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Cover Story

Take that, China

A gutsy emerging markets internet strategy has paid off very handsomely for Naspers.

10 March 2009
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Antonie Roux quickly learned that to build a business around connectivity, Naspers needed to operate in a fully-fledged, deregulated telecommunications environment, unthreatened by a monopoly.

At around the time that two computer graduates called Larry Page and Sergey Brin were collaborating on an interesting research project that would later be called Google, MySpace was conceived and eBay sold its first item, Naspers was making eyes at China. This was a time when everyone was falling in love with start-ups from Silicon Valley, the magnet for media investments. It’s hard to imagine that ten years ago, emerging markets were perceived to be the Wild West. They were viewed as risky, dangerous territories where only the brave or foolish dared to go.

“We made some very expensive mistakes in China in the beginning. We lost a lot of money. But we didn’t want to compete with well-funded Silicon Valley start-ups and believed emerging markets would eventually yield greater value,” says Naspers CEO of internet operations Antonie Roux.

He’s speaking to me from Cape Town, en route to Hong Kong after having just landed back in South Africa. A man who spent most of the last decade in Asia, Roux has learned some interesting lessons about doing business in emerging markets.

He joined the Naspers group in 1979 and was part of the team that founded prime-time television station M-Net in 1985. Twelve years later, Roux was appointed CEO of internet service provider (ISP) MWeb South Africa. In 2002, he was promoted to CEO of internet operations for MIH and spent five years in Bangkok. Apart from overseeing the group’s global internet division, he serves on the board of various MIH and Naspers companies, including Tencent. Roux has since returned to Cape Town where he lives with his wife Sonja and their three children.

Jewels in Naspers’ internet crown



* In China, the Olympics helped drive a record performance from Tencent (Naspers shareholding = 35.5 percent), which is already the country’s largest and most frequently used portal. With active users exceeding 350 million, Tencent is a strong cash generator for Naspers. Tencent will be working with Ibibo (100 percent) to develop Naspers’ Indian business interests.


* E-commerce operations Allegro (100 percent) in Eastern Europe and Ricardo (100 percent) in Western Europe are enjoying good growth with buoyant revenues. Ricardo launched new services in Austria and Greece, while Allegro made investments in the Czech Republic and Hungary.


* In Russia, mail.ru has grown its base to over 45 million active e-mail users, and continues to add services, including a social network offering called Moi mir@ Mail.ru, blogging, vlogging and a Flickr type offering, internet auction Molotok.ru, payment system Dengi@mail.ru and search engine GoGo.ru.

Entering the Wild West

“You go into the market, you don’t understand the language or the culture, and you think this will only work if you fly in expats to manage the business. Not only is this incredibly expensive, but it just doesn’t work. The biggest lesson we learned is that you don’t invest in a product or an income statement. You invest in a local team. Now we find the best local teams we can get, people we can trust and then do everything we can to support them,” says Roux.

And it’s not just China that hurt Naspers. “They’ve certainly made their mistakes,” says Kevin Mattison, an analyst and director at Avior Research. “They lost money early on in China, Indonesia and in Thailand. They overcapitalised MWeb and lost money there, and recently invested in Tradus (the European online auction company). If you take where the markets are right now, no doubt they paid a very full amount for Tradus.”

After MWeb had gained some critical mass in South Africa, one of the first things Naspers did was to start an ISP in China. “We quickly learned that if you want to build a business around connectivity, you need to operate in a fully-fledged deregulated telecommunications environment that isn’t threatened by a monopoly. You need to be in a position to own the pipe,” says Roux.

“We were way too late in deregulated markets, and other markets had a situation very similar to the South African telecommunications scene, which makes it a hard slog. After our China ISP, we took the decision to focus on the communications and social networking side of the internet business.”

In emerging markets, business models look completely different to those in developed markets. “It’s interesting to see that traditional media businesses are facing their biggest risks right now,” says Mattison. “If you are the owner of the New York Times, your revenues are disappearing. Look at US billionaire Sam Zell’s buyout of the Tribune Company (which owns the Chicago Tribune and Los Angeles Times). It’s a disaster. The revenues are plummeting and there is nothing to suggest that this will slow down,” he says.

Growth economies

This is because of the structural shift in consumer behaviour, and the market move to internet and mobile. This market shift is amplified in emerging geographies like Brazil, Russia, India and China, where large demographic segments are becoming economically active.

There is raised productivity and higher levels of disposable income, contrary to what is currently happening in developed markets. Then there’s the dynamic of broadband access, which is driving a rising income picture for internet business models that operate in these territories.

A case in point is Tencent, founded in 1998 and in which Naspers bought a 50 percent stake for $32 million in 2001. “After Tencent listed, Naspers’ stake was diluted to 36 percent, and today that investment is worth some $3.7 billion,” says Mattison. “They’ve done well there, which may be a question of luck, but they spent a lot of time in China developing their own platforms, so it may be more that they were at the right place at the right time.”

Internet businesses require some initial investments in technology and skilled people before any revenue is generated. They’re not cash-generative from the get go.

“If you look at the progression with Tencent, you’ll see that the early years required investments in systems and technology,” says Godwill Chahwahwa, an equity analyst and portfolio manager at Coronation. “But now, having achieved critical mass, their products are earning lots of cash and the reinvestment required to grow the business is minimal so you have an extremely cash generative business.”

One of the biggest institutional investors in Naspers, Coronation believes that in addition to the pay television assets in Africa and South Africa, the internet side of the media giant’s business is critical to the future of Naspers.

Naspers has managed to acquire internet assets that have a moat around them in the form of product innovation and captive internet communities, says Coronation’s Godwill Chahwahwa.“If you look at global media trends, the internet is the fastest growing category in both developing and emerging markets. In fact, it’s taking market share from other traditional media categories such a print in the form of newspapers and magazines. In addition to this, the way that Naspers has positioned itself in the internet space is strategic. They haven’t gone for developed markets, but emerging markets where growth is extremely high and the potential for growth is more attractive because internet penetration levels are low when compared to developed markets,” says Chahwahwa.

“Naspers has managed to acquire internet assets that have a moat around them in the form of product innovation around captive internet communities, with very decent barriers to entry and a strong local management team who understand their market.”

And looking at media companies around the globe right now, it looks like Naspers has astutely traded early pain for long-term gain, and very cleverly positioned itself in high growth markets. The group’s interim results for the six months ended September 2008 showed significant growth from the internet side of the business, which contributed R1.8 billion to Naspers’ revenue growth of 32 percent (or R12.7 billion) for the financial period. No pain, no gain

“Naspers has been able to build up the largest portfolio of internet assets in the developing world because we invested relatively early,” says Roux. Ten years ago, the market was cautious, if not sceptical about Naspers’ foray into internet investments in territories like China and then Brazil, India and Poland. But short-term pain has matured into gain and long-term value for the media giant, and the future potential for growth is exciting.

It makes one think of the time, many years ago, when Koos Bekker declared that Naspers would be one of the biggest media businesses in the emerging world. The statement raised wry and sceptical chuckles from people who couldn’t see or understand Naspers’ strategy for the internet in emerging markets. No one’s laughing now.


Young guns – Naspers’ local promise

• Matthew Buckland was an emerging rock star on the South African digerati scene before Naspers snapped him up to drive growth for the media company’s mobile and social networking products. A Rhodes graduate who oversaw most of Mail & Guardian’s online success stories, Buckland is now ensconced as general manager of Publishing and Social Media at 24.com. “We have a basic social network in beta called Spaces. There’s also Answerit and a basic video sharing site in Play, which needs to be redeveloped. We’re presently redesigning and boosting our blog offering,” he says. “We’re going to be changing the way we develop our sites, going heavily into open source and creating an environment of innovation, risk-taking and rapid development. We’re looking at a new division to facilitate this.”

What of the local market and the terrible Telkom legacy that has left South Africa one of the most expensive and most broadband-deprived markets in the world? “When it comes to the web, I think it’s a mistake to be restricted to a country’s borders. That’s why it’s called the World Wide Web,” says Buckland.


We made some very expensive mistakes in China in the beginning. We lost a lot of money. Antonie Roux, Naspers
But, saying that, the web in South Africa is set to grow substantially larger if you take a long-term view. “Although market growth is painfully slow, we’re moving in the right direction with the advent of Seacom, the Altech ruling, mobile broadband and Neotel challenging Telkom’s dominance. The mobile web is obviously a big growth area, and anecdotal stats point to a mobile web that’s already double the size of the desktop web in this country.”

• Afrigator, the African social media directory and blog search engine, was already doing really well before Naspers invested in it, took some of the brains behind the business to Cape Town and gave it a resource injection that will put the outfit on steroids. Afrigator recently announced an innovative community revenue sharing initiative that has accelerated site usage and membership dramatically.

“When Naspers invested in us, we had some 3 000 blogs on board, with 50 percent of our members outside of South Africa,” says Justin Hartman, managing director of Afrigator. “At that stage, we were four guys running a garage start-up who would never have achieved what we’re doing now. Since then, this has grown to 5 500 reaching up to 600 new blogs per month.” The launch of Adgator allows advertisers to target top blogs in bespoke categories, while enabling bloggers to do what they love and earn money. Currently available in South Africa, the community advertising model will be extended to include Nigeria, Kenya and Egypt, which are currently Afrigator’s biggest territories. “Afrigator has just joined the Online Publishers Association and already we’re the ninth best performing site on that audited network,” says Hartman.

• The youth demographic is a holy grail for many local marketers, but attracting and engaging youth sectors has been notoriously difficult for advertisers who don’t understand the language and behaviour of this demographic. Touted as the local answer to Facebook for younger generations, Naspers acquired a majority stake in BlueWorld last year. “Naspers has a very strong grip on the older market, so the BlueWorld acquisition helped them gain a share in the youth market, and the acquisition was made more attractive by a few other niche social network properties that BWCOM (BlueWorld Communities) operate. This included Zoopedup.com, an automotive social network where users can set up a profile about their car and interact with other young motoring enthusiasts,” says Charl Norman, who helped found the networks and now manages them for Naspers. What about barriers to entry and is local really lekker?

“We have very few local competitors, although US giants Facebook, MySpace and UK-based Bebo are market leaders and natural competition, but we have very strong differentiators that appeal to our market. Facebook is a tool to manage your friends, whereas BlueWorld is an open eco-system where everyone can see your profile and the content you publish (blogs, videos, photos and the like) with privacy settings for users to change this if they want. We also have a ‘bands’ area that serves as a local MySpace where artists can create a profile for their band and share their music. BlueWorld is a great place to meet new people and make friends all over South Africa, with a local flavour and real life presence that Facebook can’t compete with. We also cannibalise Facebook by writing applications for their platform that ultimately promotes BlueWorld on their network. We use these applications as user acquisition tools. For us, Facebook is a marketing platform rather than a major threat. We’re one of the only local online destinations that has implemented Facebook Connect, which enables visitors to sign up to BlueWorld and port their Facebook profile data across to our network,” says Norman.