Recalling the past ten years, Zou Shenglong, founder and CEO of Xunlei, concluded that premium subscription is the best consumer-facing business model for internet services, citing advantages it brings on cash flows, pricing power and building the overall platform (source in Chinese).

Founded in January 2003 and becoming one of the leading download and video streaming services in China, Xunlei introduced the subscription model in 2009. Till today, it has four million subscribers — 1% of the user base, paying RMB9.8 ($1.5) or RMB15 ($2.4) per month, to contribute approaching half of its total revenues. The company expects to have 10 million subscribers in two to three years.

The revenues generated by subscriptions as a percentage increased from 2.4% in 2009 to 16.9% in 2010 and to 26.4% in the three months ended March 31, 2011, according to its F-1 filing with SEC in July 2011.

img:vip.xunlei.com

Different from premium services offered by western products, the package a Chinese service would offer must range way more widely than its core business. Xunlei’s includes 30 plus privileges, from premium download offerings to online gaming. Tencent is widely recognized as the creator of the subscription model for monetizing an internet service. From 2000 to now, Tencent’s QQ Membership, with 20-plus combinations of offerings, has over 20 million subscribers. Contributing the first revenues to the company, the model still generates about 20% of the internet giant’s total revenues.

Xunlei acknowledged it modeled Tencent’s both in gaming business and the subscription service. Zou Shenglong pointed out that it took six years for Tencent to get one million subscribers, thinking that must be a turning point for such a business. So he didn’t think it’s a coincidence when Xunlei’s subscriber growth accelerated after having gained one million sign-ups.

Zou also counts the membership model as the base for developing other transaction-based paid services, such as gaming his company started operating in 2008. He thinks two preconditions can have more users pay for more services: a powerful platform that can have impact on user behaviors and a paying user base.

“Unrealistic to make big money through video advertising”

Besides subscriptions and gaming, the third revenue source of Xunlei’s is online video advertising. But that’ s not a good business, according to Zou, given the content costs. The company has spent hundreds of millions yuan each year on licensing copyrighted video content since 2007, trying to scale up an advertising-based business and promising to share revenues with content providers. Unexpectedly, video content prices skyrocketed in the next years when online video streaming services crowded the market. Though prices declined to be comparatively reasonable in this year, Mr. Zou said “currently it’s unrealistic to make big money through video advertising”.

Its online advertising revenues as a percentage declined from 70.7% in 2008 to 51% as of March 31, 2011, as disclosed by its F-1.

Although most Chinese web services with large user bases, including Sina Weibo and Youku, adopted the subscription model, Xunlei is one of the few that succeeds in making a considerable income there. While it’s proven that users would like to pay several yuan a month to speed up downloading or video streaming, it seems online video sites like Youku have difficulty in charging for accessing premium content — or there is little to offer since fierce competitions make it really hard not to offer any video for free. As to Sina Weibo’s subscription offerings, I really think they are just trifle features that should have been for free anyway. It may be too early to judge. Maybe that premium subscription model will still be workable for any web service when premium offerings and timing are right, as Zou Shenglong believes in.