolls-Royce and oust other members from chatrooms.

Nothing Quite Like It

“In terms of a business model, there really isn’t a technology company overseas quite like YY,” said Qiu. “It’s unique.”

In return for user-generated content, YY has set up revenue-sharing arrangements with performers and generally takes between 60 and 70 percent of the money entertainers generate, according to the company’s Chief Financial Officer Eric He.

Ni takes home between 5,000 and 10,000 yuan a month and spends about four hours a day, four days a week on the platform. She hosts a radio show, a live video broadcast and plays online games with her fans in return for fees.

“I’m the sexy mature type, that’s what they like about me,” said Ni. “You feel like a star. Hundreds of people will respond to whatever you say.”

About 41 percent of YY’s revenue is generated from online gaming and 35 percent from its music unit that includes live performances and karaoke. The company’s revenue more than doubled to 820 million yuan in 2012. It also turned a profit of 89.2 million yuan in 2012, compared with a loss of 83.2 million yuan in 2011.

English Courses

In the past, YY has been subject to fines for user material deemed inappropriate, according the company’s prospectus. These days users have the option to flag content and YY uses automatic censors to scrape images, mine texts or detect unusual traffic spikes, said CFO He.

Ni, who performs under the stage name Mu Xiaowen, says she sometimes blows audience members a virtual kiss. “A lot of the people on YY, to be honest, are just quite bored and use it to kill time,” she said.

YY sees another opportunity for its revenue sharing model in online education where it’s attracted 20,000 teachers to use its platform to teach everything from foreign languages to government civil employee examination courses.

Li Shi’an, 44, a deputy principal in a middle school in the eastern province of Liaoning began teaching English on YY in May 2010, using its free voice software YY Client. He now has about 100 students and earns about 10,000 yuan a month from his online classes.

Online Reputation

Still, the company’s reputation for being an online gaming and music platform means that a “big portion” of its future education users would need to come from other sources, said YY’s He.

While the company tries to expand from an entertainment vehicle to a multiplatform service, Ni continues to perform the role of a virtual girlfriend for many. Perhaps, not for long.

“I need to get married and have kids. I need to find a boyfriend,” said Ni. “Right now I just stay at home all day.”

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