On song

Lei Jun: a big YY shareholder

Who says being a karaoke singer isn’t a proper career choice? In China, many amateur singers are now making a living crooning online, thanks to YY.

The company, which counts Xiaomi founder Lei Jun as a shareholder, launched its IPO on Nasdaq last week, the first Chinese firm to list in the US since April. It raised $79.8 million.

YY started out in 2005 as an online portal for China’s gamers. Three years later, it developed a voice-based service allowing gamers to chat over the internet while slaying monsters or coordinating Navy Seal missions. The company then added video streaming, similar to YouTube in design. With more than 400 million registered users – more than the social networking site Renren – YY now provides voice and video sessions for a wide range of audiences in music, education, fashion, sports and personal finance. Tens of thousands of people have participated in some of these sessions concurrently.

But one of the most popular uses of YY is for karaoke, where one person sings and others follow along and chat with each other. The best of these amateur singers can actually make money. One of the site’s largest sources of revenue is selling virtual products – not the standard weapon-and-amulet fare preferred by veteran gamers but virtual roses. Fans can purchase flowers (Rmb1 per rose) for the performers they like the most, which can then be cashed in for real money. YY takes a share of the flower fee.

The singers thus have an incentive to deliver stirring performances. And it can be lucrative. After building up an expansive fan base, performers can even schedule a live concert on the site, allowing followers to watch and listen for the price of a “virtual rose”. According to YY, the most popular musicians can make up to $20,000 a month (though admittedly, most people just earn pocket change at best).

YY’s revenue in the first nine months of this year was Rmb553.2 million ($88.8 million), up 168% year-on-year (the company makes over 30% from its virtual florist services). Net income was Rmb55.9 million in the same period.

The IPO was helped by not being priced too aggressively, at $10.50 or close to the bottom of the range that YY’s bankers had been looking for. That valued the company at about 5.2 times annualised revenues for 2012, cheap if YY can keep growing at current rates. As of this week, the stock was still trading over $14.

Like Tencent, an internet giant best known for its instant messaging service QQ – YY appeals to a broader, low income population, rather than the rising middle class. “The core group of users [for YY] is the lowest income group in China’s virtual world. You may think it is silly to spend Rmb10 on a concert but for people who are in the lowest income bracket, going to a virtual concert is much more compelling,” Zhang Yunfan, president of 178.com, an online game website, told Global Entrepreneur.

YY is already looking beyond music for revenue, building up its education business in a similar way. Members can set up their own channels to teach subjects, for which online students are then charged a fee. According to YY’s chief executive David Li, one college student made an astonishing $188,000 by using the site to give Photoshop lessons en masse.

Perhaps YouTube should take heed. While virtual tickets for streaming events sounds like a simple concept, there is no comparable Western equivalent to YY. And since YouTube has propelled so many grass-root singers to stardom (Justin Bieber started out in a similar way), the YY business model could revolutionise the way that musicians and educators distribute their content online.

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