Tencent Started a New Round of Competition — and Deepened Both the Convenience and the Monopoly of the Chinese Internet | 2017 Company of the Year

The Chinese-language internet has gradually become a centralized network built around Tencent and its partners.

Pony Ma has changed.

In early December 2017, Fortune magazine's annual forum convened in Guangzhou, where Pony Ma sat down for a half-hour conversation with Fortune executive editor Adam Lashinsky. These events — big names on stage talking big ideas, corporate executives paying steep prices for a seat and a chance to network — tend to produce very mild conversation.

At first, the two stuck to anodyne topics: how WeChat came to be, artificial intelligence, nothing sharp. Lashinsky closed with a gentle question: "This morning Mr. Jack Ma said he respects you very much" — a reference to the diplomatic non-answer Jack Ma had given that morning when asked about his relationship with Tencent.

But Pony Ma was not in a diplomatic mood. He took up the thread and said he had known Jack Ma for many years, and that each company had once won its own market — but that now "there are probably a dozen or more areas where we compete, and it's been unprecedented in its intensity."

He then attacked the "empowering other companies" line that Alibaba had been pushing in every public venue, calling it a centralized way to control smaller firms. "If in the future 100 percent of your channels are inside your ecosystem," he said, "your fate is basically in someone else's hands — and so is your profit." Tencent, he declared, would pursue "decentralized" empowerment: "Tencent doesn't own the house. We don't say we'll rent it to you or let you run a stall in our mall. We let you build your own house — your fans, your customers, all yours in the end."

In the past, Pony Ma had kept a mild, deferential public image. He rarely talked about competitors, and almost never went after another company so directly. The one exception was the early 3Q War. In 2013, when he and Jack Ma shared a stage at the launch of ZhongAn Insurance and Jack Ma laid out Alibaba's plans to challenge WeChat in social, Pony Ma merely replied, politely: "Every field will have its own segmented strengths. Everyone can build on what they do best."

But over the past year, Pony Ma grew combative. He commented in Moments that ofo had no chance of winning, and that Alipay's investment in bike-sharing companies was hurting small investors. When someone posted a Moments update joking that the jianghu had formed an anti-Alibaba alliance, he dropped into the comments to write "things always reverse at the extreme."

Pony Ma's shifting public persona moved in lockstep with Tencent's aggressive expansion.

In 2017, Baidu pulled back across the board, and its advertising lead over Tencent shrank steadily. Alibaba, for its part, had largely stopped talking about social.

Instead, Tencent and a roster of its portfolio companies pushed into the retail market Alibaba had long dominated. Meilishuo and Mogujie tested the waters; the WeChat team followed; WeChat mini programs became an e-commerce platform.

In the final month of 2017, Tencent made back-to-back investments in Vipshop and Yonghui Superstores, a direct challenge to the "New Retail" concept Alibaba had been promoting for over a year. Meanwhile Tencent's core businesses — social and gaming — looked unbeatable: WeChat kept growing, and the year's two biggest gaming sensations, Honor of Kings and "chicken dinner," both came from Tencent.

Controlling both capital and traffic, Tencent invested in 113 companies over the past year — a third more than Alibaba and Baidu combined. Today, every internet business you can think of has Tencent, or a Tencent-backed company, inside it. The old balance among the "BAT" trio is gone.

Contrary to the "decentralization" Pony Ma proclaimed, what powered Tencent's 2017 explosion was precisely a centralized internet — a Chinese-language internet that turns around WeChat.

That centralized internet pushed Tencent's market value past $500 billion on November 20, 2017, the first Chinese listed company to clear that mark.

Tencent's sheer weight even made Apple — a company that never bends for an app — make an exception. Five months after the WeChat "appreciation" dispute, Apple revised its App Store rules to let apps accept WeChat Pay for "tipping" digital content.

As traditional companies lean ever harder on internet channels, and internet companies move offline, Tencent's grip will only tighten.

Convenient communication is a good thing, and nothing is more convenient than a messaging tool that reaches everyone. As a centralized platform, WeChat has lowered the cost for businesses and individuals alike to use the internet.

But the internet was built from the start to be "decentralized," precisely so that no single node could affect the whole network. And Tencent has never been shy about using its control to crush competition. A recent example: it blocked large numbers of individual users and official accounts for forwarding Double Eleven Tmall red envelopes.

Nor is Tencent the only force that can control this network. In mid-2017, the People's Daily and Xinhua News Agency fired off consecutive broadsides naming Honor of Kings, wiping $15.1 billion off Tencent's market value in a single day. Content controls on WeChat also tightened: entertainment official accounts vanished in batches; reporting on Beijing's eviction of migrant workers, and commemorative articles about certain events, disappeared almost instantly — with unprecedented efficiency.

The explosion of Tencent's influence in 2017, and the even larger changes it will bring, is why QDaily chose Tencent as its Company of the Year.

Hooked on Traffic and Capital, Former Challengers Become Tencent's R&D Centers

The Fortune forum in December was the first time Pony Ma had spoken at length at an overseas-media event since 2011, when the U.S. tech-and-venture outlet TechCrunch came to Beijing to host a conference.

That TechCrunch conversation was pointed — it covered copycatting, stifled innovation, and Tencent's failed group-buying business. Pony Ma was fairly candid in admitting that Tencent had a Microsoft-like reputation for killing innovation, and he said the company had to change, because no single company can do everything.

In 2011, WeChat had just launched; it was not yet China's only social app. The hottest internet business that year was group buying, but Gaopeng — Tencent's joint venture with the original group-buying pioneer, Groupon — was a disaster. As Wang Xing put it at the same event: "They made so many mistakes, I don't know where to begin." Meituan had just raised $50 million in a round led by Alibaba.

But after Meituan and Dianping merged, Tencent became Meituan's most important investor, bringing both capital and traffic; Alibaba had already exited in 2016. The same pattern played out in other mergers of an industry's two largest players — Didi and Kuaidi, Meilishuo and Mogujie — and those companies all leaned toward Tencent in the end.

Gradually, the question Chinese entrepreneurs had to answer shifted from "What do we do if Tencent copies us?" to "How do we get Tencent to notice us?"

Traffic costs and capital determine how fast an internet company can grow. Plenty of companies have money. But only Tencent can reach every single Chinese internet user. The cost of acquiring a new user online had long since passed 200 yuan for Alibaba and JD.com. What Tencent has is users.

For any new service, launching on top of WeChat — letting users register and log in with their WeChat accounts — is the obvious, no-brainer move. In mid-2016, Liu Qiangdong said half of JD.com's new users were coming from WeChat — and that was happening even as JD.com blanketed the country with advertising. Today, Tencent's combined stake in JD.com already exceeds that of the company's own founder, Liu Qiangdong.

When Wang Jun left BGI to found iCarbonX, he turned down Neil Shen of Sequoia China and chose to take Tencent's money instead. One reason, Wang Jun explained, was the power of the WeChat platform — every person on WeChat is a potential customer or data source.

Wang Jun's thinking is typical of many startups today: take Tencent's money, get Tencent's traffic, become part of the Tencent ecosystem.

Tencent is the most active investor in China, having now outpaced the venture-capital firms too. In 2017, Tencent completed at least 113 investments; Alibaba did 45, Baidu 39. For three years running, Tencent's investment count has topped the combined total of Alibaba and Baidu, and the gap keeps widening.

As Pony Ma said, Tencent no longer does every business itself. Instead, its invested partners have entered every market.

In every industry still burning cash, the market leader has Tencent's backing: Didi, Meituan, Mobike, Kuaishou — all of them.

Tencent's aggressive investment in new internet companies is like betting on the front-runner in every race, so there are no surprises. And its stranglehold on traffic makes almost every internet company willing to take its money.

We went through the top 100 apps on the App Store: only 40% were independent apps outside BAT, and of those, five came from Toutiao and five from Meitu. The rest were mostly offline-utility apps for banks, China Unicom, and China Mobile. Genuinely new internet services could be counted on one hand.

These companies, dependent on Tencent's capital and traffic, can no longer challenge Tencent. They work like Tencent's R&D centers, testing opportunities across different fields and then using WeChat's traffic to enter each market. And not siding with Tencent carries a real cost: before their mergers with Didi, both Kuaidi and Uber China had been blocked by WeChat for long stretches.

In 2017, there was one more reason to take Tencent's money: it made going public easier.

The Hong Kong Stock Exchange Now Bears the "Ma" Name — Raising Capital Gets Easier for Tencent and Its Portfolio

Over the year, Tencent's stock price doubled. In November, its market value passed $500 billion and briefly overtook Facebook to become the fifth most valuable company in the world — even though Facebook's monthly active users had already reached 2 billion, more than twice WeChat's.

Tencent's years of investing also came full circle in 2017.

In the final quarter, two businesses Tencent had spun off or backed went public in quick succession: China Literature, in which Tencent holds a 65% stake, listed in Hong Kong and surged as much as 100% on its first day of trading; Sogou listed on the New York Stock Exchange, raising $585 million. And Yixin, a car-loan platform Tencent had invested in, listed in Hong Kong after its IPO was oversubscribed 560 times; the stock shot up 30% on opening day.

The businesses run by China Literature and Yixin are not especially familiar to Hong Kong investors. Their surges owed largely to Tencent. Investors in Hong Kong have already anointed Tencent as the grand narrative that will succeed Li Ka-shing. Today the combined market value of three Tencent-affiliated companies accounts for more than 12% of the Hong Kong Stock Exchange's total.

"People expect China Literature to be the next Tencent, to make up for having missed Tencent," one institutional investor told Fortune. The upshot: from China Literature to Yixin, any stock tied to Tencent has drawn at least several-dozen-times oversubscription on listing in Hong Kong.

Two more "Tencent system" businesses — music and healthcare — are poised to list in Hong Kong. Bloomberg, citing people familiar with the matter, reported that Tencent Music has hired investment banks for its IPO, with plans to list in Hong Kong in 2018 and raise at least $1 billion. WeDoctor, a telemedicine group Tencent has invested in, plans to close a new $500 million funding round before the Lunar New Year, then list in Hong Kong.

Easy access to Hong Kong's capital markets means not only that Tencent can collect bigger investment returns and keep investing in more companies, but also that its listed affiliates can raise capital cheaply — giving them a stronger competitive position going forward.

The Super-App WeChat Keeps Growing — Even Apple, Which Controls the Operating System, Gave Way

In April 2017, WeChat announced that long negotiations with Apple had broken down, and that it was shutting off the "appreciation" tipping feature for official accounts on the iOS version of WeChat — because Apple was demanding a 30% cut of all digital-content transactions.

It was rare for an iOS app developer to drag its conflict with Apple into the open. Apple responded firmly, saying WeChat was welcome to follow the rules and update its app.

The rule Apple cited dated to 2010, when Apple set it to undercut competitors like Amazon: all virtual-goods transactions on iOS must go through Apple's payment system, with a 30% commission to Apple.

Apple has always enforced its rules strictly. The entire 360 suite of apps was once banned from Apple for a year for collecting users' phone data without permission.

But WeChat is not 360 Security Guard. Today WeChat is the app nearly every Chinese smartphone user has installed — and keeps on the home screen. By Tencent's own figures, half of China's mobile internet users spend an average of 90 minutes a day in WeChat. For a sizable share of Chinese people, this one app — chat, news, shopping, ride-hailing, mobile banking, financial services, and more — is essentially the entire internet.

Five months after the standoff, Apple backed down. It not only waived its cut of "person-to-person appreciation," it also let third-party developers integrate non-Apple payment services for small transactions.

Faced with WeChat, the super-app, Apple loosened its grip on the iOS operating system. But WeChat's own monopoly did not budge an inch: inside the WeChat app, you still cannot use Alipay to tip the author of an official account.

Lax Regulation and Telecom Operators Let Tencent's Monopoly Deepen

By figures China Unicom recently released, Tencent's co-branded "King Card" SIM has signed up 50 million users in 14 months.

China Unicom has co-branded cards with Baidu, Tencent, Alibaba, JD.com, Bilibili, Didi, Toutiao, and others — but the Tencent King Card has a pull all its own.

For 19 yuan a month, the Tencent King Card makes every Tencent app data-free: WeChat and QQ use no data; Tencent mobile games like Honor of Kings and CrossFire run on unlimited data; streaming QQ Music, Kuwo, and Kugou — the three most-used music apps, all now owned by Tencent — is unlimited; watching Tencent Video is unlimited. Open Mogujie to watch a livestream and that traffic is covered too.

Tencent had already used investment to lock up dominant video and music libraries. Now it has teamed with a telecom to subsidize the data on top. Users pay far less in data fees for Tencent services than for competitors' — and the competitive moat is dug.

The "BAT" Balance Collapses as Tencent Moves Into Alibaba's Core Business

For years, Baidu, Alibaba, and Tencent were seen as the three controllers of the Chinese-language internet: Baidu decided how people found information, Alibaba decided what people bought, Tencent decided how people socialized.

On mobile, fewer people open a search engine and more open WeChat. Advertising budgets have shifted accordingly.

After the medical-advertising scandal erupted in 2016 and Baidu went through management upheaval, its revenue growth nearly stalled and its profit fell to around 30% of 2015 levels. In the PC era, Baidu used its search monopoly to control the traffic gateway to the Chinese-language internet — but that model did not carry over to mobile.

Over the past year Baidu shut down its cash-burning O2O business, sold Baidu Waimai to Ele.me, and spun off its games business. Baidu's advertising has recovered growth in recent quarters, but Tencent has caught up. Riding WeChat Moments advertising, Tencent's ad revenue has grown more than 40% for five straight quarters.

After advertising, Tencent doubled down on retail.

Having walked away from its own e-commerce business three years ago, Tencent has now invested in every major e-commerce player outside Alibaba. Beyond JD.com, other Tencent-backed platforms include Mogujie Meilishuo (women's fashion), MissFresh (fresh groceries), Pinduoduo (group buying on WeChat), Zhuanzhuan (secondhand goods), and Xiaohongshu (women's lifestyle).

In mid-December, Tencent bought into Vipshop, China's third-largest e-commerce platform, filling a gap in branded apparel — a category where JD.com has poured in money but struggled. Tencent brought JD.com along for the deal, and together they took 10.5% of Vipshop; Tencent became Vipshop's largest shareholder outside founder Shen Ya. In the statement announcing the partnership with Vipshop, Tencent stressed the "rising demand" among WeChat and QQ users to "search for, discuss, and buy branded apparel."

Meanwhile, WeChat mini programs — meant at the start of the year to help businesses enter offline services — pivoted in the second half to distributing online traffic, rolling out a series of features to support mini-program e-commerce.

Data from Mogujie showed that on Double Eleven, new users arriving via mini programs outnumbered app-sourced new users by 4.2 to 1; a single product shared via a WeChat mini program reached a peak of 110,000 shares. Spreading e-commerce products through WeChat's social graph became easier than ever. By contrast, Taobao and Tmall products shared to WeChat cannot be opened directly — users must copy a link and paste it back into Alibaba's own apps.

WeChat's recently updated version 6.6.0 pushed the mini-program entry point further still: pull down from the home screen and your most-used mini programs appear right away.

On December 11, Yonghui Superstores announced that Tencent would take a 5% stake in the company. Tencent would also inject capital into Yonghui Cloud Create, Yonghui's controlling subsidiary, taking 15% of it after the investment. Based on Yonghui's pre-suspension share price, Tencent's cost for the 5% stake was about 4.65 billion yuan. The amount actually paid would be slightly discounted, but it still ranked as Tencent's largest domestic investment of 2017.

Yonghui Cloud Create's two flagship projects are Yonghui Life — a fresh-food convenience chain running since 2015, now with 200 stores — and Super Species, a fresh-food supermarket format launched in January that year, similar to Alibaba's Hema Xiansheng model, with 24 stores already open.

Online or offline, whatever Alibaba is doing, Tencent is moving into it too. Meanwhile, Alibaba has stopped betting on social as heavily as it did the previous two years — the only social tool it still runs is the enterprise product DingTalk.

But Business Is Not the Only Force That Shapes a Company

Honor of Kings became a phenomenon, pulling away from Onmyoji in 2017 to become the most profitable mobile game.

But mid-year, the People's Daily and Xinhua News Agency attacked Honor of Kings in quick succession, charging that it distorted history and got elementary-school students "addicted." In one day, Tencent's market value on the Hong Kong Stock Exchange evaporated by $15.1 billion. Investors may not care much about social responsibility, but they care deeply about which way the political wind blows.

In 2017, ever-stricter internet regulation showed up everywhere at Tencent.

In June, a batch of entertainment accounts — including Yansu Bagu and Dushe Dianying — were permanently shut down; WeChat was their main platform. A month later, the Beijing Cyberspace Administration summoned the responsible executives at Sohu, NetEase, Phoenix, Tencent, Baidu, Toutiao, Yidian Zixun, and other sites, ordering them to clean up eight kinds of "disorder" on self-media platforms, including "misreading policy and deviating from correct guidance," "fabricating and spreading false information," and "flaunting wealth and pleasure to promote distorted values."

After that, discussion sparked by Beijing's eviction of migrant workers rarely lasted 24 hours on WeChat; the phrase "low-end population" went straight onto WeChat's list of blocked search terms.

Such controls existed before WeChat, but content used to be scattered across individual websites and was hard to scrub fast and completely. WeChat requires official-account content to live on Tencent's servers, with no external links — delete it on WeChat and it is gone entirely. That makes information control through WeChat exceptionally efficient. Today Toutiao and Weibo work the same way.

With Honor of Kings and the Wanda example as precedents, internet companies rushed to fall in line with rapidly tightening policy. Party branches went up inside company after company.

Jack Ma said in various settings that Alibaba's "study of the 19th Party Congress documents is probably more diligent than any other company's."

Pony Ma said nothing publicly about how he was studying. But around the 19th Party Congress, Tencent published an article saying that more than 7,000 of its employees are Party members — about 23% of total headcount — and that Party membership grows by nearly 1,000 a year. In that article, titled "Tencent Pledges Loyalty to the Party," Tencent also pressed one theme: WeChat, too, was built by Party members.

Today, a cube-shaped sculpture stands in front of Tencent's old headquarters building. Inscribed on it: "Start a business together with the Party." Inside the Tencent building, a large banner has gone up: "Party building leads the red heart of the internet."

Cover image via Visual China