Tencent cares a lot about its public image – to the extent that it blocks articles criticising its business. Are its censored critics onto something? We take a look at the company’s life-or-death business model.
In May, an article published on WeChat criticising Tencent spread on Chinese social media and was soon blocked on all Tencent platforms. The article compares Tencent with a company that has become synonymous with missed opportunity – Nokia. In 2007, Nokia had a 50% market share in the phone industry. Just five years later, it had slipped to 5%.
But from the outside, Tencent could not look more different from Nokia. Born in 1999, instant messenger and web portal QQ was Tencent’s first product, which went from humble beginnings to having the world’s fifth-highest internet traffic today. In 2011, Tencent launched WeChat, a messaging and social media platform that has since grown into a super app which most of China’s 1.4 billion population now use on a daily basis.
However, some have doubted Tencent’s capabilities to innovate and questioned some of its business strategies. Tencent looks like a company in its prime, so how is Tencent comparable to Nokia?
There’s nothing unique about Tencent’s business model
The goal in China’s highly competitive tech industry is to gain as much user attention as possible and then monetise users. Although Tencent produced two hugely successful products, the author of the blocked article argues that the company has always heavily relied on its high traffic to keep its businesses going.
The theory goes that if you have your users’ attention, you have at hand the easy opportunity to introduce new products and features to them. Tencent does not disclose how much money WeChat makes, so it is hard to pick apart this argument. However, Tencent does release its aggregated revenues. From its recently released 2019 Annual Report, we can see that nearly US$10 billion (18% of total revenues) comes from advertising, with most revenues coming from “services,” which includes game revenues. If we were to attribute most advertising revenues to WeChat, we would see that Tencent made around US$10 from each of its Chinese customers in 2019.
With its profits, Tencent has invested in a range of other companies including video-sharing website Bilibili, short video app Kwai, and live streaming service DouYu – and then opened portals to them in its products. Nokia dismissed touchscreen phones as a gimmick that used up too much battery. By the time they realised they were wrong, they were no longer able to play catchup. The author warns that by failing to lead innovation and instead buy into trends that have already started, Tencent is in danger of becoming the next Nokia.
Many will be surprised to hear that the world’s biggest game company is not Nintendo, Microsoft, or Sony – it’s Tencent. Tencent is not an innovator in gaming, though. Instead, the company bought significant stakes in some of the world’s biggest games, including League of Legends, Fortnite, and Call of Duty.
Currently ByteDance, the company behind TikTok and its Chinese counterpart Douyin, is possibly Tencent’s biggest competition for user attention. Tencent lost out on a critical opportunity by not riding the short video wave, which has evidently been won by ByteDance. This gives some weight to those who criticise Tencent for failing to innovate. In the first half of 2019, ByteDance took a larger chunk of advertising than both Tencent and Baidu put together after advertisements grew by 113%.
Tencent proved the success in buying out popular games and then introducing them to its existing users. Why can’t ByteDance do the same and take a massive bite out of Tencent’s market share? As ByteDance broadens its business by applying the same techniques Tencent used to gain a monopoly, it will likely continue to threaten Tencent’s hegemony in China.
The same goes with content. Content is particularly indispensable in China for attracting and retaining users as most people spend their time online to get all kinds of information, including traditionally offline activities such as reading news and watching television shows. If Tencent can dominate in content, it can dominate the internet in China.
What Tencent has done is buy up and copyright a wealth of favourite content creators in China, create new content, then feed it to its users. By having such an extensive portfolio of talent, Tencent has been able to trial and error products, and in the process created some hits, such as the TV show The Untamed. Xiao Zhan, the star of the show, is vehemently protected by Tencent – perhaps because he is the personification of their business strategy.
The other side of the argument
The censored article aroused debate online, but not all agree with its argument. Another article points out that in addition to Tencent’s traffic, it also has a variety of apps, a clear advantage over its competition. This helps Tencent build ecosystems. For instance, if you are playing a Tencent game, you are easily able to share your activity with your friends on WeChat or QQ. This attribute has helped WeChat maintain a 95% market share in many game genres in China.
Reducing Tencent’s success to its high volume of users would be naive as it does not explain why some of China’s biggest internet companies including Baidu, Youku, and Weibo have not enjoyed the same success as Tencent. Even companies directly related to another industry have not been able to break into their neighbouring sector.
Also, the gaming industry is a hard one to break into. Only 35 or so of the thousands of games developed in China every year turn a profit and just 15 of those go on to occupy 80% of the market. Tencent’s talented game developers and content creators have a proven record of creating high quality and popular work. And with WeChat and QQ to distribute them, Tencent has a business model many envy.
How far Tencent goes to maintain its monopoly
Tencent’s Q1 2020 revenues saw a 31% growth to US$5.26 billion, owing to high demand for video games during the COVID-19 lockdown. Social media advertising revenue also grew by 47%. Looking at the figures, some netizens joked that “several hundred million [CNY] a day doesn’t sound bad.”
The giant also recently pledged US$70 billion in high-tech investments over the next five years, an area set to define the next era of development in China. However, the way Tencent handles its competition still raises eyebrows. Last week WeChat blocked WeTool, a third-party program for managing WeChat group chats. The ban brought headache to community managers and has hit the education industry especially hard, where companies frequently use the tool to manage group chats containing thousands of customers.
The program was also used by SMEs to help acquire customers. Lucky for Tencent; with WeTool now gone, many of these SMEs will soon result to using WeChat advertisements to make up for their loss, raising their cost of customer acquisition and putting more money in Tencent’s pockets.
The WeTool ban comes amid a recent crackdown of third-party WeChat tools, with many accounts banned and funds lost in the process. Onlookers have explained the trend as not just a move to abolish unwarranted tools that many users find a nuisance, but also a strategy to brutally clear the way for the success of Tencent’s Enterprise WeChat service.
Back in 2018, Tencent also challenged ByteDance with a block. Around February that year, Douyin was receiving around one million new users per day. Faced with a flood of Douyin videos on WeChat, Tencent decided to block its users from posting short videos. This temporary solution failed to curb the success of Douyin in the long-term, though. 57% of ByteDance’s 1.5 billion users are still located in China.
The bans show another side to Tencent’s success story, where the company often chooses to block anything taking attention away from its ecosystem to protect its dominance. To an extent, it has worked so far, as Tencent continues to dominate much of the internet in China. Nonetheless, whether this strategy proves to be just an awkward managing of competition or the guilty conscience of a weakening business model is yet to be determined.