Has Tencent beaten Facebook at their own game?
Emerging markets, including China and India, have been among the most popular destinations for investors in recent months, with many attracted to their diversification benefits. There remains a common misconception that these countries are still the “manufacturer for the world,” but the companies that now inhabit these countries, in many cases, have surpassed their developed world peers.
This week, we take a look at one of the most popular members of the BAT (Baidu, Alibaba, Tencent) group of companies, specifically Tencent. The company was founded by current CEO Ma Huateng, affectionately known as “Pony Ma,” who continues to lead the business 23 years on. In many ways, Tencent is the company that Facebook is seeking to be. The company’s core business lies in its social networking platform, but this has been supplemented by online gaming, advertising and a digital payments platform.
Tencent was one of the ‘original’ Chinese technology companies, emerging just as the Dot Com boom hit in the US. It all began with the incredibly popular Weixin communication and social networking platform, which boasts a monthly user base of 1.2 billion people; for comparison, the population of China is just 1.4 billion. The company is clearly expanding beyond its homeland shores.
The WeChat platform is known as a “super app” in which many groups ranging from delivery to ride-sharing actually offer their apps through WeChat rather than directly via an App Store. Users are able to connect with others, purchase goods and most importantly transfer money and message each other securely.
As has been the story with most successful tech names, Tencent was forced to (and has continued to) pivot on multiple occasions. Outside of social networking, the company is best known for its extensive collection of investments and gaming titles. These range from the incredibly popular PUBG or Player Unknown’s Battleground, and more recently the Call of Duty mobile game. The standout titles, however, are sourced from the group’s ownership of US-based Riot Games, and the associated League of Legends titles, as well as its distribution of the incredibly popular Fortnite franchise through a significant stake in Epic Games.
It is this strategy of taking significant stakes in game, movie and other studios or platforms and supporting distribution throughout China that continues to expand the group’s “network effect.” In recent years the group has continued to expand into both content, including the delivery of news, video and music via its platforms, as well as software utilities and cloud computing.
Tencent has seemingly done the near-impossible in quickly monetising its social media business, with a series of unique verticals. The platform has recently expanded into allowing businesses to connect directly with consumers, link products to its content and ultimately allow closed-loop payments, all on the same platform. In recent months the group has launched healthcare and insurance services that do everything from finding the right doctor to settling your bill after your consultation.
It is also seeing significant success in its pivot to advertising with innovative platforms like Weixin Moments, seeing strong growth as advertisers link their ads with mini-programs to complete transactions on the spot. Tencent has also launched an integrated platform that allows streamlined advertising across every aspect of its platform more efficiently. The company is also challenging Google, Zoom and Microsoft with recent launches of its own Tencent Meeting, and Tencent Docs platforms, with its trusted brandname clearly supporting their traction.
It hasn’t been all smooth sailing for Tencent, with Trump’s short-lived ban on WeChat highlighting growing concerns about the use and control of the data it has. And this data is significant, with 1.8 billion users across the two main platforms and its Weixin app ranking first in China for monthly users on both Android and Apple platforms. The company’s sprawling investments across multiple sectors and control of data is also attracting the attention of Chinese authorities that recently delivered a record fine against Alibaba. This was seen in full force when gaming approvals were effectively put on hold for most of 2018, having a severe impact on revenue.
That said, the company sailed through 2020, reporting an incredibly strong finish to the year as the digitisation trends spread throughout Asia. Sales were up 26% in the December quarter to US$20.5 billion ($26.3 billion) with social network sales up 27% and online advertising up 22%. Interestingly, these were well below previous growth levels, averaging 40%-plus.
It is clear that Tencent has the three key traits that are important for any modern business. Firstly, it has the network effect, afforded by its huge user basis and loyalty, particularly from Chinese nationals. The second is its aggressive strategy on acquisitions and willingness to try new verticals like insurance, healthcare and the cloud. It is taking significant positions in up-and-coming businesses to solidify its dominance. The last is its annuity-like revenue coming from both advertising, subscription, in game purchases and payment processing.