NetEase accuses Momo CEO of 'violating ethics'

Accusation made ahead of social networking app's US IPO

The CEO of Chinese location-based social networking platform Momo Inc was accused of violating professional ethics by his previous employer on Wednesday, ahead of Momo's NASDAQ listing.

Internet technology company NetEase Inc said in its Sina Weibo post Wednesday that taking advantage of its content and technology resources, Tang Yan secretly set up Momo in July 2011, while working for NetEase from December 2003 to September 2011.

Tang, NetEase's former editor-in-chief, was also accused of corruption for channeling millions of yuan to 4 Degrees (Beijing) Co, an advertising company founded by Tang's wife Zhang Sichuan, according to the post.

The statement said that NetEase reserves the right to launch a lawsuit against Tang.

Momo refused to comment on this when contacted by the Global Times on Wednesday, citing complete silence during its IPO process.

But Li Yong, Tang's former boss at NetEase, immediately posted a statement on his Sina Weibo account on the same day to support Tang, saying that NetEase's accusation is exaggerated.

"Tang intended to leave his position after the 2011 Spring Festival…As the company was shorthanded at that time, I allowed Tang to set up his own business during non-working hours," said Li, who left NetEase in 2012.

Regarding the corruption charge, Li noted that NetEase had carried out an official investigation on that, which failed to uncover any problems.

"It will be hard to tell whether Tang violated laws, as the two sides have yet to really file any lawsuits or present relevant evidence to prove their claims," Zhao Zhanling, legal counsel with the Internet Society of China, told the Global Times Wednesday.

NetEase said in an e-mail to the Global Times Wednesday that the statement is targeted at Tang Yan instead of Momo.

But analysts said that NetEase's accusation came at a time when Momo is gearing up for its IPO in the US market, signifying fierce competition in the domestic instant messaging (IM) sector.

As for major Internet companies, China's IM industry appears to be a critical turf. Internet behemoths like Tencent and Alibaba have been actively carving their territories for IM service. NetEase also tapped the sector by co-launching Yixin with domestic telecom carrier China Telecom in 2013.

A report issued by Beijing-based market research firm Analysys International in November showed that Yixin is the No.8 mobile IM social app in China with 9.6 million active users in the third quarter.

The Momo app, released in August 2011, ranked third, attracting 64.3 million active users over the same period with its features that enable them to chat with nearby strangers anonymously. Tencent's friend-based IM app WeChat maintained its market leadership with 385.8 million.

Luo Lan, an industry analyst with Analysys International, told the Global Times Wednesday that NetEase's conduct will create some setbacks for Momo's upcoming listing.

Momo expected to float 16 million American Depositary Shares (ADSs) at a price range between $12.50 and $14.50 per ADS in the US market. Its trading is reportedly set to open on Thursday (US time).

Both Luo and Zhao believed the current accusation will not likely postpone Momo's trading schedule and its influence on the firm's share price will be temporary.

But if NetEase can prove its accusation, Tang may likely be arrested for economic crimes, which will surely be a huge blow for Momo's performance in the US capital market where investors value company founders' professional ethics, Zhao noted.

In addition to such a potential scenario, analysts said that Momo's net losses can also be worrying.

According to Momo's prospectus, the company's net losses stood at $22.9 million during the nine months ended September 30, 2014, compared to $9.3 million in losses for all of 2013.

Momo said in the prospectus that it plans to monetize user traffic through cooperating with Alibaba to place targeted marketing of merchants on Alibaba's marketplaces, and cooperate with online classified website 58.com by providing users easy access to their marketplaces.

Upon the completion of the IPO, Momo would sell shares to Alibaba Group Holding worth $50 million and 58.com Inc worth $10 million through the concurrent private placement, according to the prospectus.