While Everyone Else Talked About Ecosystems, Tencent Quietly Built a Walled Garden | Top 15 Annual Report
WeChat is the net that catches us all
WeChat is the net that catches us all
"I saw something on Moments…" — you have surely heard someone near you start a sentence this way. For more and more people, WeChat Moments has become a daily source of new information.
By December 2015, China had 620 million mobile users, and over the previous year instant messaging had remained the country's most-used internet service. WeChat's own 2015 WeChat Life White Paper had already revealed that 570 million people open WeChat every day, and a typical user opens it at least 11 times.
Going to Baidu to scroll the news or look something up suddenly feels like a habit from the last decade. What replaced it as China's new gateway to the internet is WeChat.
In 2015, WeChat's Reach Was Turning Into Tencent's Future Revenue
"WeChat — it's a way of life." That advertising line became reality in 2015; by then it was hard to meet anyone who didn't use WeChat. And WeChat saturated everything at exactly the moment Tencent needed it most.
In the early days of QQ and QQ Zone, memberships and the "Yellow Diamond" premium service were Tencent's main source of revenue.
In 2009, QQ membership revenue grew slowly, but browser games like Crossfire and QQ Dance spread fast, and for the first time gaming became Tencent's main income. Tencent was already the world's largest gaming company.
By 2015, that growth had slowed; in the second quarter, Tencent's online gaming revenue grew 11 percent more slowly year on year. That is when advertising picked up the slack.
In January 2015, you almost certainly saw the chatter about the ads for BMW, Vivo, and Coca-Cola. Whether or not you had spotted an ad in your Moments briefly became something friends talked about. Each of the three companies spent more than 5 million yuan.
More advertisers crowded into Moments afterward — the luxury house Dior, General Motors' Cadillac, the film My Sunshine, the actress Bai Baihe… Each of these early advertisers also paid at least 5 million yuan for a spot in the feed, with the price rising according to impressions.
After that, Moments ads were folded into Tencent's own ad-delivery system, Guangdiantong. In August, the official Moments ad site went live and brought the entry price down to 200,000 yuan. By the first quarter of this year, just 50,000 yuan was enough to show a photo, some copy, and an H5 link in Moments. Next to Google, Baidu, and Weibo, where a few hundred yuan buys you an ad, WeChat is still hundreds of times more expensive.
None of that stops Tencent from making money off it. From the second quarter of 2015 on, revenue from these ads roughly doubled each quarter year on year. Tencent's online advertising revenue for all of 2014 was 8.308 billion yuan. In the first three quarters of 2015 alone it had already reached 11.699 billion yuan, with WeChat the main driver of that growth.
At this rate, Tencent passing Baidu to become China's largest advertising company is only a few years away.
WeChat Ads Sell So Well Because Tencent Built a Walled Garden
What will finally push Tencent's advertising revenue past Baidu's is not just the sheer size of its audience. More important is that WeChat guards every single ad slot.
A WeChat official account is edited through a back end that belongs to WeChat alone. Inside it, everything must obey WeChat's rules: no external hyperlinks, no video from anywhere but Tencent Video.
When Tim Berners-Lee invented the World Wide Web, he built it on two things: web pages and hyperlinks. Tencent has now killed one of them, seizing absolute control over how information travels.
Keeping people from leaving is only part of it. WeChat official accounts are also barred from plugging into any third-party ad network, which means Baidu's automated ad system cannot place ads on official-account pages. In the PC era, that was one of Baidu's biggest revenue streams. In the mobile era, the same reader-drawing accounts feed customers to Guangdiantong, Tencent's own ad platform.
Baidu cannot advertise inside WeChat — and companies cannot even run their own viral campaigns there. The "H5 quizzes," games, and ads that race through Moments usually stop opening once they pass about 10,000 clicks. The reason given is some version of "reported for malicious marketing" or "inducing shares."
Last Spring Festival, while everyone was busy grabbing red envelopes, Alipay's passcode red envelopes were also blocked from Moments. WeChat's response at the time: "WeChat Moments is a small, private circle built on chains of personal relationships, and the WeChat red envelope is a playful, affectionate exchange between friends. We will never allow anyone to use red envelopes as a pretext for malicious marketing in Moments and ruin the Moments experience."
Yet this very week, WeChat's own pixelated 'red envelope photos' had taken over everyone's feed.
In short, exactly who gets to make money inside WeChat is for WeChat's "final interpretation" alone to decide. The method is no different in kind from why you can't open facebook.com in China — this place has been turned into one giant walled garden.
Tencent's Walled Garden Reaches Far Beyond WeChat
Over the past year, with the lone exception of Trip.com Group's acquisition of Qunar, Tencent's hand was behind every major internet merger in China. Its reach already extends well past WeChat.
On Valentine's Day 2015, to fend off the overseas rival Uber, Didi Dache and Kuaidi Dache came together. Tencent and Alibaba jointly took stakes in the new Didi Kuaidi, and Didi still runs on Tencent Maps today. From its early investment in Didi Dache to its follow-on investment in the merged company, Tencent has put in at least 2.7 billion dollars.
In April, 58.com took a strategic stake in Ganji.com. Tencent paid 400 million dollars for newly issued 58.com shares — ostensibly to help the two companies integrate — and became a major shareholder with 25.1 percent.
In October, Meituan and Dianping merged. A month later, Tencent put 1 billion dollars into the combined company, while Alibaba sold off the Meituan shares it had held.
Tencent also invested in 76 companies at home and abroad in 2015, among them the Q&A community Zhihu.
As the internet changed the way business is done, it changed the way you live. Today, food delivery, ride-hailing, e-commerce, group buying — all these new internet services sit under Tencent's control.
Alibaba and Baidu are hardly short of money either, but startups want more than capital — they want users and the power to control how information flows.
This kind of internet contest, settled by raw user numbers, is becoming more common. These companies usually take a process that used to happen offline and move it online, making money by cutting out or reshaping a distribution channel. The real technical differences between them are small. The only way to beat a rival product is to draw more users.
That is what makes WeChat, Tencent's new weapon, so attractive. Beyond steering traffic to the third-party apps tucked into WeChat Wallet, Tencent also uses it to help its own companies hammer their competitors.
When Didi Dache and Kuaidi Dache were still rivals, Kuaidi ride coupons were nowhere to be seen in Moments.
While Didi and Uber were locked in an all-out subsidy war, WeChat purged every Uber-related official account again at the end of 2015. To this day, searching "Uber" in WeChat returns no official-account results.
In February 2015, WeChat blocked NetEase Cloud Music and Alibaba-backed Xiami Music from Moments. Eight months later, NetEase sharing came back — after NetEase licensed 1.5 million songs to QQ Music.
JD.com, which had long since dropped Alipay, finally won Tencent's backing in 2014 by selling it a 15 percent stake. Even now, you still cannot share a Tmall or Taobao product link directly inside WeChat.
Leaning Too Hard on Those Hundreds of Millions of Walled-In Users, Tencent May Be Missing Bigger Chances
In 2016, WeChat's ambition is roughly to become an operating system. At the WeChat Open Class early in the year, WeChat chief Zhang Xiaolong was already planning to launch "Application Accounts."
In his speech that day, he said: "I believe everyone's work comes down to one thing — how to keep users sticky, how to keep them inside your product as long as possible, and keep them from leaving it."
By Q3 2015 earnings, Tencent had the strongest ability to make money from each user
Inside the walled garden Tencent built for itself, it makes more money per user than anyone else — even more than Facebook and Google.
Tencent has the money to do what it wants, but not necessarily the skill to do it well. WeChat has a vast user base and unmatched stickiness, but what happens after you have funneled all that traffic into your own products? When traffic comes too easily, many products lose any reason to improve.
"Licaitong," the wealth-management product tucked inside WeChat Wallet, is a textbook case. Online and off, WeChat Pay has grabbed plenty of market share; across the coverage of Shanghai's top-ten convenience-store chains, it is almost level with Alipay, which had a head start of many years.
In late January this year, WeChat got into the spare-change wealth-management business, much like Alibaba's Yu'e Bao. The result: once you put money into Licaitong, all you can do is wait for the returns — you can't spend it through WeChat Pay, and withdrawals aren't instant.
Why can't Licaitong work like Alipay and Yu'e Bao, sweeping spare change into wealth-management products automatically? Most likely because of Tencent's so-called "internal competition mechanism." Although the final settlement with the banks always runs through Tenpay, every wallet and wealth-management product at Tencent — WeChat Wallet, QQ Wallet, Licaitong, WeBank — has built its own separate payment system. The account systems are siloed and cannot talk to each other.
Beyond wasting development resources, the fact that they don't support one another dilutes the huge traffic each one gathers on its own.
This week, WeBank — in which Tencent holds a 30 percent stake — raised another round at a valuation above 5 billion dollars, still less than a tenth of Ant Group's.
As an independent Alibaba subsidiary, Ant Group holds the full suite of internet finance products today: Alipay, the "debit card" for ordinary users; the "wealth cards" — Yu'e Bao, Zhaocai Bao, and Ant Fortune; the "credit card," Ant Huabei; the lending services for small businesses and rural markets — "WangShang Dai" and "Ant Micro Loan"; and a credit-scoring system, Sesame Credit.
As internet finance goes mainstream, the banks are handing their voice over to internet companies. Alibaba, sitting on huge piles of cash and bonds, may one day grow a subprime-fueled capital market, much like the young subprime mortgage market that took shape in the United States in the 1980s.
Tencent, meanwhile, is still standing guard over the loose change WeChat brought in. That slowness may cost Tencent an enormously valuable chance.
This reliance on control runs through Tencent's various businesses. For a long time, QQ Zone did no marketing at all — because after a few experiments, the people involved found that marketing campaigns brought in next to nothing compared with a QQ pop-up. But when QQ Zone needed to make money and needed marketing, it had no such experience to fall back on, despite a ten-year history.
The same problem shows up at Tencent Video. Tencent Video has consistently spent the most on video licensing, yet the content it buys is not always run well. When The Legend of Mi Yue premiered at the same time on LeTV and Tencent Video in November 2015, many people assumed it was only on LeTV.
According to third-party figures, for the hottest TV series of the second half of last year — and despite QQ pop-ups, WeChat, QQ Zone, and Tencent Entertainment all at its disposal — Tencent's viewership came in at less than a third of LeTV's.
The problem grew starker once China's video platforms started making their own shows to pull in viewers. iQIYI made the breakout hit Qipa Shuo; Youku Tudou made Wan Wan Mei Xiang Dao; Sohu Video turned Da Peng into a star with Diaosi Nanshi. By comparison, when Tencent Video's marquee original reality show The 15 of Us (《我们 15 个》) launched in mid-2015, all it drew was ridicule — and not for any lack of promotional muscle.
Outside social networking, Tencent has shown little creativity in any field at all.
It is hard not to think of Baidu in its day. In the desktop era, the search engine was the gateway to the internet, and Baidu too once decided which sites you visited, which services you used, which ads you saw. But when the technology shifted, Baidu had already lost the ability to change.
Sitting comfortably behind that walled garden, holding every competitor down — apart from being the better investor, how is Tencent any different from the Baidu of those years?
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Cover image from Pixabay, Fast Company, and The Next Web
Translated from the original QDaily article. Original publication date retained.