Chinese social network Weibo (NASDAQ:WB) issued a warning to its users on Sep. 8, giving them one week to verify their accounts with real names. That statement was made in response to a notice from the Cyberspace Administration, which recently issued new rules that required messaging service providers to verify the identities of their users and retain group chat logs for at least six months.

The government already asked Weibo to identify all its users by their real names in 2011, but Weibo's parent company SINA (NASDAQ:SINA) later admitted that it hadn't enforced the rules because it was time-consuming and alienated users. Regulators then ramped up real name identification efforts in 2015, but the new rules also weren't strictly enforced due to the difficulty of filtering fake identities.

Weibo's mobile app.

Weibo's mobile app. Source: Google Play.

However, Weibo's recent announcement indicates that the government is getting much more aggressive about monitoring social networks, which have been considered hotbeds of conversations on "sensitive" topics. Weibo didn't explain what would happen if users failed to register their real identities by Sep.15, but more aggressive enforcement could potentially force millions of users off the platform.

The exhausting business of censorship

Weibo usually self-censors its content to appease Chinese regulators, but it's a massive, time-consuming process. Last year, a former Weibo employee told the CPJ (Committee to Protect Journalists) that censors worked either 10-hour day shifts or 14-hour night shifts to review posts which contained "sensitive" words.

Nonetheless, clever users still used fake identities, abbreviations, shorthand, and coded languages to get around those censors. For example, Weibo's aggressive censorship of all posts referring to June 4, the date of the Tiananmen Square Massacre, led to users using "7-1, 5-1" (the math equals the date) to refer to the event. "Democracy" is also abbreviated as "MZ" -- which refers to the pinyin spelling of "min-zu" (democracy).

Tiananmen Square, Beijing.

Tiananmen Square, Beijing. Source: Author.

These constantly changing codes are practically impossible for Weibo's algorithms and censors to identify. But it can, in theory, identify pseudonyms and fake accounts.

Weibo does this by asking mainland users to register their mobile phone numbers, which must be registered to a "real" person with a national ID. It's unclear if Weibo actually verifies those numbers, but new laws might force it to do so -- which would be an arduous task with 361 million monthly active users.

SINA and Weibo's constant clashes with Chinese regulators

SINA and Weibo both clashed with regulators in the past. Two years ago, regulators threatened to shut down SINA's news portals for "distorting news facts, violating morality, and engaging in media hype." A shutdown never occurred, but SINA had to monitor its own stories more closely.

In late June, regulators ordered Weibo and several other websites to halt their live video broadcasts, claiming that they weren't covered by a recently introduced broadcasting license. In August, regulators accused Weibo, Tencent's WeChat, and Baidu's Tieba of enabling users to spread "violence and terror, false rumors, obscene pornography and other content that endangers national security, public safety and social order."

It's unclear how these investigations will pan out, but they indicate that these tech giants must pull of tough balancing acts to appease both users and regulators.

Should investors be worried about Weibo?

Weibo's official statement confused many investors. It demanded that all its users register their real names within a week, didn't explain what would happen if they didn't, then oddly added that it had already completed real-name registration for all its "active" users -- without any additional details.

It's highly doubtful that Weibo would issue an ultimatum if it already registered all its users, but it's just as unlikely that Weibo would delete all its unverified accounts right after the time limit expires.

This leaves Weibo in a lose-lose situation -- it can either wait for Chinese regulators to clamp down even harder, or purge its network of all unverified accounts and potentially reduce its MAUs by a large amount. This all puts Weibo stock -- which rallied 160% this year and trades at 121 times earnings -- in a very precarious position.

 

Leo Sun owns shares of Baidu, Tencent, and Sina. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends Sina and Weibo. The Motley Fool has a disclosure policy.