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CNBC Transcript: Charles Chao, CEO and President, Sina Corp

Following is the transcript of a CNBC interview with Charles Chao, Sina Corp. The interview was broadcast on CNBC on 24 March 2017.

All references must be sourced to a "CNBC Interview".

Interviewed by Eunice Yoon, Beijing Bureau Chief, CNBC.

Eunice Yoon: So you're a Chinese domestic player and at the same time you're listed in the United States and there's been some talk that a possible trade war between the U.S. and China could influence the share prices of Chinese companies that are listed in the U.S. more broadly. Are you worried?

Charles Chao: Well I think in general, everybody worried about that. I mean, nobody wants a trade war between the biggest and the second largest economy of the world because nobody benefits right? And so, everybody try to avoid that.

I don't think it's going to happen. It's still going to be a lot of talks but I think eventually, people will realize it's better for two countries to sit down and talk and work together. It's good for these two countries and also good for the entire world, I think.

So, to answer your question, we're worried but I don't think it's going to have too much direct impact on us. And because our company and our internet business, our business is not too much impacted by the trade. It's really, more the, you know, growth in the domestic market will impact us I think. And also, our invest base actually become more diversified over the years. So now we have the institutional investors from the U.S., and also, a lot actually from Asia, from China. And so the investor base become more diversified so I think the impact on us on share price, probably limited, I think.

EY: So you don't see any real vulnerabilities then, for Sina, when it comes to the possibility of a trade war between the U.S. and China.

CC: (Laughs) If you talk indirectly, everybody will be affected but directly, not too much I think. Yeah.

EY: What do you think the best possible outcome would be for a meeting between President Trump and President Xi?

CC: Well I think it's a good first step, in my opinion. And they have the opportunity to get to know each other and establish dialogue and maybe their personal relationship between these two leaders. And that I think, actually, will help to, actually, at least dissolve some of the misunderstandings and actually they can find some common grounds to work with. I'm sure there will be a lot of common grounds. I mean, I think these two countries, if they work together, can be good for the world. But if they fight each other, nobody benefits and in a lot of areas, actually, China and the U.S. are very complimentary to each other. And I think it only makes sense for them to work together and I hope they can reach that conclusion. Yeah.

EY: Sina is often described as China's version of Twitter. At the same time, you guys are very different companies and more recently we've seen that your active monthly users are up dramatically. Also, profits are doing well. Revenues also higher. So what are you doing differently in China versus what Twitter is doing?

CC: Well I think in broad base, I mean, you're right. Actually not Sina, more our subsidiary called Weibo, is sometimes called, you know, China's Twitter. But as you said, it's a very different product. I mean, and we're probably more close to Twitter plus Instagram and plus YouTube. And that tells you the difference and in those areas we have been working on, like multimedia you know.

If you look at Instagram, right, Youtube, what kind of multimedia, special video, is really driving the growth of the usage and the user base growth for our company. Especially last year, and if you look at the entire 2016 really the company is growing very fast and in terms of users, and revenue and profits. The user base growth and usage, video is playing a very vital role here because the usage of video consumption by the users had grown almost 10 times in 2016 versus 2015. Of course, 2015 is a much smaller base but we expect video usage will continue grow very, very quickly in 2017 in both show video and live broadcasting.

So actually, I think that's one of the area. And also, we have been very focused on get into the lower-tier cities in China because if you look at China as a population, say 700 million internet users. But the first-tier, second-tier, of course these are our major you know, market for the user base before. But if you look at third-tier, fourth-tier cities and even fifth-tier cities, there are a lot of potential we still can penetrate and expand the user base. So those areas we will also be very focused upon in terms of the growth and so there'll be multiple areas.

First will be the content area become more video-driven, which is the trend around the world not just China, right? And also, in terms of geographic locations, and market we want to be more into the low-tier cities in China and acquire more users.

EY: Well as you push into these low-tier cities, smaller cities, not everybody there has as much disposable income as say, in Beijing or Shanghai. So, how do you make money off of the live-streaming and the short videos?

CC: Well I think that for us, I mean, you know our company like, in a way, is like a media platform. A social media platform. But if you provide a free service, you get your revenue from advertising, right? So it doesn't matter what your users are, is it from the first-tier cities, second-tier cities, third-tier cities. You have different kinds of targeting in terms of advertising to different user base. And not only we have the targeting different user base, but also in terms of different forms of advertising.

Now we have video, we have social, we have mobile. And so this is, these are categories, actually grow the fastest and online, you know, the advertising categories. That explains why, I mean, we are growing very nicely. Like, last year, if you see one of our strategic investors, Alibaba side, our organic growth in revenue advertising was up like, over 100 percent.

EY: What kind of ads are the most lucrative?

CC: (Laughs) It's much more diversified in a way. You know, like most of these mobile, social companies, we generate most advertising from our information feed. These areas actually, people spend most of their time on our social platform and so we have advertising, I mean, in different kind of forms, even in video form. I mean, to target different kinds of audience base.

EY: How much time are they spending on feed?

CC: Well that depends, and because the difference is that we have a main feed we call information feed based on social relationship like Twitter. I mean, you follow somebody, you get content. And we're also starting a discovery area session that allows people to actually get recommended content from us and those are the most trendy topics, content also maybe interest-base kind of information feed.

And those areas actually growing very fast. So it's a combination of social feed and interest based feed for us, so we have two feeds for people to consume their time here and that actually greatly increase our inventory kind of, you know, for advertising and also allows us to add more inventory for advertising. And so, put in more users, more usage and more inventory for advertising, and also with more usage we have more data to actually allow us to have more targeted advertising.

So, today we're not only serving the so-called key accounts, which are mainly the branded advertisers. But also, one of the greatest, I mean the fastest growing area for us is SMEs. Yeah, so the small and the medium-sized enterprises and also a lot of the internet, we call influencer doing a lot of advertising and promotion for themselves to make themselves much more influential on our social site.

EY: So SMEs are going to you? Or are you advertising to SMEs to come on to the site?

CC: No actually we establish ourselves channels around the country so we serve these SMEs mainly in areas like e-commerce, areas of like, mobile apps. And also, in areas of online to offline business, so called 'O2O' business. And those are three big categories for SMEs and that area is actually growing very fast.

EY: In the U.S., companies like Facebook and Google are also trying to grab as many digital advertising dollars as they can. At the same time, they're being criticized for not doing enough to vet the information on their site, in terms of fake news or rumors, so how are you dealing with that challenge here?

CC: Well I think this is a topic we are very familiar with and actually in China in the early days, you know, Weibo has been in this market for more than seven years now. And in early days, a lot of rumors, a lot of so called, fake information, fake content, fake news on the social platform Weibo and we believe we have to deal with from the very beginning and because, you know, what the new media has changed, in terms of the entire industry, how people publish their information, how they distribute information, now everybody no entry barrier anymore right.

Used to be that traditional media you have people like you, and editors, and people in the traditional media who have vet the information to make sure their accurate, reliable, so on and so forth. But in the new media space, everyone can publish and with Twitter and Weibo.

Everybody not only can publish their information, but can also distribute their information through their relationship right. You can retweet, you can repost, and distribute very quickly on a social platform. So it is a problem, I always believed that there should be an order on social media. Of course, over the period, social media have its function to correct itself in terms of rumor or filter information by itself. I mean, but a lot of times when the correction is done, damage is already done. So I always believe there should be some regulation rules or game rules to keep good order on social platform.

EY: Well, so was there anything that you had to do in China that you felt was different from, say, the United States because of the way the media market here has been evolving and young it was when you were entering?

CC: Definitely, I think the media market is also our experience in work in this area for a long time in terms of new media and also, with the China condition and we are super conscious about how to deal with, you know, the fake news. How to keep good order on social platform.

And so, whatever you heard recently, like, what people started to do and all these social problems become aware that we have to vet information all these we have been doing this for many years, actually. For example, in the very early days, I mean five to six years ago, we start to mark this fake news, fake information on the post itself if we found something.

First we have a mechanism to attack the fake news or to verify information in news and content if it's significant. So, we have volunteers on our site who actually volunteer to check if a news event is reported and also, we work with the local media companies. Local newspaper, local TV stations, to get their help and to verify their local news if something was to happen in their location. And we also have our own system rating, I mean we have our own staff people who will follow this news or content where it is significant, for example, a large volume of retweets and that means it's a significant event then we will try to verify ourselves. I mean, to make sure this is the accurate information.

So we have been doing that, actually, very early on and we also have these kinds of mechanisms ready. For example, if we find it's fake news, fake content we will actually highlight that on the original tweet post. Every time. And then there's a button next to it, if you click the button you will read detail, why this is not correct and what is the correct information, these type of things. So that particular post will go with the retweet and the reposting when it's actually distributed, on the social platforms itself.

I remember five years ago we also establish this system in China that, this is the first time any social company have done that is to, the so called self-regulation rules. And that's the protocol for everybody using our site is basically, I mean, we actually establish credit system for each account, each person who want to publish information. If you keep doing the fake news, fake content, your credit rating will come down. And so we have a systematic system to track that so if you don't have a credit rating, if the credit rating is going down below certain point, your content can be eliminated. So actually, through all these mechanisms, we want to make sure to establish more credibility on social media platform and have the mechanism to correct any fake news if we detect that.

And I think over the years it's getting much better, and also government is becoming much more conscious about, clarify a lot of information. For example, in early days, like, if a news event happens, if a social disaster or a natural disaster happens or maybe, an explosion in a factory or car accident that killed many people, whatever. I mean, usually, you do not see here, in the government voice, very early on. So it takes a while for them to, "Okay so this is what really happened, right?" I think over the years the government become much more conscious about get the actual news, the accurate information, to the public, at the very early on. So, if you look at official accounts, websites on government agencies, especially from these, we call, 'Gong An', like police. We have almost like, 10,000 police accounts, official accounts on Weibo itself. Actually, they will publish whatever is, you know, the first minute, the real information to clarify a lot of information or news. So that the public can receive the first hand, the news or accurate information they can.

And a lot of time the rumors travel because you don't have source saying, this is, the official source saying this is the correct, this is not correct. That's why a lot of the rumors flying on social platform. But now actually the government is doing a much better job in terms of publishing first hand accurate news information. That actually makes the platform much better.

EY: But what do you make of the concern that the clampdown of rumors in China, is a way to silence dissent?

CC: Well I think you have to - I mean this is quite a misunderstanding, because a lot of the rumors have nothing to do with political issues. I mean, or any you know government related issues. Purely because it is a fad issue or sometimes, I give you, an example.

In the early days, a lot of people wanted to attract followers on their accounts. They tend to publish a lot of fake information, or exaggerate a lot of things to attract eyeballs to make them influential. Actually you call these actually they're publishing a lot of fake content. So I mean you have to, deal with these people, because they spread rumors for their own sake, sometimes without any social responsibilities.

And in China, I feel that problem is more so, than we have in other countries. And we have to deal with that issue. Most of these issues have nothing to do with political issues at all.

EY: Why do you think in China, you and others in your position were more aware of the idea that there could be fake news and rumors than say in the U.S. because it was only just recently that the idea of fake news has really come up as an issue?

CC: I think because of the views of U.S. counterparts they don't believe you should manage social platforms. Because users can manage their social presence themselves, I mean the fake news can be corrected by the system. I mean, in China, I think we have more experience dealing with the issues and I think we're also more aware that this could be a problem if we don't deal with that. For example.

EY: Do you think it's also because it's a young media market?

CC: It's young, I think it's also in China there's a lot of times, you have a lot of people have a very different behavior online and so they have to say a lot of things online without taking responsibility.

I think part of it is the lack of, I think, legal system to deal with issues I mean, offline actually. In the U.S. there is a lot of existing laws to deal with your behavior when you publish something, when you attack something verbally. Or you attack somebody or spread rumors, there could be consequences legally. But in China, the process is not that mature for legal system. So we had to have in some way to get the system ready.

I mean, it's not a government legal system, but it's really a system where the platform can adopt to deal with the issues. Otherwise just think about it, you can't attack each other with rumors, and you can spread rumor about a person, about the company then it's going to be a disaster if you don't have a system to deal with that. It could be a disaster; nobody would want to use your platform anymore.

EY: So maybe, another step is to strengthen the enforcement and the laws?

CC: Yes, actually it's getting much better. In China, now there's a lot of legal cases to deal with these issues. If you spread a rumor about a company or a person, you may have the legal consequences. You can go to court or sue somebody. And the court will rule with a lot of penalties. So it's actually getting much better.

EY: We're also seeing China just supporting a lot of entrepreneurship here, really encourage startups. What are the pros and cons of being a startup in China?

CC: Well I never thought of that questions, pros and cons in China versus other countries. But in general, China is a much larger market. If you're successful in one area, you could be successful because the market is so big. And so that's part of the reason there's a lot of established companies, very successful, starting from very small companies. And in the internet space for example it's either US companies versus China companies in the entire world.

If you look at the big companies, established companies. Part of it because China market is very big and also, in early days there's a lot of startup companies because all the VC industry has been very concentrated in this area. And so you got a lot of VC funding from this particular market. And then the VC funding and the entire committee expand to other categories.

So right now, it's part of the government initiative that they want to transform China's economy from manufacturing based to more innovation based and then service based industry. So that encourage people to have more innovation kind of activities and so they encourage people to have startup companies, to have all these great ideas, different kinds of things.

Part of it, to solve employment problem. Part of it, it's a good environment they want to encourage. I mean to have this startup culture going on. And I think over the years there's been a lot of successful companies in this area. But I think there's a.. that's the pros part. But the cons, I think a lot of times people have too much expectations on startup companies and that's my observation. Because they only look at the very successful companies. This is Tencent, Alibaba, Sina Weibo, we all started from very small startup companies. But people understand there's only very, very few successful companies in each category.

EY: In the US, this is part of the culture, right? That everyone knows you could fail, but here maybe not.

CC: Yeah I think so. A lot of the times people set unreasonable expectations about startup companies. That's actually a problem for a lot of Chinese entrepreneurs. Because a lot of times you just start with something you get experience, and most time you will fail. You learn from the experience, and you move on and you will do better next time. In other careers, or startup companies.

But that actually, the expectations now I think is getting better in terms of the market and becoming more mature. Used to be a big problem I mean at least that's my observation.

But I think this trend parallels very well with Chinese economy, the training, and for example, one of the areas we have observed and that's one of our driving force for usage and revenues is the so called internet influencer. That group actually they started to everybody started to actually manage or tried to work on social media to make themselves more influential. They are called internet influencer right? It's the same term in the U.S. I think. And so they want to make more sales, more famous, more influential on Internet. So that they can start their own business or sell personalized product or service so on and so forth. It could be social e-commerce, live broadcasting, could be a host, could be somebody who just selling their ideas and whatever. There's a large group of this people who's growing on social platforms. That's the driving force for a lot of new initiatives and a lot of opportunities for us that you have the demand for, promotion demand for advertising, organically in the social platform.

We help the people to become more influential, and once they become more influential, they have the ability to do business internet. And when they do successful business on the internet, they will generate additional demand for promotion and advertising. So that part of the ecosystem is growing and growing very nicely on our social platform, and I think that actually could be very important driving force for our business going forward because if you look at it, this is really the vision we have here is in some way is that Weibo is a social ecosystem.

So people create content, consume content, in the process people create content become more famous. And they will benefit from that ecosystem, I mean by getting more followers or building their social platform to do something else. That if you cope with the trend for social commerce and like you said startup company innovation, actually internet empowers people to allow people to do business, personalized service, and product business, just by individual or small group of people.

So we want to empower this people to do business, and first for them to be more influential right. And then do business on our website and then in a way, start their personalized business going forward. And that's the kind of ecosystem we want to push here. And over the process we believe that we can build a very strong ecosystem and with that ecosystem we are going to have more revenues and growth on the whole platform I think.

EY: How easy is it for entrepreneurs to be innovative in China?

CC: Well I think it depends. In general, I think we learn from other people's experiences as well and we can be innovative and adapt a lot of product and technology and the usage to local market. China market is very different from other markets in terms of scale and user behavior. So they are a different level of innovation of course in terms of original product and technology.

And China still has some way to go, but it's much better now. If you look at internet products, especially in mobile internet, China is much better than the U.S. And if you look at application level, especially in mobile internet, China has much more demand.

EY: What do you mean?

CC: Just think about the usage itself, and how convenient it is if you take your mobile phones and you can get around in Beijing and anywhere if you want to shop, have dinner at a restaurant, if you want to go to a movie. It all can be solved by a mobile phone, you don't have to take any cash or credit cards.

And that problem, you cannot get that kind of service in the U.S. right? Application level in many ways China has much more demand and much more convenient partly because of scale, partly because of mobile payment is very convenient in China. So this is the foundation for a lot of mobile internet monetization.

EY: Are there things you could do in China as a startup that would be much harder if you were say in the U.S. say regulation wise or if you're dreaming of an idea and want to make it into a reality. What are the advantages of this environment vs. say the U.S.?

CC: I don't see much of difference to be honest with you. I mean, I think part of it probably the difference is the protection of the IP. And copyrights, IP and so on so forth.

That is a major difference before that, if you innovate something if you create IP or copyrights, you're well protected in the U.S. But if in China, early days there's no good protection in terms of legal systems enforcement of legal rulings, so on so forth. And there's no penalty to deter people from not doing that. And I think that was the major problem for a lot of Chinese companies who want to invest in the areas of technology or innovations because whatever you come up with someone, a big guy will take it. And duplicate that in their big platform database, and they can prevail very quickly and they can win the market very quickly.

But now actually it's getting much better and I think China is doing much better in terms of protecting. Still lagging behind, I wish that we can do much better but compared to five years ago, six years, 10 years ago, it is much better and so then it's all the environment you're talking about, it's improving, but of course it's not the same in the U.S. But, it's improving I think, that will drive a lot of innovation or the funding and investment in a lot of the innovative industries.

EY: It's so interesting that the markets see regulations differently, like you said, in China there is desire for more regulation or more enforcement regulation and at the same time in the U.S. they've been talking about how it's important... deregulation is needed in order to try to allow the innovative juices to flow.

CC: I think a lot of the times, the term, what is a regulation, sometimes people literally and when they explain this term or understand what this term means, people who actually get less freedom and less market economy. When you say regulation in China a lot of areas have too much regulation but a lot areas actually in terms of legal system establishment, legal enforcement is not quite there. So in that sense, for example, we just mentioned the fake news and rumors attacking people and spreading rumors about companies and a lot of people doing that before. So if you don't have a legal system to punish there will be a disaster in society. So in that sense you need a more established legal system to deal with these issues.

Same with IP protection. If you violate IP, first nobody deal with it, secondly if you go to court after like one year, two years after the legal process you win like 10,000 USD for the penalty that means nothing. That would not deter any guy from breaking or infringe your IP.

So the legal system has to change to cope with the development of the industry and especially when you say innovation, you need that legal protection system. I think for U.S. the innovation industry, the entire industry I would say is a whole package. You have the legal system, lawyers, accountants, you have all these people working with very sophisticated systems so if you miss one piece then it's not quite there for innovation, I mean for innovative companies to grow.

EY: But I wonder, at least in the Chinese market, one of the ways it could be unique, is that some areas it isn't very regulated and may be that is a benefit for some startup companies.

CC: Yes yes.

EY: It could lead to more experimentation?

CC: If you are in the right place at the right time, yes. Some areas like if you have more established rules and regulations then it would not increase these.. because innovation is especially the new industry. You are always in a grey area. Because it really is something.

If you innovate something for new usage, a new business model, it's not something that's quite there before and it's always using existing interest for example in system. So if you don't have very tight regulation, these gray areas can be used by startup companies to grow fast, because there are no clear rules here. But if you have more established rules like the U.S. in some areas actually have more trouble. But in China it's less trouble for certain industries and that's exactly right and so in ultra area, for example in early days a lot of video sites, they're doing a lot of things.

It's not clearly violating laws but in U.S., clearly some regulation cannot do this but in China it's not quite there and these people are growing very fast. China has become more sophisticated in this area and I think these two systems are getting closer.

EY: What would you say to the critics who say China is a very controlled environment, in terms of media or innovation or politically that it won't ever get to the point that it could be a truly innovative entrepreneurial culture?

CC: I think that's an exaggeration. Only certain areas, of course you will see more innovations, in a more free environment but on the other hand, China have made a lot of progress in a lot of areas and is not very sophisticated.

The internet industry is very sophisticated and everybody connects online and if you look at infrastructure market is so big and in that sense whatever you do it's easier to get results, get monetization which in turn can help the successful company to invest more money in innovation areas.

So I think there is no one single factor, that this is because of this, China could be less competitive in this area. But I think a lot of times, it's more factors. There is one question that is important here is that China's economy is always growing very fast even at a much lower reduced speed, it's still the highest growth in the world right now and so given that kind of scale and economic growth they will support a lot of new innovations and new companies to grow and there is no question about that.