Tencent Built a Giant Intranet Out of WeChat, and Users Are Already Used to It | Top 15 Year-End Report

Apart from perfecting its giant intranet, Tencent didn't get much done this year.

In the first month of 2017, anyone riding Beijing's Subway Line 10 would have noticed that Nikon had painted the inside walls of several cars the bright yellow of its own logo.

For an ad that big, Nikon skipped the slogans and the photos of its cameras. It simply printed a huge QR code in the most conspicuous spot on the yellow car, with the words "Nikon China, Official WeChat" underneath.

A few years ago, an ad like this would have sent you to a website or a Weibo account.

Today, print ads that want you to pull out your phone mostly want you to add them on WeChat. Services people don't use very often increasingly put their effort into WeChat official accounts and service accounts, and many barely bother updating their own apps anymore.

WeChat now covers the whole of China's mobile internet population, and half its users spend 90 minutes a day on it.

People chat with family and friends on WeChat, discuss work in WeChat groups, read the news on WeChat, and scan a QR code to pay for dinner. For a growing number of Chinese people, WeChat is the internet.

So when Zhang Xiaolong, president of Tencent's WeChat Business Group, said in September 2016 that he was going to build "mini programs," no one dared miss out.

No One Dared Miss Out on Mini Programs

"WeChat mini programs are applications you can use without downloading or installing anything. They make the dream of apps being 'within reach' real — users can open an app just by scanning or searching."

In the early hours of September 21, 2016, a Moments post from Zhang Xiaolong introducing "mini programs" set off a party among developers and entrepreneurs.

Nothing had been announced yet about where to find them or how to use them — the product was still in closed testing — but mini programs had already been declared the next "WeChat official account" opportunity.

Within 24 hours of that post, developers had set up mini program discussion groups of no fewer than 500 people each. What they cared about most was what mini programs could do, and how to get into the closed beta as fast as possible. Over the National Day holiday, mini program hackathons sprang up in Beijing, Guangzhou and other cities.

On January 9, 2017, the first day mini programs officially went live, more than 200 of them launched, plenty of them from large developers: Trip.com Group, Meituan, Midea, Qunar. Even Toutiao — which competes head-on with Tencent News and gets hit with small-scale blocking on WeChat from time to time — built a mini program to pull in users, even though the display ads it lives on can't run inside one.

Mini programs came with too many restrictions. There is no "app store" for them inside WeChat. They don't track follower counts. They can't be shared to Moments. They can't be used to make games. They don't do fuzzy search — you have to type the exact full name to find one. And a mini program's name can't match an official account's, which makes searching harder still.

All of this gave developers plenty to complain about.

But one restriction almost nobody noticed: from the first day of development, mini programs did away with the hyperlink.

Mini Programs Are the New Frontier of Tencent's Intranet

When Tim Berners-Lee defined the World Wide Web 28 years ago, he described two things: the "web page," and the "hyperlink" that connects pages. Mini programs have killed the second one.

Part of the reason nobody seems to mind is that people are used to WeChat's control by now.

Four years of official accounts had already turned WeChat into an intranet: all the content sits on Tencent's servers, the video and the ads are served by Tencent, links inside an article can't take you outside WeChat, and a competitor's official account can simply be banned.

Mini programs raise the walls of that intranet higher. An official account at least leaves a "view original" link in the bottom left corner at the end of an article, which opens a web page when you tap it. Mini programs don't even have that.

Killing hyperlinks to control "traffic," turning the internet into an intranet — that is nothing new on the Chinese internet. The portals did it, and so did Taobao.

But mini programs have gone beyond news and selling goods. Whatever WeChat says its intentions are, a mini program is an app. An app controlled by WeChat, not by Apple or Xiaomi.

The effect is even larger for Android users, who make up more than 80% of China's phone market. A mini program's icon can sit directly on the phone's home screen, where it looks no different from an ordinary app. Once you tap into a mini program, you can only use that mini program — you can't go back to WeChat. Which makes it no different from an ordinary app.

Mini programs carry a lot of restrictions today. But however popular they get later, and however their scope is adjusted, the number of developers building them right now shows that whatever rules WeChat sets, China's internet services will follow.

The Intranet Protects Tencent's Increasingly Important Ad Revenue

Over the past two years, thanks to the growth of WeChat advertising, the "performance ads" in Moments have become the fastest-growing piece of Tencent's core business.

In April 2015, Tencent merged Guangdiantong, the department that ran most of its ad business, with the separate WeChat Advertising Center to form the Social and Performance Advertising Department, putting the "display" brand ads on websites and the interactive performance ads in Moments and QQ under one roof.

The numbers show that year-over-year growth for the whole online advertising division is falling — from 118% in the fourth quarter of 2015 to 51% in the third quarter of 2016.

But the drop is concentrated in traditional brand advertising: ads on the Tencent portal, pop-ups and the like. Part of that is the decline of the PC, part of it the government's restrictions on medical advertising.

The ads in the WeChat and Qzone feeds — what Tencent calls performance ads — have held growth above 80% for the past three quarters.

At this scale, that is a very high growth rate. Tencent's main rival, Baidu, has watched its ad revenue growth fall to single digits because of its medical-advertising scandal.

You could say Tencent's ad growth is entirely WeChat's doing.

Moments has gathered up nearly all the information most Chinese people share with each other. That is exactly where the value of advertising lies.

The intranet protects this advertising system. On an ordinary web page you would see ads from Baidu or Alibaba — the former usually interest-based ads matched to the page's content, the latter mostly merchants selling things.

The restrictions on official accounts make sure those competing ad channels don't exist there. And for a sizeable share of Chinese internet users, official accounts are the news.

Inside apps, mini programs have wiped out any possibility of selling ads through anything but Tencent's Guangdiantong.

Protected by all this, Tencent lowered the price of entry for WeChat advertising in 2016 and started showing Moments ads for nearby businesses based on where the user is.

If mini programs eventually bring in more users who enter WeChat through offline services, local advertising will work better still.

But the Intranet Hasn't Protected Its Gaming Business

Games are still Tencent's biggest source of revenue. It looks like a business with no risk at all: Tencent can funnel hundreds of millions of people in through QQ and WeChat.

WeChat's "More" page pushes game notifications on its own. Even if you have no interest whatsoever, the only way to clear the little red dot is to open it and take a look.

Tencent's games used to be copies — QQ Dance, QQ Speed, QQ Tang, CrossFire and the rest.

After succeeding with licensed titles like MU Online and World of Warcraft, Tencent switched to licensing and buying. Its most profitable PC games, Dungeon & Fighter and CrossFire, were licensed. So was League of Legends, which came later.

At the end of 2015 Tencent bought Riot Games, turning League of Legends, which it had only licensed, into its own game. In June 2016 it bought the Finnish mobile game developer Supercell, making Clash of Clans, Boom Beach and Clash Royale its own games too.

Yet in 2016 NetEase briefly passed Tencent on the iPhone, making more money from games. NetEase has no QQ or WeChat feeding it users.

On App Annie's revenue ranking for December 2016, all four NetEase games on the list, Onmyoji among them, were developed in-house. Of Tencent's five games on the list, which included Honor of Kings and Naruto Mobile, only those two were developed in-house — and Honor of Kings was already an old game from 2015.

In 2016 Tencent spent a great deal on investments — Renrenche, Douyu, Meituan-Dianping, Didi and others — but the largest single sum was the more than $4 billion it paid for Supercell (the total price was over $8 billion, though half the money came from Tencent's investment partners).

When a big company buys a game studio, there is almost no example of that studio going on to do better work.

The more likely reading is that in buying Supercell, Tencent bought two games, not the ability to make good ones.

The Same Shortage of Innovation Shows Up in Almost Every Business Outside WeChat

Judging by the financial numbers, Tencent is a great success.

Year-over-year growth in games and advertising may be slowing, but it is still growth in the double digits — remarkable for a company almost 20 years old with a market value above $240 billion.

Tencent Video launched in 2011, and 2016 figures put it first among all video sites for total views. Tencent Video also announced that it had reached 20 million paying members. But video sites make their money selling memberships, and what drives people to buy a membership is exclusive content.

Anyone can buy rights. Buying foreign films and TV shows is a game of capital, and has nothing to do with the ability to innovate. Original programming tests that ability far more.

According to figures from EntGroup, between January 2015 and October 2016 the Chinese video site with the most original programs was iQiyi, at 38% of all shows. Tencent came third with 21%, behind LeTV.

On quality, the most-watched original web drama of 2016 was iQiyi's The Mystic Nine, with 11.4 billion views on its own. Yu Zui (《余罪》) and Go Princess Go were second and third, and neither had anything to do with Tencent Video. Tencent's own shows, such as Rebirth of a Superstar (《重生之名流巨星》), came fifth, eighth and ninth.

By Douban rating, Tencent placed a single web drama on the 2016 list, Minor Superpowers (《微能力者》), with a score of 7.9.

WeChat's financial services are another example. As of 2016, WeChat Pay still had not been connected to Licaitong, two years on. Never mind WeBank, now in its third year: in the mini program it just launched, its account system still isn't linked to WeChat Pay, and users have to bind a bank card separately to use it. It runs apart from Tencent's other wealth-management products too — QQ Wallet, Licaitong — each with its own account system, none of them connected.

In the second half of 2016, Licaitong ran a series of subway ads. The message, roughly: you can manage your money inside WeChat, let me show you where to find it.

As for the future, Tencent is investing in AI companies. You may have heard of Microsoft's chatbot Xiaoice. WeChat actually has a chatbot of its own that does much the same things, called Xiaowei — except that you could use it and still not remember it.

Tencent has in fact put real effort into AI. In 2015 it set up an AI research institute with the University of Hong Kong called WHAT Lab. WeChat has a "WeChat Pattern Recognition Center." Tencent also has its Intelligent Computing and Search Lab, founded in 2015 as well.

But two years on, the Chinese company showing the most visible progress in AI is Baidu. It has now brought in Qi Lu, who has more than a decade of experience running large engineering teams.

Baidu's AI is still a clear distance behind Google's. But in an increasingly closed Chinese market, it may not need to be better than its rivals abroad.

The other future business Tencent takes seriously is cloud computing. The world's biggest cloud companies — Amazon, Microsoft, IBM, Google — are hemmed in by policy: they can't move their full operations into China, and they can't win serious contracts from the government or state-owned firms. Since 2015, executives from Tencent and Alibaba have been touring the country signing cooperation agreements with local governments.

Two years later, Alibaba Cloud is the bright spot in Alibaba's earnings, holding triple-digit percentage growth. Tencent can't supply any comparable number.

In every new market that poses a real technical challenge and demands sustained investment — the kind you can't solve by buying companies and playing investor — Tencent has made little headway.

This company, which has taken over our daily lives, looks less and less like a technology company.

About the Top 15 Year-End Report

2016 was a turbulent year around the world. Judging by how companies performed, the market leaders had a harder time of it than the challengers chasing them.

The Top 15 companies QDaily follows for the way they lead changes in how we live did not have an easy year as 2016 came to a close, and they all shared exactly one problem: a ceiling.

Whether developing new products (Apple's watch and car) or developing new users and channels (IKEA moving into e-commerce), these industry leaders are all searching — urgently, and perhaps blindly — for the "next" engine of growth.

Breaking through that ceiling is harder than it looks. The 2016 Top 15 year-end report is not all good news.