DigiCha

There is a report in the Chinese press that Netease is in talks to buy into Microsoft’s MSN China joint venture by purchasing the 50% share owned by the current Chinese partner. MSN China is a joint venture that was established in 2005 between Microsoft and Shanghai Alliance Investment Ltd. (SAIL). This report is unconfirmed and so should be considered as just a “strong rumor” at this point.

The participation of Netease in the MSN China JV would be interesting, for at least these reasons:

1. The Bing search engine would have a huge potential Chinese audience; Netease is one of the most trafficked sites in China. Bing-Netease integration could pressure Baidu, eventually, and could fast-track Microsoft’s efforts to fill the hole in the market left by Google’s retreat. Netease’s homegrown search engine Youdao still has miniscule market share;

2. MSN Messenger, while dwarfed in market share by Tencent’s QQ, is the 2nd most popular instant messaging application in China, and specifically has very good share among “demographically attractive” urban, white collar workers (even Google China employees use MSN IM);

3. Netease is a very sucessful game developer and publisher. The company operates Activision/Blizzard’s World of Warcraft, and their self-developed games are still hugely popular and lucrative. A partnership with Microsoft could facilitate the export of some of Netease games into the US and Europe. Microsoft still has very powerful game distribution channels;

4. Console game machines like XBox 360, Playstation 3, Wii etc are technically illegal in China. There is of course a vibrant grey market, with decent sales of pirated games. Microsoft has been trying for many years to bring XBox into China. With a partner like Netease, which has possibly the best game publishing, distribution, marketing and payment channel networks in China, Microsoft could potentially be in a position to crack the Chinese market for XBox360, pending regulatory approval;

5. MSN China might benefit from a change in management, and a partner like Netease could bring more experienced, locally attuned managers into the venture.

These are just rumors for now, but a deal could make a lot of sense for Microsoft and Netease.

What do you think? Please tell me what you think in the comments.

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