Internet delivers for Naspers

Eleven years ago Naspers started investing money in Internet operations in emerging territories. The decision was costly. Analysts were sceptical. Competitors amused, more so when Naspers began to burn funds in China.

“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.

But as markets have turned and social media begins to slay print, it appears Naspers is having the last laugh. The group's latest financial results must have brought management and shareholders satisfaction in a strategy that is yielding good results in tumultuous financial markets. The group recently reported a 30% increase in revenue to R26.7 billion for the financial year to 31 March 2009, primarily off the back of its Internet and pay-television operations.

The Internet division, headed by Roux, grew revenue by 136%, boosted by the inclusion of e-commerce units Allegro and Ricardo. Meanwhile, the share of income from associate investments, including Tencent in China; Mail.ru in Russia; and Abril in Brazil; doubled to R1.5 billion.

“Our strategy is paying off,” says Roux, who explains that the only vulnerability in the mix is content. “Content services are so dependent on advertising revenue that if the world goes up in flames then advertising revenue goes up with it. That is why those businesses that are exclusively reliant on advertising will remain problematic and vulnerable.”

Naspers' Internet business straddles fixed and mobile, is strongly community-based, and focused on five core revenue streams, namely gaming, commerce, content, communication and social networks.

“We are seeing good traction in communications, social networks, commerce and games,” says Roux. China's Tencent is a good example of a sound investment with a strongly mixed revenue stream. A garage start-up, this investment contributed R1.2 billion to core headline earnings, and with micro-payments proving resilient in the China market, revenue growth looks strong. And the numbers are impressive.

At the time of closing off for its financial year end, Tencent had 935 million registered Internet messaging (IM) accounts, and 183 million active user accounts on Qzone and its blogging, photo and music sharing site.

As markets have turned and social media begins to slay print, it appears Naspers is having the last laugh.

Mandy de Waal, ITWeb contributor

“Tencent has six pillars to the business, the biggest of which is the communication platform for e-mail and instant messaging. It is the biggest portal in China, generates the most traffic, which is primarily entertainment information. Then the third leg is a social network service product, which is way ahead of anything that you will see in South Africa in terms of advancement,” says Roux. “This revolves around a virtual life with virtual pets with thousands of products that people can buy using micro-payments. We have 184 million paying subscribers to this service.”

Tencent also sports games, but not gambling. Game categories include casual games like chess, multiplayer online games and situational and role-playing games. Then there's an e-commerce type offering like eBay and a strong wireless business.

Roux says there are thousands of reasons for Tencent's remarkable growth, but the most pertinent is management's ability to understand the market better than any of the competitors. “The biggest lesson we learnt 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.

“We like to give management a tremendous amount of rope. We never place expats in offshore businesses. We guide on strategy and then put good governance in place. The biggest risk is that you don't know what is going on in the market because you don't have someone on the ground. Then trust takes a while to be established. We've been working with the founders of Tencent for close on nine years. We trust each other implicitly.”

Roux says the real value for Naspers has been realised by leveraging intellectual capital. “We are able to see trends in one market and then pass these on to other markets. However, our biggest challenge remains identifying winning formulas and transposing these from one market to another. This and sharing intellectual capital through all the emerging territories we are invested in.”

And what will the future bring? “When Lehman Bros went under and the world changed overnight, we got very excited because we thought there would be a slew of wonderful opportunities. However, we've discovered that the good companies are profitable and sitting on a lot of cash and sweating the recession out. Our investment pipeline for the last nine months has become relatively small in terms of new stuff.”