Guagua is a Chinese online video social platform similar to a web-based karaoke bar with millions of users in the country’s smaller cities. As of June 2013, Guagua had more than 75 million registered users and revenues of 580 million yuan ($90.6 million). The company is working to diversify by building communities focused on finance and education.

Co-founders Dong Guanjie and Zhang Hong Tao are among the earliest experimenters in the interactive online video community in China. They started their venture with an audio chat room early in 2003. With the rise of faster online technology and more affordable bandwidth, their chat room evolved into an online video community.

Enlight Media, one of the biggest entertainment companies in China, invested 75 million yuan ($11.7 million) in Guagua last October. The objective, says Dong in an interview with Knowledge at Wharton, is to integrate online and offline entertainment resources, offer opportunities to grass-roots stars and improve the tastes of the video community.

Dong also notes that content management is a big challenge. The online video community has to survive on self-regulation, and there is the temptation to cross the line of decency in certain programs to ramp up the numbers. That has, in the past, invited government action.

But video communities in Tier II and Tier III cities will continue to flourish because of the lack of entertainment alternatives in those areas, says Dong, who calls these areas “a goldmine [in China] that has never been seriously explored.”

An edited transcript of the conversation follows.

Knowledge at Wharton: When did you start the video community business?

Dong Guanjie: I was working for Langma UC, then the second biggest instant messenger service in China, just behind Tencent’s QQ. When QQ recorded explosive growth, Langma UC was forced to think [about] diversification.

I was working on audio projects at that time. The video community can be traced back to the audio chat room. In 2000, when bandwidth was still very poor, there was a product called Bihai Yinsha Audio Chat Room, where users could say something [to others in the room] by pressing F9 [on their keyboards]. It was very chaotic.

We introduced a microphone-rotation rule to manage the chat room; users had to wait their turn to say what they wanted. This minor change turned things upside down. It became a performance model; the speaker began to perform — singing, telling stories or reading a poem — and other users became the audience. When the Internet hardware environment became much faster, audio chat rooms gradually changed into video chat rooms where people could see the speakers performing.

Knowledge at Wharton: Why did you start your own company instead of continuing with UC?

Dong: In 2004, the audio chat room business of UC was acquired by [then the biggest portal company in China], and I started working for Sina. But Sina executives had a different perception of chat. So my partner Zhang Hong Tao and I left Sina at the end of 2005 and launched our own video community project. That became very popular with concurrent users reaching 20,000 in the first month.

However, we didn’t find a proper profit model as bandwidth costs were huge. So both of us went back to work for other companies. In our spare time, we worked on improving the video community functions.

In 2007, became popular in the U.S., and in China was doing well, too. They had the same profit model — offering virtual gifts [items that have digital social capital, and aesthetic or functional value to users] for better interaction. For the online video community, the demand for interaction is actually much higher than that achieved by Myspace and So we decided to adopt the virtual gift business model.

In May 2008, we launched the new version of the Guagua community with a newly added gifts function. We started to make profits the next month. Two months later, my partner and I resigned to focus on our own project. Investors began chasing us from the very next week.

“For the online video community, the demand for interaction is actually much higher than that achieved by Myspace and”

Knowledge at Wharton: There are many online video communities — for example. How does Guagua differentiate itself?

Dong: By coincidence, our angel investor, Xiong Xiangdong, is also an investor in, [which] started operations in 2005. Monthly revenue [for] reached millions of yuan as early as 2008. We employ the same business model.

However, we target different audiences. 9158 is like a high-end exclusive club, meant for rich customers. Free users have no place in that community. They don’t get an opportunity to perform, but only to be part of a passive audience. In Guagua, we are like a big entertainment park for common people. Everyone has the opportunity to perform, and you can enjoy interaction with others even [if] you don’t spend a penny to buy gifts.

The result is that we have 75 million users, many more than But our ARPU [average revenue per user] is much lower. 9158’s ARPU is around 5,000 yuan, and their overall revenue is two times ours.

Knowledge at Wharton: The online video community industry has been accused of being unrestricted — how have you responded to that?

Dong: Earlier, regulations were not adequate. There was an online video chat company in 2004 that gained 100,000 users in a few months by mainly renting chat rooms to users for 100 yuan ($15.60) per month. There was no monitoring of the content. It had to be closed down by the government.

We have been in operation for more than five years and have never crossed the line. We have built up a 100 person-plus team for content management in Jin Hua city (Zhejiang Province). Secondly, we have partnerships with local Internet management authorities. To some extent, the current regulatory model of the industry was initiated by us. However, the most important thing is to strengthen your own operating model and actively guide your audience in the right direction.

Knowledge at Wharton: How do you manage the community to prevent unacceptable content?

Dong: A video community is not driven by technology but by operations. In Guagua, some users are content providers, some are the audience. We have two guidelines. One is to promote interaction between the performer and the audience. When there is better interaction, there will be a stronger desire to express your emotions, and there will be more demand for gifts or tools. We have to cultivate the stickiness of users to our community and then attract more talented people to perform to create more high-quality content.

Secondly, you have to build a whole set of role-design mechanisms. In Guagua, there are hundreds of thousands of karaoke parties each night. How do we manage and organize such activities? We have designed three kinds of roles with different responsibilities. First is the landlord, who is the operator of each video chat room [i.e. the performance platform]. He or she must continuously organize different shows and parties in the room. The second [type of role] is the performer who tries hard to interact with the audience. Third is the agent, who looks for performance opportunities for actors [within] the whole community.

We have set up motivational systems for these categories. The revenue of the room comes mainly from buying virtual gifts and tools. This is shared by us and the landlord and agents. The landlords and agents then pay the performers.

Knowledge at Wharton: How do you choose a landlord?

Dong: The landlord needs to manage a team. The precondition of becoming a landlord is to have a team of 15 people. He has to submit a business plan to a special committee set up by us to review the major theme of the room, operational method, etc. We ask for video interviews of every member of the team and we have people check their execution. After a two-week trial, we conduct another review. Our review committee [is composed of] online users, current landlords and our own employees. If you get the support of a majority of these reviewers, you can become a regular room.

“We are trying hard to consolidate the online and offline entertainment value chain to help performers enter the traditional entertainment business.”

We only allow rooms to share in revenue when consumption reaches a certain level. Also, the landlord must organize more than three activities every week. This is part of the contract between the landlord and us. In addition, the landlord must pay us a deposit to prevent the risk of illegal content. Right now, there are some very successful landlords. A young man from Jilin Province [in North China] made 200,000 yuan ($30,000) in one month.

Knowledge at Wharton: You have done so much to monitor content. Why does Guagua still have some objectionable content?

Dong: There was a survey on online users’ behavior in Tier II and Tier III cities, which showed that the main motive for them — especially young girls — to be online is self promotion. In a virtual community, there might be a huge audience watching her and sending her virtual gifts. She might feel she is a star willing to perform madly for her fans. Without professional training and guidance, she may find it difficult….

Guagua is devoted to upgrade grassroots performance to professional entertainment and give every performer the opportunity to become a real star one day.

Knowledge at Wharton: What have you done in this regard?

Dong: This April, we teamed up with Enlight Media to launch a Star Road program and offer performers different resources based on their influence in the community. There will be a comprehensive rating system to measure influence. Then we will sponsor a single [song] or arrange a role in a movie. We are trying hard to consolidate the online and offline entertainment value chain to help performers enter the traditional entertainment business.

Meanwhile, our company has a 100-person team to train performers to become more professional and interact with the audience. This includes training in how to face the camera and make-up skills.

Knowledge at Wharton: How did the 75 million yuan investment by Enlight Media last October come about?

Dong: Frankly speaking, a purely financial investment does not help us too much. Guagua has a stable profit model and we have been making money since July 2008. We talked to many investors at an early stage, but they were put off because of the content risk.

In 2011, we looked at integrating with traditional entertainment resources. We worked with many TV stations, including Hunan Satellite TV Station [the biggest entertainment TV station in China]. They might have become an investor if Enlight Media had not been one step ahead.

In early 2012, we were working together with Enlight on a project called Passion Singing. It was combining our community and the TV channel and was very successful. This prompted Wang Chang Tian [president of Enlight Media] to take a stake [in Guagua]. He spent 75 million yuan to get 32% of our equity. The valuation was not too high, but we have agreed that all Internet strategies of Enlight Media will be executed on Guagua’s platform.

Knowledge at Wharton: The performance of the video community has not been that outstanding. Why are so many users still so committed in terms of time and money? What is the profile of your user?

Dong: Our mainstream users come from Tier II and Tier III cities. China has around 500 million Internet users. On top of news, Weibo [a Chinese micro-blogging website], games and video applications, there are demands that have not yet been served.

“We think that entertainment is not the only way to optimize the value of an online video social community. We will develop more extensive applications such as finance, education and drama.”

Most of these users have not had too much online experience. In Tier II and Tier III cities, people don’t have much choice in entertainment and leisure activities. Karaoke places are very expensive, and online games don’t serve all age groups. We are like an online karaoke bar that is convenient, inexpensive and safe to play at home. You can sing a song in front of your computer and have an audience from all over China. Some of the online users have money but are quite lonely spiritually. So they are willing to spend a lot of money on the online performers.

Many of our users are very loyal and visit the community every day. I [can] confidently say that the Tier II and Tier III cities are a goldmine that has never been seriously explored.

Knowledge at Wharton: What are the numbers for Guagua today?

Dong: We have grown at 200% CAGR [compound annual growth rate] from 2008 to 2012. Our revenue in 2012 reached 580 million yuan. We have 75 million registered users; the number of concurrent users at peak time is more than one million. The gross margin is around 50%. With the profit-sharing with landlords, our net margin is less than 20%. We have to spend on developing other communities like finance.

Knowledge at Wharton: Why do you need a finance community? What is the business model?

Dong: Finance is another direction we are taking. We have found that our users use our product to talk about stock selection. We also have an education community on bodybuilding, yoga, dancing, etc. We follow our users. We are building a big platform. If users like to go in one direction, we will try to support them.

The business model for the finance community is not mature yet. Right now, we invite experts to give free lectures on stock investment and gain some ad revenue due to high traffic. We plan to sell finance products in the future.

The online education business model is relatively simple. Teachers offer content, users pay for the lecture based on hours or months and we share the revenue with the teachers. At present, we also ask teachers to pay a deposit. As a platform, we are trying to build a credit rating system for the teachers based on their performance and impact on the community.

Knowledge at Wharton: Where do you see Guagua going?

Dong: Many of our peers are entering the entertainment business; it has become a major revenue source for them. However, we think that entertainment is not the only way to optimize the value of an online video social community. We will develop more extensive applications such as finance, education and drama. We will use the current profit to support these new vertical businesses.

Some people like to realize big profit as early as possible. We are not eager to get cash, but want to maximize the value of the video social community. We want to build Guagua into a comprehensive social video platform.