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The Hong Kong-listed company keeps its customers glued to their phones
Xu Ye is a thoroughly modern metropolitan millennial. She reads science and cultural articles on the way into work, takes and dispatches orders from her boss, lunches on organic produce in an NGO-run community garden and picks up artisanal bread on the way home.
By Chinese standards, she says, her life in Shanghai is “peculiar”. But in one key respect it is utterly typical: like hundreds of millions of her compatriots, she carries out much of her daily life over Weixin, a wildly popular messaging app, on her smartphone.
Her connected lifestyle is largely thanks to Tencent, a $225bn internet company whose social platforms have become a part of the very fabric of Chinese lives. For people like Ms Xu, Tencent’s myriad apps and services offer a way to work, play and pay.
It is, says one banker, “a social enterprise powerhouse”: under one roof, it has amassed China’s answer to Facebook, WhatsApp, Spotify, Kindle and ApplePay. Chi Tsang, internet analyst at HSBC, says Tencent has “the most killer apps in the world”. Weixin, along with the WeChat app outside China, has 846m active monthly subscribers.
Tencent also has a huge multibillion investment portfolio, ranging from stakes in Didi Chuxing, China’s biggest ride-sharing company, through to start-ups. It dabbles in artificial intelligence, electric cars and bike sharing. Its posse of champion hackers managed to gain remote control of Tesla’s Model S, forcing the US carmaker to roll out a security patch.
“They started with distribution and now they are monetising everything they can,” says Scott Likens, a partner in the emerging tech practice at PwC. “It is the opposite of the traditional business where you’ve got the product and say, ‘Now let’s find the customers’.”
Fittingly, it is based in Shenzhen, a fishing backwater turned bustling metropolis across the border from Hong Kong. It was here that Deng Xiaoping in 1992 launched the then-isolated country on its rollicking ride into capitalism, and today it is China’s answer to Silicon Valley.
The company employs 3,000 workers, more than half of whom are in research and development. While its home market is by far and away the largest, Tencent has an overseas presence in many sectors — its WeChat payments app can even be used at Caesars Palace in Las Vegas.
“They are everywhere, the US, Europe — especially among Chinese speakers because if you want to contact business or family in China there is only one way to contact them, and that’s WeChat,” says Elinor Leung, a research analyst at CLSA.
Alongside Baidu and Alibaba, it is one of China’s three largest internet groups (they are collectively known as BAT). But its Hong Kong listing, in June 2004, differentiates Tencent from its rivals, which headed to the US capital markets.
That decision alone won it accolades. “Tencent has a better corporate governance than Google or Facebook,” says Richard Windsor, founder of independent research company Radio Free Mobile, pointing to its spurning of the dual-class shareholding allowed in the US but banned in Hong Kong.
Strategically, however, it has evolved along similar lines to its Silicon Valley peers, says one banker. “Tencent has had a typical US-style upbringing: for the first three to four years [after its initial public offering] it did nothing; [management] just delivered on what they said they would.”
That steady push up the ranks is typical of its founder, Pony Ma (his name is a pun: Ma means horse in Chinese). Unlike his namesake Jack Ma at Alibaba, Tencent’s Mr Ma shuns the limelight and favours a low-key sartorial style that colleagues and acquaintances say is emblematic of his nerdy persona.
An engineer by training, the 45-year-old is listed as the world’s 46th richest man by Forbes, with a net worth of $21.9bn. But he prefers philanthropy over a splashy lifestyle, with the only conspicuous display of his wealth being a palatial home in Hong Kong.
Paying for content
Mr Ma started Tencent in 1998 as the messaging service QQ — not in a garage, Silicon Valley-style, but in a high-tech park in Shenzhen, jammed between hustlers selling pirated phones and PC repairs. Online gaming was added in 2004 and is now the group’s major revenue driver, accounting for Rmb18.2bn ($2.6bn), or almost half of its third-quarter sales. Unlike NetEase, its Chinese rival, Tencent has largely licensed rather than produced its own games.
This year, however, it doubled down on its bet by paying $8.6bn for a majority stake in Clash of Clans developer Supercell, passing on some of the cost to a consortium of investors and keeping the Finnish developer’s management in place.
“They have a long-term view on gaming,” says one banker, who reckons half of all deals they look at on a daily basis fall within the sector. “They are definitely looking outbound.”
More generally, content — specifically exclusive, copyrighted content — is a top priority for Tencent. It operates on a “freemium” revenue model, offering some content free and charging at the premium end.
This, Mr Tsang says, plays into “the increasing propensity of China users to pay for content” — something they initially shunned, turning instead to pirated movies and music.
“Over the past two years the government has cracked down on pirated content and even the ones you still get, the quality is so bad relative to what you can get from Baidu and the others,” he says. “And the operators have got smarter about putting quality content behind the paywall.”
Thus Tencent, which has exclusive coverage in China of the NBA basketball championships, can charge viewers Rmb22 a month for a basic subscription and Rmb60 for premium viewing.
Like Alibaba, Tencent “has gone well beyond copying [the west],” adds another banker. “They are inventing and reinventing what their businesses should be”. Tencent’s Moments feed on WeChat prefaced Facebook’s addition of Messenger and the $22bn acquisition of WhatsApp.
Payments are another case in point. China’s online third-party smartphone payments market dwarfs that of the US: iResearch estimates it to be worth Rmb15.7tn in 2016 — 28 times the $62.5bn forecast by eMarketer for the US in 2017 — and Rmb28.5tn in 2018.
It is dominated by Alipay, which is operated by Alibaba affiliate Ant Financial and has more than half the market, but TenPay ranks second with a 38.3 per cent share in the third quarter, according to Citibank.
Tencent’s Mr Ma said in May that the average number of mobile transactions exceeded 500m a day, and that over Chinese new year — when it is traditional to hand out hong bao, or red envelopes of money — more than 2.5bn virtual packets were distributed across its platform.
Tencent favours a cautious approach to monetising its database of active monthly users. Rather than blitz Moments with ads and risk the sort of backlash dished out to Facebook, Tencent has restricted itself for now to a maximum of one ad per user each day.
UBS estimates WeChat Moments’ ad load at about 1 per cent of non-advertising content, compared with 7-10 per cent for Facebook, leaving big scope for growth. In 2015, online advertising made up 17 per cent of revenues.
China’s mobile ad market was worth Rmb90bn in 2015, according to iResearch, up 178 per cent year on year, and is forecast to grow at a compound annual rate of 54 per cent from 2015 to 2018.
Yet monetising the subscribers — and its database — offers the real keys to the kingdom for China’s BAT contingent and their global peers.
Native ads are increasing in China, as elsewhere, and Tencent is helping to rewrite the rules of engagement for digital advertising. Take the entertainment show A Date with a Superstar, produced by Tencent and sponsored by L’Oréal, whose cosmetic products twirl across the screen. Ad Age describes the show as “essentially a giant commercial”.
Other consumer goods companies are following suit with similar partnerships. “They’re attracting the big spenders who have been active in TV and are now embracing online advertising,” says one analyst.
Not everyone buys the monetisation story. Mr Windsor argues that Tencent’s different platforms make it harder to aggregate and exploit the big data they are sitting on. QQ and WeChat have yet to be fully integrated, for example.
“I don’t see Tencent being ready to grab this opportunity in 2017, and so in the short term a slowdown looks inevitable,” he says.
Big data, Big brother
Calling China home offers the BAT companies a huge advantage: international competitors are largely locked out and the trio owe at least part of their success to the absence of the likes of Facebook, Twitter and Google.
However, calling communist China home has a darker side, and an Orwellian shadow hangs over the BAT.
The first is straightforward censorship. Usefully for its global expansion, Tencent’s WeChat operates two systems of censorship, with users registered outside China able to access more sensitive words than those inside the country.
BAT power
The market capitalisation of China’s three largest internet groups on December 15: Baidu $59bn; Alibaba $226bn; Tencent $225bn
Source: Bloomberg
Potentially more insidious are China’s plans to build a social credit rating systembased on online behaviour. At face value, this plugs a glaring gap. China’s rapid but uneven development means only an estimated 30 per cent of the population is covered by the existing rating system, says Alfred Shang, a financial services partner at Bain & Co.
The fears in China go beyond being excluded from loans due to their online profile. Some fear the plan, published by Beijing last year and due to roll out nationwide by 2020, aims to use algorithms and big data to rate citizens’ “honesty” and “trustworthiness” alongside their creditworthiness. At the worst, say privacy advocates, the system is designed for mass surveillance.
“I kind of worry if Chinese users are going to push back against that,” says one analyst. “A credit score is one thing, but a social score seems a little bit overstepping that.”
PwC’s Mr Likens adds: “I think there’s a dangerous slope. You are getting access to really personal data now. You are getting into who I am as a person and that does bring up some concerns.”
The plan is ambitious and observers question the ability to roll it out by 2020. Until then — and probably afterwards as well — the big data amassed by Tencent and its peers are primarily viewed at face value: a fabulous treasure trove of consumer information on shopping, eating, travelling and wealth.
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