Ni Linlin has made a career out of convincing men to send her virtual teddy bears, necklaces, and blue roses. Using a laptop in her 10-square-meter (110-square-foot) living room in Qingdao, China, the 25-year-old entertains as many as 2,000 fans a day as a DJ and singer on YY (YY), a Chinese entertainment website with nearly a half-billion users. For Ni, however, coyly playing with her fans online is no game: She earns five times more than two years ago when she quit her job as a secretary.
Part American Idol, part online hostess club, YY’s service allows freelance entertainers like Ni to use live chat rooms and streaming video to build a following among the company’s users. Performers then earn cash by charging fans fees for interacting with them in real time, such as by joining them to play online games using YY’s own Skype (MSFT)-like software. Entertainers also pocket a cut of the revenue from virtual gifts proffered by their smitten admirers. Racy jokes and low-slung tops are allowed; nudity is not. The service is a hit. Guangzhou-based YY’s stock has surged 50 percent since its November listing on the Nasdaq.
“Very often in second- and third-tier cities and rural areas their only places for entertainment are Internet bars [which offer Web access for a fee, plus drinks and snacks],” says Jenny Lee, a Shanghai-based partner for GGV Capital of Menlo Park, Calif., which has invested $17 million in the company. YY is “capturing peoples’ desires,” says Lee.
About 70 million frequent users spend an average of more than 52 hours a month on YY for its entertainment functions, including karaoke and gaming. The company has 457 million registered user accounts. What separates YY from rival services such as Tencent Holdings’ QQ or the live broadcasting service 9158.com is better audio quality and more stringent monitoring of content that could cause problems with censors, says Eric Qiu, an analyst at Guosen Securities in Hong Kong. The company “usually shuts down users who go over the line.”
A basic YY membership of 20 yuan—about $3.20—a month provides access to ringtones on the service and eliminates waits to enter chat rooms if they are at capacity. A premium-level account allows users to own a virtual Rolls-Royce visible to other online users and to oust members they don’t like from chat rooms. Since YY Music began allowing users to purchase virtual gifts such as roses and candies in March 2011, the business has generated 339 million yuan ($54.7 million) in sales. “In terms of a business model, there really isn’t a technology company overseas quite like YY,” says Qiu. “It’s unique.”
YY shares revenue with online performers such as Ni, generally taking 60 percent to 70 percent of the money the entertainers generate, according to company Chief Financial Officer Eric He. Ni takes home between 5,000 and 10,000 yuan a month earned during the four hours a day, four days a week she spends on the service. She hosts a radio show, a live video broadcast, and plays multiplayer online games with her fans for fees. “I’m the sexy mature type, that’s what they like about me,” says Ni, who performs under the stage name Mu Xiaowen. “You feel like a star. Hundreds of people will respond to whatever you say.” Still, she recognizes that laptop fame has its limits. “A lot of the people on YY, to be honest, are just quite bored and use it to kill time,” she says.
About 41 percent of YY’s revenue is generated from online gaming, while 35 percent comes from its music unit, which includes live performances and karaoke. The company’s revenue more than doubled in 2012, to 820 million yuan, helping it turn a profit of 89.2 million yuan, compared with a loss of 83.2 million yuan in 2011.
Early on, YY had received government fines for users posting material deemed inappropriate, according to the company’s prospectus. These days users can flag suspect content and YY uses automatic censors to scrape images, mine texts, or detect unusual traffic spikes, says CFO He.
YY sees another opportunity for its revenue-sharing model in online education. It has attracted 20,000 teachers who use its platform to provide instruction in everything from foreign languages to how to ace government civil service examinations. Li Shi’an, a deputy principal at a middle school in the eastern province of Liaoning, began teaching English on YY in 2010, using its free voice software, YY Client. He now has about 100 students and earns about 10,000 yuan a month from the classes.
YY’s He says that given the company’s roots as an online gaming and music venue, there would need to be expansion beyond the existing customer base for online education to take off. For now, its entertainment businesses continue to expand. Nonetheless, Ni says she could live with a little less success. “I need to get married and have kids,” she explains. “I need to find a boyfriend. Right now I just stay at home all day.”