Re-Examining NetEase Fonuder: The Formation of NetEase s Unique Development Path

(Chinese Version)

On February 16th, NetEase (NASDAQ: NTES), one of China's leading internet and online game services providers, released its Fiscal Year 2016 Unaudited Financial Results. According to the report, NetEase’s total net income for fiscal year 2016 was RMB38.2 billion (US$5.5 billion), an increase of 67.4 per cent year-on-year. Besides, its net profit reached RMB11.6 billion (approx. US$ 1.7 billion), an increase of 72.3 per cent year-on-year. NetEase hit a record high in terms of both net income and net profit. At the same time, NetEase’s net income and profit for the fourth quarter also beat analysts’ expectations. Therefore, it came as no surprise that NetEase’s positive financial report drove up its stock price by an extraordinary 14 per cent, making its market capitalization hit nearly US$ 40 billion.

Although NetEase almost missed all the so-called golden opportunities in the Chinese internet industry, such as e-commerce, social networking, O2O, live streaming and sharing economy, etc., it demonstrated its unique understanding of “golden opportunities” through its positive financial result in the past year and vitality that’s seldom seen in traditional internet companies.

NetEase’s Onmyoji is undoubtedly the most popular mobile game in China right now. NetEase’s Kaola.com has become the biggest cross-border e-commerce platform in China. Based on ODM model, NetEase YanXuan has grown into a black horse in the high-quality e-commerce market. NetEase Music is in the top three in the Chinese music streaming market in terms of MAU. In addition, “Wei Yang” pigs raised by NetEase were sold for over RMB100,000 (approx. US$ 14.57) on online auction, which thrilled the tech as well as the swine industry.

As some critics have pointed out, NetEase did a lot of things in 2016 that were typical of NetEase. While NetEast’s traditional rivals such as Sina and Sohu have faded out of the public’s attention, and even Xiaomi’s once popular internet thinking has been badmouthed by some people, NetEase fully showed its muscle in 2016 to become the fourth biggest internet company in China (after BAT, Baidu, Alibaba and Tencent). How did twenty-year-old NetEase manage to shake off all the bonds and develop a unique NetEase-style development path. Above all, this might have something to do with Ding Lei, the very founder of NetEase.

Although Ding seemed to have disappeared from public life during the past decade, he had managed to led NetEase all the way from IPO, suspension and resumption of trading to today’s record high stock price and conquered one battleground after another, from game, e-commerce, education to music and agriculture, etc. In an age when business patterns are constantly evolving, it’s already unfit to still describe Ding as “conservative, deliberate and late to adapt”. Perhaps, it’s high time we re-examined Ding Lei and his NetEase.

NetEase's recruitment poster featuring Ding Lei

Master of jokes? VS An entrepreneur who still has hit limits

Ding’s impact on NetEase is no smaller than that of Jack Ma to Alibaba and Richard Liu to JD.

However, there’s still something very unique about Ding. For example, it is said that Ding knows all the employees (from top executives to eight-level ordinary employees), and he still wears 300 yuan UNIQLO clothes though was worth 30 billion yuan. Besides, Ding is said to be expert in design, operation and can talk cheerfully and humorously in English. However, Ding would also make fun of himself and call himself a “farmer entrepreneur”. He even changed his NetEase account ID into “NetEase UFO Ding Lei”. Moreover, NetEase employees also dare to make fun of Ding: they would make special stickers package for him, write a song featuring him and even make remix videos about him.

Some internet user even summarized NetEase as “a company living in jokes”.

Through all these jokes, Ding is no longer an unreachable idol, but becomes simply a very interesting and true person. However, Ding also has hit limits. These limits not only define what Ding would do and would not do, but also help build NetEase’s competition barriers.

Ding became the richest Chinese at the age of 32 and he was often associated with concepts such as youth, fortune and internet during the first decade of the 21st century. However, different from other Chinese internet tycoons such as Jack Ma, Robin Li, Richard Liu, Ding often declined to accept media interview and attend public events. He seldom issued internal letter to employees and almost seemed invisible to the public.

This actually has something to do with Ding’s personal value orientation: product is the best marketing tool, and providing high-quality products and services is the best way for entrepreneurs to serve for public goods.

For Ding, the right thing to do is always just “serve the people”. Although it might seem pretty similar to Chinese-style political philosophy, Ding regarded it as a very simple and effective management way to manage and develop products. According to Ding, to “serve the people” is to develop “products of integrity”. It is under such principle that Ding chose what to do or what not to do, which also affected NetEase’s product selection and positioning.

For example, Ding scoffed at the idea of capital speculation of real estate as well as counterfeit products on e-commerce platforms. “If consumers are always complaining about purchasing counterfeit products through my platforms, I would hardly be able to fall asleep. I don’t like the idea of people speaking ill of me behind my back.” Therefore, NetEase’s agricultural product “Wei Yang” Pig and open course platform are all semi-charitable business Ding himself wanted to give a try.

A decade ago, when Service Provider (SP) business was booming, NetEase surprisingly exited the market because Ding couldn’t stand that there were companies who deliberately laid subscription traps for users. However, that decision meant that NetEase would give up 40 per cent of its income. Later, when “hookers” poured in its local dating platform, NetEase decided to shut down the service. When Baidu was involved in medical ads scandal after the Wei Zexi incident last year, Ding said with proud in Earnings Conference Call that NetEase never accepted medical ads.

“He not only knows how to make money, but also knows if he should make that money,” Li Yong, former editor-in-chief of NetEase, described Ding. Although Ding came to fame and fortune in an early age, he seemed to know better than others how to be self-restraint and true to himself.

After scandal broke about over NetEase’s swine business, Ding never bother to explain too much to the public. During 2011 Internet Conference, when the host Wang Lifen asked Ding several times why did NetEase entered the swine business, Ding felt so awkward that “almost burst into tears”, having no clue what’s wrong with keeping pigs. When Zhejiang Businessman magazine asked for his response for doubt if NetEase was actually enclosing land in the name of keeping pigs, Ding said frankly that: “All I attempt to do is make things perfect. When other people doubt me, I just feel wronged. Yet, I won’t give up.”

It is precisely Ding’s own value orientation and requirements on himself that determined what NetEase would do or not do, helped NetEase avoid breaking the boundaries of moral principles and made NetEase confident to say that “as long as it is developed by NetEase, it will be of high quality.”

As we can tell NetEase’s development path in recent years, we can tell that NetEase’s competitiveness does not rely on information asymmetry or temporary space and time barrier. Ding prefers ever-green business, so NetEase is based entirely on “long-term and general assumptions”. NetEase doesn’t rely on dividend from smartphone, technology or population, but rather on the nature of products. In other words, NetEase cares more how to improve user experience and help maximize users’ business value. For many analysts, this is actually the biggest contribution NetEase make to the Chinese internet industry.

NetEase is known to be the most original and creative player in the Chinese game industry, which is something Tencent can never learn. NetEase is also known of the middle-class disposition in terms of its cross-border e-commerce platform and self-operated brands, which is something Baidu and Alibaba’s Tmall can never learn. NetEase’s endeavor in agriculture and animal farming is so great that far outweigh that of its rivals. As a matter of fact, NetEase might be able to conquer the giant brand agriculture market owing to its unremitting efforts.

“When you watch any video clips about Ding on any occasions, you might have two completely opposite kinds of feelings: Ding might be in the wrong venue, and Ding will never be changed by the world and money,” some analyst once commented, believing that Ding has already learned how to “dance with chains”.

Slow to adapt? VS Striking back with the proper timing

Nobody in the Chinese internet circle can tell clearly what’s NetEase’s strategy. Likewise, nobody would think of NetEase when it comes to cutting-edge technologies and concepts. However, NetEase often turns out to be one that laugh the last and the best after rounds of competitions.

Some analysts attributed such phenomenon to Ding’s personality: Ding is slow to adapt but will always gain mastery by striking only after the enemy has struck. When we look back on NetEase’s development in the past two decades, we may might that they are much too simple and limited to explain Ding and NetEase’s achievement. As a matter of fact, slow-adapter Ding might be the one who always saw the best opportunity. Seeing NetEase’s transition from portal, wireless added value service to game and e-commerce, Liuyedao, a famous Chinese media critic, summarized that: “Ding always has his own ways, and NetEase will always adapt to the times.”

When NetEase was established, Ding saw opportunities in the Chinese free email market and made NetEase one of the earliest email service providers in China. In fact, NetEase even defeated global email giant Hotmail in the Chinese market. When NetEase launched its IPO on NASDAQ in 2000, the internet bubble happened to burst unfortunately and NetEase’s stock price dropped less than one dollar per share. There was a time when NetEase was on the verge of delisting.

On the brink of failure, Ding eyed on SP business and gradually steered NetEase out of the shadow from portal ads. Wireless added service enabled NetEase to survive the crisis, and Ding seized the opportunity to become the first Chinese internet company to conduct internet game business. At that time, everybody said Ding must be crazy. When he recalled the past, Ding once said that he kept all the newspapers and magazines full of articles doubtful of his decisions at that period. For the past two years, NetEase again grabbed a share of the cross-border and high-quality e-commerce market through two of its e-commerce platforms Kaola.com and YanXuan.

However, Ding is “ahead of the time” in another way. For Ding, when you blindly chased speed and golden opportunity, you might often end up in failure. Instead, he prefers to throw a long line (long-term investment) to catch big fish (competition barrier). “To do the right thing is the guiding strategy here at NetEase. We can be slow and late than others, but we can save twists and turns once we see the right opportunity,” Ding once explained.

Therefore, Ding and his NetEase never cared about “golden opportunities”. When journalists asked him what NetEase would do the seize the “golden opportunities” such as groupon, video streaming and e-commerce, Ding just said: “I only care about good timing, geographical convenience and good human relations.”

When we look back, we may find that NetEase wasn’t in a hurry to participate in all kinds of battles, from the groupon battle in 2008, video streaming battle in 2009 to cloud storage battle in 2011 and internet plus battle in 2015. When asked about NetEase’s involvement in Weibo (microblog) battle, Ding said in an interview in 2016 that: “In fact, I don’t want NetEase to carry out our own Weibo platform. However, I’ve got no choice since every other people at NetEase want to do it.” Although Ding might be regarded as “conservative and slow to adapt” at that time, we might find Ding to be wise and far-sighted when we look back.

Guan Guoguang, a friend of Ding, once asked back some journalists, saying that: “You’ve all missed one problem: what makes Ding unique and what’s his core principle?” It seems that the answer is that Ding prefers “accuracy” than “swiftness”. For Ding, it’s more important to “watch for the proper moment for action” than to “strike first”. Such way of thinking is the upright opposite of mainstream internet thinking, but nevertheless, it contributes to NetEase’s core competitiveness. It is by watching for the proper moment that NetEase learns enough lessons, moves for actions and stands out, as we can tell from NetEase’s success in cloud music, e-commerce and agriculture market.

Although Ding’s personality might let NetEase miss some opportunities such as social networking and make NetEase difficult to be understood by the capital market sometimes, such deliberate ignorance of the so-called “golden opportunities” and common trend also might help NetEase gather more forces to consolidate and improve itself and form a unique presence in the Chinese internet circle.

Although NetEase’s unique product methodology can’t help it beat companies who always strike first and wide in an age when everybody is seeking for technology, user base and golden opportunities, it helps attract a solid base of NetEase loyal middle-class users and build a solid defense. After all, China is still short of a platform big enough to serve the rising needs for quality, better life and sophistication of China’s rising middle-class. NetEase, however, seems to be born with such genes.

Fundamentally, NetEase’s success has to do with the wave of consumption upgrading and the rising demand for user experience. NetEase properly adapts to this trend and target the right group of users with the right timing. Therefore, economic gain is a natural result.

When we re-examine Ding, we may find that he loved making fun of himself, but he also had his limits. Such limits set the basic value orientation of NetEase: focus on the nature of products. Ding might be slow to adapt on the surface, but actually can always strike back in the proper time. This is how NetEase manages to avoid risks, and this is why NetEase is still full of vitality after rounds of transformation.

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[The article is published and edited with authorization from the author @Ru Feng Bu Ru Feng (which means: better be crazy than be like wind), please note source and hyperlink when reproduce.]

Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.

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