Tencent in 2014: Pony Ma's Belated Fright and the Anxiety Ahead

Top 15 Year in Review: Tencent

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Tencent's Chess Game After WeChat

For Tencent, WeChat's explosive success was most likely an "accident."

In October 2010, Kik, a free chat app built on the phone's address book, signed up 1 million users within 15 days of launch. Zhang Xiaolong, then general manager of Tencent's Guangzhou R&D department, suddenly saw that the mobile internet would produce a new kind of instant messenger, one that could seriously threaten QQ. After thinking it over for an hour or two, he emailed Tencent CEO Pony Ma and proposed that Tencent build a product of its own in this space. Ma soon wrote back to agree. And so the WeChat era began.

That accident has left Tencent uneasy ever since: what if WeChat had come not from one of its own teams but from a competitor? The thought is frightening.

The unease made Ma see that what Tencent does best is still communications and social platforms. Only by holding tight to that core, and reaching out into every related industry, could it keep its commanding lead in the market. In 2014, Ma said, Tencent finally went back to what it really is: a connector.

You could see it over the past year. Tencent began handing its non-core businesses to partners: in search, it teamed up with Sogou; in e-commerce, with JD.com. What Tencent itself provides is the underlying platform for communications, user authentication, storage and distribution, plus a platform for transactions and payments.

Tencent also rushed to buy stakes in a string of companies. In our roundup below, you can see the giant has placed more pieces on the board in O2O, healthcare, real estate and media. Whether to protect itself or to fight competitors for market share, Tencent, driven by anxiety, went on the offensive again and again, so as not to end up like Baidu, a company that fell behind because it stood still.

This year Tencent also found a new competitor in Xiaomi, whose user numbers, user loyalty and ecosystem of smart devices have put Tencent on guard. Its most important weapon against Xiaomi in the years ahead is WeChat.

This year Tencent laid out a very large plan. In the years ahead, it will have to digest it.

WeChat: From Chat App to Ecosystem

At first, Zhang Xiaolong was clear about what WeChat should be: "We only do one thing. A product can have only one positioning, or one main function." As recently as a year and a half ago, he still defined WeChat's core this way: "WeChat is a messaging system. Its core is people and information, and they flow through the system."

WeChat's shift from "light" to "heavy" set off a wide debate in the industry in 2013. Asked whether turning WeChat into a platform would bloat this once-simple product, Zhang explained that whether something is bloated depends not on how many functions it has, but on whether users, in the experience they finally get, feel it is bloated.

By the end of 2014, WeChat had clearly gone a long way down the road to "heavy." Today's WeChat is an e-commerce channel, a game console, a wallet, a code scanner and countless stripped-down third-party apps rolled into one. WeChat now describes itself as an ecosystem, a platform, a "forest."

In fact, WeChat has made many trade-offs to keep you from feeling the "bloat." Business service accounts, for example, appear only if users choose to follow them, so their functions stay out of sight. Still, more often what you notice is the downside of getting "heavy." Can't tell "official accounts," "subscription accounts" and "service accounts" apart? Dianping's entrance tucked under "Wallet" in the "Me" tab? Putting up with the baffling review process for official accounts while wondering why Moments is overrun with ads?

Our guess is that whether WeChat can survive this transition, from a pure "chat app" to an all-in-one "platform," will go a long way toward deciding the future standing of both WeChat and Tencent in the industry.

Expansion and Positioning

Looking back at 2014 a few years from now, Tencent's moves this year may make more sense. Every company may feel deeply threatened by how Alibaba and Tencent performed this year, but the company that is actually most afraid is Tencent itself.

1. O2O

This year Tencent partnered with many of the biggest companies in vertical sectors, handing its non-core businesses to them and reaching into the areas it considers most promising.

1. Finance

In January, WeChat quietly launched Licaitong, a money-market fund product, and stepped into internet finance. Right after came the Spring Festival red-envelope campaign, an unprecedented success that let WeChat "do in one night what took Alipay 8 years." Over the following year, Didi red envelopes flying everywhere got you into the habit of paying with WeChat. WeChat is now one of the two main ways you pay online. You may find it hard to believe that WeChat's payment function launched less than a year and a half ago.

1. Tech media

New media in China is a lopsided industry. Professional outlets (such as Huxiu and 36Kr) cluster around tech and venture capital, while lifestyle, finance and current-affairs news is scattered across millions of WeChat official accounts, with no central place to find it. This year Tencent clearly wanted to strengthen its professional standing in tech and venture media. It bought the China rights to well-known American tech outlets such as Business Insider and ReCode and folded them into its tech channel. With these two partners on board, more foreign partners will likely follow.

1. Video rights

The fight among video sites is still deadlocked. Tencent has cut a bloody path through it on the strength of its content (read: cash-burning) muscle. This year, Tencent Video's average daily mobile reach grew 5-fold, and its advertising revenue grew 2.7-fold year on year.

Tencent's Q3 2014 earnings report specifically noted a marked rise in Tencent Video users and said the company would reallocate its organizational resources to focus better on video and mobile. So in 2015 we will see Tencent stream 900 episodes of HBO series, including Game of Thrones and The Newsroom, exclusively; open a National Geographic Channel section; livestream 50 online concerts; and produce its own year-long reality show, We 15 (《我们 15 个》)...

In other words, Tencent Video wants to be more than a big platform for playing content. It wants a hand in every link of the industry chain, from acquiring content to distributing it, and to build a business that spans the whole chain, upstream and downstream.

So what is Pony Ma worried about? Let us count, from smallest to largest.

Worry No. 3: Tencent on PC, or Tencent on Mobile?

At the much-publicized World Internet Conference in Wuzhen, Ma said WeChat is not as powerful as many people imagine: "Many people say Tencent already has its ticket onto the mobile internet boat, but as I see it, that ticket is only for standing room."

This was not just modesty. Tencent's financial statements show that more than half its revenue currently comes from online games, and that share is rising.

Over the past six months to a year, the rules of the internet game have changed sharply; this was when the tipping point from PC to mobile came. On Tencent's current position, Ma said: "In the shift to the mobile internet, Tencent has so far only captured what we do best, communications and online communities. In e-commerce, search and the other areas where we came up empty on the PC internet, there is still a lot we can't do."

As competition for distribution channels from 360, Baidu, Wandoujia and others heated up, Tencent also joined the fight for entry points, and Yingyongbao, its app store, once seen as a weak spot in Tencent's mobile business, was brought back into play. Starting in January 2014, Yingyongbao combined 12 distribution entry points, including QQ Music, Tencent Weibo, Tencent Video, Qzone and Tencent Game Hall, and became the single platform for pooling and distributing traffic across Tencent's channels. Fed traffic by WeChat and mobile QQ, Yingyongbao became the fastest-growing app tool of the year. According to Tencent, Yingyongbao now distributes 110 million items a day, half of them games.

Not being left behind in the mobile era is also why Tencent is most wary of Xiaomi. Because Xiaomi controls the phone, the user's first point of entry, it has a built-in advantage in the mobile internet era. MIUI's 70 million users still trail WeChat's 468 million, but Xiaomi, which controls both the software and the hardware, has more loyal users and a firmer grip on distribution than WeChat.

Worry No. 2: Why Hasn't QQ Become the Gateway to Mobile?

You may not know it, but mobile QQ currently has more users than WeChat. As of the third quarter of 2014, Weixin and WeChat together had 468 million monthly active accounts; mobile QQ had 542 million.

So why hasn't QQ, with all its years of accumulated users, become Tencent's gateway to mobile? The answer lies in who uses QQ and who uses WeChat.

• QQ covers every age group; you will find plenty of QQ users among students and among middle-aged and older people.
• WeChat has a large user base in tier-one cities, but in tier-two, -three and -four cities and in the countryside, QQ and mobile QQ are the more mainstream platforms.

Put another way, QQ dominates among low-end users (those with less money to spend). WeChat, by comparison, has users with more spending power, more stable networks of social relationships and a link to the real world, which makes it a better foundation for Tencent's grand strategy. So although mobile QQ has more users than WeChat for now, and the two are growing more alike in function, the tool of greatest strategic value to Tencent will remain WeChat.

Of course, Tencent, a champion of internal competition, has not neglected mobile QQ either. In May 2012, Tencent overhauled its internal structure and merged three business units, QQ, Qzone and mobile QQ, and QQ has pushed into mobile without hesitation. Because QQ and WeChat users differ, mobile QQ is following a strategy of "surrounding the cities from the countryside." We think Ma may not need to worry about WeChat and QQ competing, because that is good for Tencent: the rivalry pushes each to grow.

Pony Ma's Biggest Worry

At the top of Ma's list of fears is probably Tencent turning into a "big" company.

In earlier years, online games brought Tencent rich profits, and Tencent used them to plunge into many fields. Looking back, Ma has said that in this period Tencent "took some detours." So this year, Tencent began to cut back.

As Tencent grew huge, it inevitably lost some agility. Weaker innovation and a duller sense for what is new are problems every "big company" will face. Tencent is no exception.

Ma knows this, and that is why Tencent has always encouraged internal competition. Internal competition in which the winner takes all wastes some resources, but the benefits are plain: it keeps teams from growing complacent and spurs innovation inside the company. After all, WeChat itself was a product of Tencent's internal competition; it was not born in the original QQ team.

In fact, Tencent has played aggressively for the past few years, launching a stream of new products and chasing new trends in social networking, the mobile internet, e-commerce and other fields. As Ma puts it, whoever can read the industry's direction and best meet users' deeper needs will win users' favor; that is the law of survival in the internet industry.

In May 2012, Tencent overhauled its organizational structure, moving from the Business Units (BUs) system it had used for seven years to the current Business Groups (BGs) system. It regrouped its businesses into 6 major groups, including the Interactive Entertainment Group (IEG), Social Network Group (SNG), Online Media Group (OMG) and Mobile Internet Group (MIG), and set up the E-Commerce Holding Company (ECC). The aim was to reorganize the businesses and structure around the main directions of the internet and the needs of mainstream users. The WeChat Group (WXG), founded this May, can be seen as the latest such regrouping.

WeChat, for its part, grew up outside Tencent's corporate system. Its internal culture, management style and incentives all differ from those of the rest of the Tencent Group. In a way, this bolted-on status has kept the WeChat team unusually alert and agile, the two qualities that matter most in internet competition today.

What 2014 Brought Tencent

2014 was a turning point for Tencent. Its revenue still comes mainly from online games, and even if, as Ma says, Tencent holds only a "standing-room ticket" to the mobile internet, the battle for the mobile era has only just begun. Owning half of the top 10 mobile apps, Tencent has already been dealt a strong hand.

The Top 15 are: Apple, Google, Baidu, Alibaba, Tencent, Amazon, Disney, McDonald's, Starbucks, Nike, Xiaomi, IKEA, Uniqlo, Wanda and Vanke. The list will change as the companies' businesses, markets and trends change. We will follow them, and their competitors and partners too.

For why we set up the Top 15 reporting project, click here for an article we think turned out rather well.

Cover image from flickr