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Weibo Warns Censorship Could Hit Future Earnings

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China's Weibo Corporation has announced that its initial public offering has raised just $286 million, substantially lower than anticipated.

The social media company sold fewer shares than expected - just 16.8 million - at the price of $17, right at the bottom of the projected range.

There are a number of factors behind this, from suspicion that the company may at some point be taken over by e-commerce firm Alibaba to concerns about the social media business in general. But there's another reason, which the company warns about in its SEC filing: that the censorship rules imposed by the Chinese government could adversely affect its business.

"Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other things, impairs the national dignity of China, is reactionary, obscene, superstitious, fraudulent or defamatory, or otherwise violates PRC laws and regulations," the company explains.

"In addition, the MIIT [Ministry of Industry and Information Technology] has published regulations that subject website operators to potential liability for content displayed on their websites and for the actions of users and others using their systems, including liability for violations of PRC laws prohibiting the dissemination of content deemed to be socially destabilizing."

Weibo Button (Photo credit: bfishadow)

Complying with these rules costs Weibo dear. US researchers have calculated that, to achieve the level and and speed of deletions they observed, Weibo would need at least 4,200 censors. A Harvard team put the figure far higher, at between 50,000 and 75,000.

But the real cost of censorship isn't to be found in the salaries of that army of checkers - or, indeed, in the expensive surveillance software that the government requires websites to install.

As the SEc filing acknowledges, censorship has the ability to severely impact the appeal of a service. Research commissioned earlier this year by the Daily Telegraph indicated that the number of posts on the service fell by an astounding 70 percent after the  government started requiring users to use their real names.

Morningstar analyst Yue Yao warned of the potential cost in a research note just last month.

"Sina Weibo is subject to potential legal risk for its user-generated content that Chinese censors could declare to be inappropriate or illegal. For example, Sina was forced to disable the comment feature of Weibo for three days in March 2012 to clean up postings related to certain rumors," this reads.

"The Chinese government may choose to further tighten its already well-established internet censorship tactics. If the Chinese government decides to restrict the distribution of information via Weibo or online postings in general, Sina’s online business could suffer in a number of ways, including diminished website traffic, or the inability to adequately monetize services or brand equity."

It's not really fair to compare the value of the Weibo IPO with that of Twitter: there are simply too many factors involved. But while careless talk costs lives, as they used to say here in Blighty during the war, this SEC filing shows that being too careful about talk can cost money.