Transcript: Fortune Global Forum: Tim Armstrong

Viewpoint: How Social Media Is Changing Business

Discussion leaders:

Tim Armstrong, Chairman and CEO, AOL
Charles Chao, President and CEO, SINA Corporation
Dele Liu, President, Youku Tudou
Neil Shen, Founding Managing Partner, Sequoia Capital China
Moderator: Yang Lan, Chairperson, Sun Media Group

Chengdu, China

June 7, 2013

YANG LAN:  All right.  Good afternoon.  I know more people are coming, but it seems we have this pressure of time.  So we’ll start immediately.  Our session will run for an hour or so.  Right now it’s 2:10, and our session will be ended by 15:10.

Welcome everyone.  I hope you have gotten a good day so far.  The topic of this session is how social media is changing the way we do business, or the changing the very fact that we do business.

We know that China has more than 500 million Internet users, twice the number of wired Americans, and these Chinese users reportedly spend 46 minutes a day visiting social media sites, and they’re changing how our society does everything from viewing the news to shopping, and investing.

And so how is social media changing China, and what’s the implication to international operators outside of China, that’s the subject that we’ll touch today in this session.

Let me introduce our outstanding panelists.  Tim Armstrong is the Chairman and CEO of AOL.  They serve 200 million consumers a month, and is one of the world’s biggest consumer brands.  And after Tim took the chairman-hood the company has been renovated and have a lot of new exciting news coming out.  And the operation has been enhanced greatly.

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And we then have Charles Chao, who is the Chairman and CEO of SINA Corporation.  He has played a vital role in building SINA into the Internet media and online advertising giant in China.  In 2009, he launched Weibo.com, now with 500 million registered users.

And then we have Mr. Dele Liu, President of Youku Tudou.  That’s really beyond translation, Youku Tudou.  So he thinks that’s a better way to call them a couch potato.  Tudou is potato.

DELE LIU:  Youku is what’s best and what’s cool.

YANG LAN:  What’s best and cool.  So cool and potato.

DELE LIU:  The best content to the users.

YANG LAN:  It’s a leading Internet video portal in China.  He’s coming from a private equity industry before.

And then, of course, we have this phenomenal venture capitalist, Neil Shen.  He’s the Founding Managing Partner of Sequoia Capital China, which has invested in many high growth companies, and was selected as number one venture capitalist in China in 2010, 2011, 2012, and probably 2013 again, consecutively.  And his company manages eight funds, up to $4.5 billion U.S. dollars.

So we have a very powerful team here talking on a very specific subject.  I would like to first of all touch on the subject about the comparisons of functionalities and popularities between the social media in the U.S. and then in China.  Charles, do you want to start on that?  What’s your observation of the different functionalities and activities?  That’s a broad one.

CHARLES CHAO:  That is very specific, and I think you have to be a user to understand the differences and compare to different products.  And I think the famous one in the U.S., everyone knows Facebook, Twitter, and maybe YouTube, broad-based you can say this is also a social media in a sense.  And in China, of course, we have Weibo, Weichat, and we also have Youku Tudou, and then the other sort of venture companies.

I think the differences between these two, I think the user in a Chinese company gets some ideas from the innovation from U.S. companies and stuff bout how the product looks like.  But we tend to through a lot of adjustment innovations to adapt to the local market in terms of the user behavior, in terms of other priorities.  And so in the social media case, for example Weibo, we have done a lot of things that’s very different from Twitter, for example.

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At the very beginning we adopted multimedia.  We have voice, we had picture, we had video, at the very beginning, and also we have a lot of interaction.

YANG LAN:  Actually, according to a survey I have read, we have embedded multimedia content 18 months before Twitter offered the same kind of function.

CHARLES CHAO:  Yes, exactly.  And also we encourage people to have a lot of interactions, like comments, and we also when we actually retweet, we allow people to make comments.  So the flow of information is very different.  And most importantly, I think, is 140 characters in Chinese is very different from 100 characters in English.  In English it’s probably only one sentence.  But in Chinese it pretty much can express a whole idea, a small story, and opinion.

So the user behavior on our Weibo is very, very different in terms of what people do, their behavior, and also the content generated probably is much more, I will say, rich I mean than what Twitter does.  So I think that there are differences, but I think that’s probably not important.  At the end of the day, I think each market has its own way to develop its product and platform.

Another probably very specific difference is probably Chinese social media at the very beginning we have been very much focused on the mobile, from the very beginning.  So when we started our Weibo more than three years ago, it’s almost four years now, we launched our mobile platform at the same time.  And almost all along our mobile platform is probably more popular than our PC platform.  Now it’s like 70-80 percent mobile, I mean at the current stage.  But I think our U.S. counterparts probably at the very beginning probably not very much focused on mobile.  That’s probably also another big difference.  But everybody knows mobile is the trend, is the future.  It’s not the future ‑‑

YANG LAN:  It’s current already.

CHARLES CHAO:  It’s like everyone has to switch to mobile, so that’s the key.

YANG LAN:  Tim, what are some of your observations?

TIM ARMSTRONG:  Yes.  I think, first, it’s great to be here.  And it’s really an honor to be on a panel with people I really look up to in terms of leaders in the Internet space.  I would say the following things.  I think one is, if you look at the difference between the China-based companies versus U.S.-based companies is there’s been more integration of the services together.  So almost all of the Chinese companies essentially have multiple feature sets integrated together, whereas the U.S. companies have essentially gone into point solutions.

And I think that’s a function of two things.  I think one is the U.S. marketplace developed earlier where mobile wasn’t really big and thought about in a lot of the larger services, the AOLs, the Yahoo!s, essentially had a very different looking business model.  And as the web basically evolved, especially in Silicon Valley, people started to build very specific point feature solutions.  Whereas the Chinese company looking from the outside seemed to develop a set of services together, or have integrated them more quickly than the U.S. companies.  And I think one of the things that you’re seeing in the U.S. now more is the need for users to have more integrated services.

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AOL is a great example of a company that was kind of open, had chat rooms, and some of the early social things on the Internet, AIM, instant messaging, and then essentially it lost the understanding of what social was.  And meanwhile, while AOL was losing that, the Chinese companies were exactly doing the opposite.  And now at AOL we’re kind of coming back around to community and social.  But the biggest difference I see is the fact that Chinese companies have thought multi-tiered in terms of social and services.  Whereas the U.S. companies have been very feature specific.

YANG LAN:  And I guess that Dele can share with us who are those people most active on social media in China?  Who are they?  It’s not you, right, it’s not our generation.

DELE LIU:  I would like to add to Tim’s remarks.  In China our social media networks are more integrated.  For example, we are working with SINA on a strategic basis to have our video embedded in their promotional, or intelligent recommendation scheme, so that users on a non-intrusive basis will be able to watch movies and dramas through Weibo, which is pretty good.

And also on a macro space I think Chinese social media are more important in the society than in the U.S., partially because our traditional media are not developed to the level of the U.S. and secondly people are connected in China.  The connectedness is fundamentally built on goodness.  So I will congratulate the Chinese on having such a platform so that a lot of good things happen in China.  So in China there are two kinds of people who use social media most often, back to your question.  One is those entertainment-driven teens, and they just like to share their lunch, breakfast, and whatever they have with the world, making their life national news.  And two is those people who wanted to influence the society in a constructive way like yourself.  And there’s a lot of intellectuals in China who are pretty vocal on Weibo and other platforms to bring changes.  I think those are fundamentally a very good thing.

YANG LAN:  It’s like a joint effort of new enlightenment in China, trying to influence the younger generation like how to view the world, how to make a change, and so on, and so forth, which is phenomenal, which is phenomenal.  And also we see that interaction between public opinion and government policies.  And of course, when you congratulate a child for what he has done to provide a great platform for China’s social progress, needless to say that he’s also under a lot of pressure about managing this very dynamic platform.  So what are some of the regulations you have to face from the government in terms of managing the content?

DELE LIU:  I think it’s a topic a lot of people are very interested, but actually what we are facing is no different from other websites in terms of the ‑‑ it’s under the same regulation, that means actually I happen to just read an article on the plan this morning and I was talking about the British government, the Minister of Culture has been talking to the big companies like Google and Facebook, and these companies tried to get their cooperation, how to control the content on social media.

And I think it’s a global thing.  It’s not just China.  I think in terms of regulations, it’s the same, every website in China, whether it’s video, whether it’s search, whether it’s a portal, whether it’s social media, we face the same regulation, which means that we cannot ‑‑ we have to control and cannot allow people to disseminate great content that’s viewed as harmful to the society.  So actually there’s several criteria, or details in terms of what is viewed as harmful to the society and I think the difference is that every country will have the issue, it’s just the criteria in terms of what is harmful, what is standard might be different.

YANG LAN:  And who defines that.

DELE LIU:  Yes, who defines that might be a little bit different.  But, it comes to the question, in terms of what exactly we’re facing, yes, there is a lot of pressure, it’s because the nature of social media in that before people did not have their power, or the ability to say if their worth is somehow restricted, or they cannot express, they cannot complain, right, because if they complain nobody hears them.  Social media, if they complain everybody hears them.  So the bad news travels very fast also.

YANG LAN:  They have 1,000 other ways to get the message through, very creative.

DELE LIU:  Yes, exactly.  So they can repost the message.  They can read the message, so that creates technical difficulties in terms of following the regulation in this country.  That’s probably part of our, I mean, as you say, pressure.

YANG LAN:  You’re observing all this, right.  Do you have a verified identity on social media?

NEIL SHEN:  Yes, we are an entity and talk about our business, and obviously our portfolio company.  But, I was not as vocal as some of our other, obviously, investors, because they feel that this probably would be more leveraged to talk about the portfolio they invest, the young entrepreneur, which I think is a good thing.

YANG LAN:  What makes you visit social media, if you are not that vocal on it?

NEIL SHEN:  Well, I think there are two things here.  One is information.  The other is entertainment.  So I think the rising of social media in China, as Dele has mentioned, is largely obviously the younger generation.  And if you look at China back 10 years ago, a lot of people would talk about the online games, right.  And it’s a lot more popular in China compared with the rest of the world.  And one of the reasons is offline the younger generation does not have a lot of places we can define entertainment channels.  And to me this is an extension.  So they go through the Weibo, or other social media for two things, one is actually entertainment, and part of what Dele was talking about, you follow the celebrities and actors, and actresses, et cetera.  And then the other is information.  And, indeed, this is a very good aggregator of information, whereby a lot of those people today, famous, on Weibo and may not be able to send a message through to all the people, which you wish to address.  So I think this is an extension of the user base, user behavior.

YANG LAN:  Tim, have you found there is involvement of the demographic of the Internet users, social media users in the U.S., and if there is some government regulations you have to face, what are they?

TIM ARMSTRONG:  Yes, I think in the U.S. marketplace right now privacy is a really big issue and something we’re facing, both in the consumer side, but also the advertising side of the business overall, which is probably slightly different than the market in China, is also the rights issues around content and media and really people being specifically tied up, because pre-Internet rights issues around content, which are really important, essentially were built for a much different world than the online world and mobile world is.  And you’re starting to see actually people rarely start to segment their rights issues down by mobile, Internet, offline media.  And I think from that standpoint there’s a lot of energy put around that and I think those are probably the two largest things overall.  And I would also just say from the standpoint of social media and what’s really where the usage comes from, I think there’s the entertainment and information that Neil was just talking about.

I would overlay that on top of where the Internet seems to be going now, whereas people are starting to really think about it by a demographic age, and what you’re actually doing in your life.  I think the Internet is getting better at basically putting kind of a zero distance between how you want to live your life and what the services and technology are.  So somebody who is 20 years old may play a lot more, or do a lot more gaming online than somebody who is 35, married, and has a child.  And really the services over time I think are going to morph to meet those demands and that’s something, one, in the U.S. I see a very big market opportunity around, and two is just from traveling I was in Japan and Korea before I came to China, and around the world cultures are different, but in a lot of ways there’s a lot of similarities between what consumers want.  I think social media is going to play a really big piece in unlocking kind of universal joint aspects of societies and social behavior overall.

YANG LAN:  And then the second question, what are some of the government regulations you have to face these days.  I know there are quite a few controversies going on at this moment.

TIM ARMSTRONG:  So on the government regulation side the one controversy that’s out there today obviously is national security.  And I think from the standpoint of where the world is going that’s probably going to be a bigger topic in the future even than it is today.  So I think that’s one.  The safety and concern, what Charles said, I think is exactly correct, which is all countries have different filters for whether it’s safety, or whether it’s protection of rights, or those things.  And really as an Internet company you have to essentially establish yourself in whatever region you’re in, in terms of filtering it to the level those governments want, and if you don’t you’re probably not going to be able to play very well in those markets.  So the regulations on the Internet today have really been about privacy, copyrights, those things.  I think you’re seeing national security pop up, obviously, both in the China market and the U.S. market.  So my guess is that’s going to be a bigger topic and regulatory area in the future.

YANG LAN:  In terms of the impact of social media on business I can cite one example, but that was not meant to be business-oriented.  We have young people recognizing different expensive watches by some government officials on Weibo and the social media.  I have to hype mine.  No, that’s a joke.  But, when they found out some government officials have more than a dozen very expensive Swiss-made watches, investigations were launched.  And some of those officials were sacked.  Was that connected with the decrees, or the decline of Swiss-made watch sales in China, I don’t know.  But, that’s just a side note.

TIM ARMSTRONG:  It did.

YANG LAN:  It did.  I know.  But then, for more conscious usage of the platform of social media, from the business point of view what are some of the opportunities that is now available for business for marketing for their products or services on the Internet?  And can users tell the difference between authentic reviews from propaganda or promotion spin?

Dele?

DELE LIU:  Definitely.  Users are extremely empowered with information, and they have friends.  So word of mouth ‑‑ actually the essence is always the real thing.  So you just cannot play around users with different commercial stuff to cheat users.  You never do that, never do that.  That’s the number one rule in social media marketing in our view.  It has to be real.  It has to be from the perspective of what you can do for the users.  It’s not what you can tell, what you tell the users.

YANG LAN:  And how about those competitions on the social media platform, because we have heard so many different cases when computers tried to blackmail or defame each other by putting some product reviews on the Internet.  Does that work?

DELE LIU:  Social media has one thing, it can magnify the reality a little bit.  For example, if you have a fifth grade crisis, it can get into first grade, or the top grade classes if you don’t manage it well.  So what you have to do ‑‑

YANG LAN:  Citing an example, we are actually buying out the baby formula powders from Hong Kong because of the news breaking out about the safety problem.

DELE LIU:  Sometimes only bad things are talked about.  And you have to be, firstly, you have to be very sincere from your heart.  You are thinking about the users.  You only talk about the truth and only truth, and you respond in no time.  And you respond in a very transparent way.  I find that transparency is always the best thing, and supported by data, by facts, by name and by location.  You just get as specific as you can.

YANG LAN:  Charles, do you want to add to that?

CHARLES CHAO:  I think this is actually a very interesting topic.  If you want to go deep, you can talk for a long, long time on that particular one.  Maybe what I can add is that in general I think social media, the nature is that it allows everybody to contribute, to share, to distribute content, and so on and so forth.  And one important thing about social media is it makes everything more transparent.  So fundamentally it changes the behavior of every individual, every business, and every government.

So before not all information is transparent.  So you can manage certain situations, events, or company’s business, or government in a more asymmetric way.  Now the information is more symmetric.  And so you have to deal with that in a more transparent way.  So I think it will change the behavior of everybody.  Not just the individual, but also business and government.

As to what Dele just mentioned, something that is very important, the social media makes everything more transparent.  So when you react on social media, you will also want to be transparent.  You’ll want to be very quick.  So if you do not deal with the crisis very quickly, sometimes the damage can be done very badly.  So it’s too bad.  I think the social media is a double-edged sword.  On the one hand, it make everything much better, easier to create content, to share the content, and a lot of good things happening with social media.  But on the other hand, it also brought in a lot of new problems for the society.  Transparency is one thing, but you just mentioned the watch thing, it’s about the transparency also.  It’s kind of what the social media does to the society is that it serves as a check and balance in a society by making everything more transparent.  On the other hand, because it’s so open, so free, everybody can take advantage of it.  So you can manipulate social media in a way that would damage another person or business or even government in a way.

So I think one thing is that social media is a trend, nobody can reverse that because everybody already has a mobile phone, which is connected, which has the capability of taking pictures, and taking video, and doing the live broadcasting even in the future.  And on the other hand, because it’s so easy in terms of access of social media, so easy to create something, and I think there is an order everybody has to build together on social media, which is something we have been trying very hard to do.

It’s not like a government regulation, which is just one thing, or law and regulation on just one thing.  It’s not enough to manage the order on social media.  So what we’re doing is to come up with disciplined kind of regulations for the users, with their participation, and they can be the judge for a lot of things.  And so I think it’s a topic probably everybody will have to deal with, every country has to deal with.  But my opinion is that there is the need for order on social media, and we have to build this order together.

YANG LAN:  Obviously everyone is trying to adapt to these new changes and the impact.

Neil, could you comment on this, because we know that clearly the social media has direct impact on people’s purchasing decisions.  Does that also have impact on people’s investing decisions, for example, affecting the stock market price for certain companies.

NEIL SHEN:  Yes.  I think basically the social media is really one form of disintimidation of the medias.  I think especially for less companies, but also for openness, there’s good and bad.  Good, there’s obviously ‑‑ (inaudible) ‑‑ smaller companies, actually they can leverage their voice if you get a good company.  And as Dele said, it can magnify that.

But I think actually it’s probably it’s slightly more negative for the larger companies in a way because you have a lot of challenges to manage.  It’s not just magnified, but it actually shortens this whole way of broadcasting.

YANG LAN:  Why?  Why do bigger companies face more challenges than smaller ones?

NEIL SHEN:  I think it’s probably more easy because when you’re in the traditional media industry, as you are a bigger company with a bigger voice.  Today the smaller company, if the content is good, if there is someone in the middle of nowhere, they can actually put the nice content in quickly.  It’s become very popular.  I think actually this intermediate is actually magnified the core of the content.

YANG LAN:  In terms of social media companies, if you want to invest in them, what are some of the criterias you will choose or drop a case?

NEIL SHEN:  Actually, we should sort of scale back and ask ourselves, do we still want to invest into a media company which are not social?  Seldom so probably.  Back ten years ago, if we were investing into media companies, seldom we invest into a company that does not have an online presence.  Today, I think if you’re investing into a media company, they not just only should be online, but they should also have the social features, because that’s very important.  It’s a lot more powerful if you have the social platform, because it’s easy to create more valuable and interesting content.

Just like mobile is important, and in the future I think if you look at the media, first of all, they have to be social.  Secondly, they have to be Internet in the sense of mobile.  That’s how important social media is.

YANG LAN:  And the key question is, how do you monetize on this dynamic activity on social media?  Tim?

TIM ARMSTRONG:  I spent basically the last 20 years working on Internet advertising stuff.  And I spent a lot of time thinking about this.  And I think from the viewpoint of what ‑‑ first of all, I think we’re in the largest potential economic benefit in the advertising business that’s been in the last 20 or 30 years.  And I think the first 20 years of the Internet, the consumer Internet will pale in comparison to what happens over the next 5 to 10 years.  And the reason is you have the real migration of users, especially on the mobile smart phone usage, you look at the U.S. as 65-plus percent penetration of smart phones.  China has I think it’s higher, as higher 67-68 percent, maybe even higher now of smart phone penetration.  So you have every consumer essentially in the world who is going to be loaded up with a smart phone media device in their hand.

And if you’re a corporation who wants to advertise to them, before you had to go through giant pipes and catch the person at the right time.  You’re essentially going to be live, connected to consumers, and I think that is a very fundamental change.   And the ad systems still haven’t caught up to where the consumers are.  So you have a giant gap and that gap is opportunity.  And that gap is going to get filled, I think, by advertising systems that will essentially be real time.  So we went through an ad campaign planning process at AOL last year and I was amazed, because I hadn’t done it in a while for our brand.  And I sat through it and we had agencies come in and pitch an idea, then they came back three weeks later, pitched another idea, and we went through this process and then they came up with one idea that was going to run one commercial.  We stopped the process, because we said essentially even by the second set of meetings we had the marketplace had changed and we needed to actually be communicating with our consumers constantly.

So my guess is a fundamental shift will happen to monetize this correctly, which is you’ll have the equivalent of content management systems, which publishers use to put information out all the time, with advertising management systems, which will essentially be real time, and they’re not right now.  But, that’s a very significant opportunity and it’s going to require advertising people, agencies, and corporations to get retrained, to think not in terms of stepping back and planning, but being interactive on a brand perspective on a real time basis.

YANG LAN:  Well, Dele, if there’s anything that will keep you awake in the evening, is that about the monetization of your services, because you have both professionally produced content and then user-generated content.  How do you make money off that?

DELE LIU:  Yes, I used to be a CFO like Charles.

YANG LAN:  You’re reading all those numbers every day, right?

DELE LIU:  I think social media monetization has to be very different from traditional interruption-based kind of media.  It has to be engagement-based, where basically you need to find the right context, the right people, and bring him or her the relevant information.  For example, in SINA’s case, we worked something on promoting videos and share revenue to users.  But, you cannot just force them, and stop their social behavior.  They don’t want to interact with commercials.  What we do is that based on ‑‑ SINA is doing a great job.  They are going to do very complicated algorithms, based on the friends and profile, and activities to recommend the needed, relevant stuff.  For example, you can ‑‑ instead of having a banner you can give game cards of Coca-Cola, or of Pizza Hut, right.  And consumers will like to accept the game cards.  So those kind of innovations are very important.

YANG LAN:  So they don’t want the commercial, but they want the game cards.

DELE LIU:  Yes, the game cards actually has served the commercial purpose even more efficiently.  So that’s a way.  So it’s got to be a paradigm transcending model and a lot of work has to be done.  I have a fundamental belief that as long as you create value for the users you will be able to monetize.  It’s just a matter of time.  But, you have to figure out a different way.

YANG LAN:  You have to sustain until you make money, right.

Well, Neil, of course you have a lot of thoughts on that.

NEIL SHEN:  Yes, obviously these two gentlemen are going to figure out ‑‑ these three gentlemen are going to figure out how to monetize them.  But, I’m very optimistic about the ultimate result, i.e., social media will be a very powerful tool and ultimately are going to bring a lot of commercial value, i.e., monetization, because if you look at the media versus commerce, right, in the traditional way there are ways to connect them.  But, in the social media, if you want to connect social media versus social ‑‑ basically e-commerce, it’s actually a lot easier.  For many products and services you do want to see your fellow friends, or your fans commentary on a particular service and product, restaurant and hotel being very good examples, right.

So I think social media is a very good way for these products to be promoted, because those commentary are coming from the social channel create very good promotions and very natural promotions for the product to be sold.

YANG LAN:  And of course, Charles, you have to comment on this acquisition by Alibaba of 30 percent of SINA Weibo, with 586 million U.S. dollars and people have a lot of expectations, how do you combine e-commerce with the influence and the flow of people on this social media platform.  So could you say something more than your official announcement?

CHARLES CHAO:  In which area?

YANG LAN:  In which area, how to monetize it, again, is the subject.

CHARLES CHAO:  First let me make a correction, it’s 18 percent, it’s not 30 percent.

YANG LAN:  Not 30, so they have the opportunity to acquire up to 30?

CHARLES CHAO:  I think this deal actually is quite exciting for us and we have been talking about the monetization for social media and I agree with these panelists that as long as you create value, as long as you have a user base, user activities, user engagement, you will find the monetization it’s just a matter of how and when, and what kind of scale, I think.  With social media, of course, engagement is very important as Dele has just mentioned, and also that engagement actually comes from many different ways.  I mean there’s engagement on social media itself and also there’s engagement on the combination with social media and traditional, for example, TV.  I mean, these days I think the trend is that it’s become a fashion that in the U.S. and China when you watch TV, when you watch a game, when you watch a movie, when you watch what’s it called, a talk show, for example, you will have a lot of people actually send comments on social media about that program, right?  And on a particular very popular program you can see a million posts just on one program.  And you probably had that experience also on your own TV programs.

YANG LAN:  Well, we have a few millions of views on the Internet alone for our television shows.

CHARLES CHAO:  Yes, exactly.  So what it means is that social media is not just information it’s also engagement.  So it’s conceivable that in the future when you actually watch TV you have sponsors that will have people from Coca-Cola here, and they have the commercials on TV, but simultaneously they will have the commercials on the social media, because these users, are actually more engaged users, and more valuable for the brand.  I mean for these advertisers.  So this is one type of engagement we’re talking about.  Of course, there are many ways I cannot get too many details.  But, talking about the Alibaba deal, I mean, so I think fundamentally with social media, I mean people can sort of all these kind of models, but in the end it’s still going to be the advertising.  And so if you look at Facebook, you look at Twitter, look at us, look at other ‑‑ any social media in the world, fundamentally I think the majority of their revenue will come from advertising.

YANG LAN:  There is still advertisement space?

CHARLES CHAO:  Yes, but the way to do the advertising is very different.  I just mentioned the example of TV engagement, Alibaba, for example, what it provides is that when talking about advertising we have to talk about the demand for the advertising, where it comes from, right.  Traditional media and other consumer products are the demand for advertising, but on social media, on online media, actually if you look at China, look at the U.S., you will find the majority demand are coming from online demand.  Online demand means e-commerce, for example, online demand means online gaming.

These two demands actually consist of the majority of online advertising revenues in China today and also for the U.S.  And so what Alibaba does, obviously, has is millions of sellers, which are the advertisers for online advertising, right.  So how we connect millions of sellers and advertisers to hundreds of millions of our social media users is the essence of our corporation.  And behind that, of course, people can just do advertising by themselves.  But, with the user integration, with the ID integration, with data exchange, we can do these promotions, marketing much more effectively, much more accurate in a way that’s not going to affect user experience too much, but it can be much more accurate and precise.  So I think that for the near future that’s the thinking behind that kind of corporation, but in the future, of course, with more data, those companies create a lot of data.  And five years from now, ten years from now I see Internet companies all about data, about big data.

YANG LAN:  The mining, mining of the data.

CHARLES CHAO:  Yes, exactly.  And so where we have a lot of data, and so with mobile Internet we’re not only collecting data for the interest of a person, but we also have a lot of location-based data who does what, when, how, these types of data, and where and more important, just like Tim says, in real time.

YANG LAN:  Do you guys find that intimidating, with everything about yourself, your private behaviors being known by some data companies?

CHARLES CHAO:  But, I think in the future that the data will be more like ‑‑

YANG LAN:  What kind of movies you watch, what kind of cosmetics you buy?

CHARLES CHAO:  Yes, it’s not something that you can actually one company will have one particular profile for one person, but combined it will probably have more accurate data.  Real time means that the Internet will suggest what you want in a particular day, at which price, at which location, and where and how.  But this is probably, I don’t know, five-ten years from now.  I don’t know what’s going to happen.  But this is for the long-term future something we’re looking into, basically.

TIM ARMSTRONG:  Just quickly, I think that’s actually part of the single biggest trend in global Internet advertising, also, is the machine to machine understanding of big data and when to target people, how to target people, when to distribute things, what to distribute.  And I think in the future of these systems, essentially, things will be looked as an object, a piece of content, an ad, and the big data systems essentially will talk to each other real time and get better and better at servicing consumers with what they want when they want it so that the privacy thing will be balanced off by the level of service you get from the providers.  The entire advertising industry, which is essentially a trillion dollar industry, most of it has not been machine to machine, it’s been person to person.  And I think the transition from person to person to machine to machine is a very big fundamental change in how it gets done, but much more accurate advertising.

YANG LAN:  You guys have touched a very important factor of social media, which is going mobile.  Especially in China where a lot of rural areas are not connected with broadband, and there is so much migration of populations in this whole process of urbanization.  Mobile applications mean so much to media and to businesses, so on and so forth.  Who will get the best advantage out of that, and who will be left out in this process?

DELE LIU:  I think Charles just mentioned one very important point.  When Weibo was created, it was actually simultaneously a PC and a mobile version.  And if you look at Weichat, we don’t even have a Weichat PC version.  We don’t.  So this is actually a very interesting development.  So those popular applications on the PC platform may not fit for mobile.  Again, we have different displays and different format of touch and feel, et cetera, for the mobile platforms.  But if you look five or ten years down the road, the major use for Internet will be the younger generation, the ’80s and ’90s.  I think we’ve got this data, this commissioned survey, 70 percent are ’90s.

YANG LAN:  Who were born in the ’90s.

DELE LIU:  — who actually first get to know Internet through the mobile Internet.  This is very significant.  So if you want to look five or ten years down the road, mobile is going to become probably a significant role of the Internet.  The product which is created from the PC times, we call that the traditional Internet, may not fit and become a good product in the mobile.  I think that’s a very big challenge for all the companies.

YANG LAN:  I learned from the New York Times guys that the most of people who view their news through PC set are mostly from English speaking countries like Canada and Australia, but the most of users for their mobile services is actually from Mainland China.  What does that tell us?

CHARLES CHAO:  That’s true.  I think the mobile penetration in China is higher than in the U.S. in terms of two figures, in terms of time spent, overall media I think that China spends more time on the Internet than U.S. counterparts.  And then among Internet users, China Internet users spend more time on mobile as a percentage than our U.S. counterparts.

YANG LAN:  And what’s the implication for video portals?

DELE LIU:  Mobile video has increased exponentially for us.  We reported in our first quarterly financial announcements we achieved 50 percent quarter to quarter growth in mobile traffic.  What happened is we find two incremental parts.  One is that existing PC users can spend more time watching video because they can utilize their fragmented, so-called fragmented time when they are in transition, or in airports.  They can spend some time on, example, UK dramas, and the second most important incremental part comes from a few hundred million people in China who are migrating and working probably in urban areas, they don’t have a TV set.  They don’t even have apartments.  But the best entertainment for them is to use their mobile phones.  And they can watch dramas, movies, variety shows.  So these are a big delta.

But currently, again, monetization is still something in the process.  And it incurs costs on our P&L.  We still need to find a way to monetize them.  And the barrier of that is related to the data.  For example, if you buy a car, you actually have been exposed to many information related to the car, say Toyota.  You watch the newspaper, you go to the TV, and you watch the online video many times.  You talk about Toyota new model on Weibo, and then finally you click and search, and which links for dealerships.  I find that search gets the biggest credit for that.

But actually the mobile video commercial, or the SMS has done a great percentage of the job.  Sometimes TV gets more credit.  But what happened is that we need to have the data to show who is the attribution of the success.  But without that kind of complicated data patterns, marketers just ‑‑

YANG LAN:  So we need some good surveys.

DELE LIU:  So that’s the machine-to-machine, people to machine, data to data kind of connection that will help to find the right answer.

YANG LAN:  Tim, do you want to add to that?

TIM ARMSTRONG:  I think that everything that was said is the same thing that’s happening in the U.S. marketplace.  And the attribution piece is huge.  Overall search sits at the end and gets a lot of credit for everything, but a lot of the work has been done beforehand.

And the only other thing I’d say mobile that people think of the fragment at a time.  We just did a study which essentially 60 to 80 percent of people’s mobile usage is in their home in the U.S.  So when you think about it, mobile ‑‑

YANG LAN:  We have stopped talking to each other over the dinner table.

TIM ARMSTRONG:  Right.  You can just SMS.  That is a pretty fundamental shift though in terms of people thought about mobile a couple of years ago when you’re out of the home, or out of the office doing things, and the reality is mobile is it.  So that’s a big change.

YANG LAN:  Great.  So we have how many minutes left?  Fifteen minutes left.  That’s good enough.  And we’ll open the floor for questions, please, raise your hand and I will hand you the mobile phone ‑‑ not the mobile phone, the microphone.  (Laughter.)

QUESTION:  It’s a mobile mike.  Andy Mock, Red Pagoda Resources.  I thank you all for a really great discussion about social media.  You guys focused a lot on the consumer space, and I wonder if you could share a little bit what are your thoughts about social media in the enterprise or the business space in China?  And in particular do you think it will follow the model of the U.S. where we’ve seen companies like Yammer acquired by Microsoft for something like $2 billion?

YANG LAN:  Neil, do you want to comment on that?

NEIL SHEN:  I didn’t get the question exactly, the last part.

QUESTION:  I was wondering if you guys could comment a little bit about what you see of the future of social media in the enterprise space in China.

NEIL SHEN:  You mean how does business adopt social media?

QUESTION:  Yes.

YANG LAN:  You mean between businesses?

QUESTION:  How businesses might use social media.

YANG LAN:  Enterprises, okay.

NEIL SHEN:  It should follow the same pattern, because it’s very useful, right.  And then there’s no reason why the Chinese corporate have different sort of behaviors.  Obviously, if you look at the Chinese enterprise market itself ‑‑ I’m not talking about the Internet, but general software market ‑‑ it has not been as developed and as advanced as compared with the U.S.  We have very few billion-dollar companies out of that space.

I do see a growing trend for enterprises to pay more attention to this.  One is, as we get into the mobile space, it’s going to actually lower the entry barriers for the small and medium company to actually be able to receive such services, especially in the form of SaaS.

Secondly, as we have the rising costs because of the human resources cost, land cost, the need for automation is getting so important.  I think this is the same dynamics compared with the U.S. 20-30 years ago.  So to save costs, to cut expenses, automation is important.  So a lot of software in the social form, in the mobile form, could actually address that need.  Clearly, this is I think the very beginning of a long journey probably.  It’s going to take some time, but I think ultimately there is definitely a need there.

YANG LAN:  Okay.  Next question.  That lady, please.

QUESTION:  Hi.  I’m Megan Barnett.  I’m with Fortune.  My question is for Tim.  It’s about this morning’s reports that the National Security Agency has been tapping customer data from nine Internet companies including AOL.  I’m wondering, first of all, is this something that AOL cooperated with, and if not what was your reaction when you found out?  And what does AOL plan to do about it?

TIM ARMSTRONG:  So we in all the countries we operate in get requests from the government.  And I think from what I know at this point, essentially, we only do what’s essentially within the guidelines of what’s legal in the U.S. based on the laws in the U.S.  I think before I came to the panel I saw some information the U.S. government put out publicly, they didn’t send it to me directly.  So I think it’s a situation where the U.S. may have been doing things outside of the United States, and not within the guidelines of what normally gets considered in the U.S. law.  But I will reserve my judgment until I get more information.

YANG LAN:  Congratulations, you got the official announcement.

Any more questions from this sector?  Yes, please, sir.

QUESTION:  (Off mike.)

YANG LAN:  You need the mike for translation.

QUESTION:  Sorry.  How prepared do you feel that businesses are to embrace social media to help them?  Are they doing that with their in-house resources, or are they using digital agencies, how are they deciding how to set their strategies as they move forward?

YANG LAN:  Are business ready to adapt to this new phenomenon?

CHARLES CHAO:  I think it’s a learning process for business.  I think Chinese Internet users actually are pretty sophisticated.  I mean the Chinese business are not as sophisticated in terms of using the Internet.  I would say in a broad sense.  Social media, it’s the same thing, they are not very sophisticated, except for the big brand companies, I think.  Large companies who tend to spend a lot of advertising budget on TV, for example, are the ones who actually spend a lot of effort and resources to start a social media.  But the small and medium companies, I think they’re still lagging behind in terms of understanding of how to use social media to help their business.

I think at the current stage it’s more like they are just using the social media basically to create their brand, or distribution of their content, and these type of things.  Not so much in terms of helping their business yet.  But there are a lot of third party digital agencies in this space right now if you look at our third party companies who are helping the business people who are doing their social media promotions, marketing.  I think there’s a lot of new companies, agencies, being created for that purpose.  And I just reviewed that last week, I think, in China we’re probably dealing with at least 50-something companies in that space helping our customers or businesses to do social media marketing, and these type of things.

I think it’s a learning process for a lot of companies, but I will say that it’s going to be very important in the future, especially I would say for the people in the city, a business like restaurants, like these kind of movie theaters, and these people actually will be taking advantage of social media more quickly than average offline small and medium companies, because I think the important part of that business is connecting mobile.  The mobile business circle, online to offline circle, is being built in China I think with the more mature of the mobile payment systems, I think that business can take off very quickly.  And that will have a lot of impact on these small companies.

YANG LAN:  Actually, smaller companies have a faster learning curve exactly because of the restraint of their resources.  So it’s like a game changing moment.  For example, in China there have been a few low budget movies making blockbuster success, movies which were made under $300 million ‑‑ no, those movies made under $300 U.S. dollars come out with $120 million U.S. dollar box office revenue.  But they use the social media much more effectively than the mature, big companies, and big movies.

DELE LIU:  And on that, the reason for movies, they are doing extremely well, they all have Chinese elements, and they used social media in an extremely smart way.

YANG LAN:  No big cast.  No big animation.

DELE LIU:  Before they start to produce those movies, they start to spread certain story lines, certain buzz words across the social media, including video, and Weibo.  And along the process of the production, they also have different stories, wave after wave of some secrecy stuff going on.  And then they have the trailers.  And while they are making the movie, every single case, when they are making the movie, they also do a documentary.  So once the movie is ready, they start to first get the documentary circulated around.  So they are making huge success.

CHARLES CHAO:  Yes.  I would say that’s a phenomenal trend in this space, and most of our companies are trying to figure out a way how we share some of the success of that.  Actually, they have done a lot of things on both our platforms, actually, and utilized a lot of users, celebrities like you guys, and to promote a long process from the very beginning of the movie production to actually the movie production to the movie promotion after it’s done, and it has been very successful.

YANG LAN:  Okay.

QUESTION:  Good afternoon, it’s a great panel.  I’m Denise Kronau with Siemens, and I would be interested to hear from each one of you how long is fragmented time?

YANG LAN:  Tim, you want to start?

TIM ARMSTRONG:  The question is how long is fragmented time.

YANG LAN:  How long is a fragment of your time, right?

QUESTION:  Yes.  When you refer to fragmented time, is it two minutes, is it five seconds?  This morning Ms. Yu Yu was explaining that on Dang Dang that they shop on fragmented time.  So I’m just curious to know your definition of it?

TIM ARMSTRONG:  I’ll give you a statistic from one of our U.S. partners has a number of grocery store chains, and checkout when you’re checking out, they have gum and candy on the aisle, and their sales were down by about 30 percent.  And it kept going down year over year by 30 percent.  They couldn’t figure out what the issue was.  And what it turned out to be was people on their mobile phones essentially getting entertainment in the line to check out.

So I actually went with the partner to the store, and we sat at the end of the cash register and watched people coming through.  And essentially what you find is people walk up, fragment of time, as soon as they have a micro-fragment of time, the first thing they do is pull out their mobile phone.  And you would watch these people go right from looking at their phone to the cashier saying time to pay, put the phone back in, get the money out, and then leave without having looked at anything.

And I think that fragment of time, this is what I was saying about getting down to zero difference between how a consumer lives their lives, if you pretty much go even in this conference and watch, when someone has a free moment, what’s the first thing they do?  So I think if you look at traditional media versus where we are today, you now are taking up more and more and more time.  As content gets better, as social gets better, those things, people are going to even want to look at their phones more.

So I think the fragments are probably different periods of time.  Some can be really long, and some are really short.  But it’s very meaningful impact in terms of how people behave.

YANG LAN:  I can assure you this session is the longest segment.  These busy people’s time for a day, and they’re like an hour of face-to-face engagement.  How about you guys?

TIM ARMSTRONG:  I would like to add another interesting statistic.  I forgot I read somewhere recently, I forget whether it’s China or U.S., average mobile phone user actually picks up their mobile phone 700 times a day.  I forget whether that’s the U.S.

TIM ARMSTRONG:  Seven minutes, every seven minutes people watch their cell phone.

CHARLES CHAO:  It’s much more than you would actually imagine.  It’s just unconsciously.

YANG LAN:  And it’s much more than women looking into the mirror.

DELE LIU:  We used to define in-house the fragment of time, the time for rest room break during TV commercials.  And now we are defining basically whenever you are not working PC, it’s fragmented time, because PC is a serious equipment.  When you have a PC normally you have a desk and you’re working, sending e-mail, working on drafting a PowerPoint, it has to be something serious.  Other than that we call it fragmented time.

YANG LAN:  Should we restrain ourselves from this force of habit?  Obviously more and more people are having bad neck, because we’re always looking down.

NEIL SHEN:  There are two stories, one is I find that the investment bankers who used to use the library a lot tend to be the very active user of the Weichat and Weibo, because they have this probably 500 kind of frequencies already embedded in their blood.  And then the second observation is, obviously I have a lot of friends, busy, busy, but they all use Weibo or Weichat.  But, the one gentlemen, I don’t want to say the name, he is super-busy and he wrote me an SMS about two weeks ago and said I’m going to stop using Weibo and Weichat.  I’m not sure that’s any bad news, but because I want to save my fragmented time for thinking of big things and read books.

YANG LAN:  Did that work?  Do you think that would work?

NEIL SHEN:  Anyway, that’s just only one out of obviously probably 500 super-busy CEOs.

YANG LAN:  Okay.  Yes.

QUESTION:  Rupert Huyett from The Heron Report, actual it’s a question for you, Yang.  You’ve got a very big sort of fan base.  How did you go about building your fan base?  I don’t understand, I don’t know the numbers, but I think it’s sort of 10 million fans.  And how do you go about building it?

YANG LAN:  You underestimated my influence.

QUESTION:  I was actually just referring to your SINA fans, I think.  But, let’s say 10, 20 million, near 20 million now.  And then how did you go about building that fan base?

YANG LAN:  Sir, I have 50 million.

QUESTION:  Five zero?

YANG LAN:  Five zero, yes.

QUESTION:  Fifty million fans, okay.  So how did you go about doing that?

YANG LAN:  Sometimes I think I’m just an employer for Charles, because I’m contributing my content voluntarily every day.

QUESTION:  So two questions, how did you build your fan base, and second question is can you monetize your fan base?

YANG LAN:  You know what, I don’t have answers for either of those questions.  First of all, it was because of the restraint of my own time I’m already too busy.  So my bloggings, micro-bloggings are most like one-way communication.  Sometimes I read private mails, or some of the comments, but really I don’t have time for those 20,000 comments every day.  So it’s more like one-way.  So first of all, I didn’t know how I turned out to have more than 50 million fans every day.  And that’s actually not funny at all, because you can easily offend a group of people without intention.

For example, the other day I was interviewing a positive psychologist from the U.S., Martin Seligman, and he said that he did a survey among all professions in the United States and tried to check out who are the happiest and who are the least happy.  And he found out that the lawyers are the least happy.  Well, first of all, they have a win or lose situation to handle every day, so a lot of pressure.  And it’s very time consuming.  And also occasionally they have to take the best scenario in mind, instead of the best scenarios.  So that will put them in a kind of stressed out situation.

When I put that on my Weibo a lot of lawyers got offended.  And they wrote me very angry mails, by saying that we are fighting for justice and the rule of law in China.  And you are saying these bad things about us.  It’s so unfair.  And it turned out that I had to apologize, because of this 140-character thing I couldn’t put everything, all the context behind this simple statement.  So I have to learn from that lesson.  And the second question I have no answer to that at all.

CHARLES CHAO:  I have the answer.

YANG LAN:  Charles can educate me on that.

CHARLES CHAO:  It’s very easy, Rupert.  The first question about how to build these fans I think I can add zero to his fan base.  So his 10, I can add one zero, it’s 100.  I’m just kidding.  And I think people who have a lot of fans in social media tend to be the ones who are already influential in a society and who also work very hard on social media.  You need both.  If you are influential, but you don’t work very hard, and don’t have many fans, I mean if you are not famous you work very hard, you’re not getting too many fans.  But, I think sometimes Weibo can make you more famous, right.  That’s one thing.  And in terms of monetization I think you have two types of people who actually one type of people work very hard no Weibo, on social media, who want to make money on Weibo.  But there is another group of people like Yang.  I mean she doesn’t care.  If she gets more famous ‑‑

YANG LAN:  If you have some good suggestions I do care.

CHARLES CHAO:  No, what I can tell you is that must people actually who actually don’t make money directly on Weibo, if they can be more famous, more influential in society, they will make a lot more money indirectly.  Do you see what I mean, like attend to your events, like being a spokesperson for Coca-Cola, and you can do a lot of things if you become more famous indirectly.

DELE LIU:  Write books.

CHARLES CHAO:  So it’s either money or fame.  But, in terms of people only care about money we have a product called ‑‑ they can adopt the advertising project, or a message on our system, so they can sell, they can send and promote a trend, promote tweets on our kind of advertising system.

QUESTION:  (Off mike.)

YANG LAN:  No, he has paid me nothing.

CHARLES CHAO:  I think it’s mutually beneficial.

YANG LAN:  I actually want to add to that, for fame, yes, for money maybe, but also for good causes.  I think the social media has provided such a powerful platform of the gathering of social momentum, and public opinion for positive changes.  For example, I once wrote a proposition on the Internet about providing private space for nursing mothers at the work place, more than 14,000 of women endorsed me on social media.  And actually the Ministry of Public Health adopted certain suggestions like that and announced that they’re going to make new regulations to benefit working mothers.  So those are things, which can be fulfilling, too.

CHARLES CHAO:  It’s not just fulfilling, they’re the highest achievement one person can get is if you look at people’s needs from the very bottom, you need food, you need the safety, and the highest is the influence society, right.  So we provide a platform for these people to influence society.  So for that you should pay us.

YANG LAN:  We have surpassed the time.  I think the time is up, right.  Well once again, let’s put our hands together for this wonderful panel.  (Applause.)  You can’t expect more.  This is the best people you can have.  And allow me to make an announcement.  There is the session, rethinking our cities in the main ballroom at 320.  So we should have a great time.  And again, thank you very much.  And thank you everyone for attending this.

END