[Top 15: Tencent] Every Company Dreams of Becoming Disney. How Far Can Tencent Get This Time?

Staking out every corner of entertainment and making the pieces work together is no easy job.

After a launch event at the end of March, Tencent Interactive Entertainment (Tencent IEG) got what looks like a good break: Tencent Comics, one of its units, was given a place on mobile QQ, Tencent's core social platform. Mobile QQ 5.6 and later now has an "Anime & Comics" entry, where users can browse hundreds of comics. Perhaps this makes their grand Disney dream look a little more within reach. Or rather, as they put it, a dream far bigger than just one Disney.

At that event, Tencent IEG again stressed the "pan-entertainment" strategy it first announced three years ago, which brings its four units (games, anime and comics, literature, and film and television) together. The official definition of "pan-entertainment" is: multi-field symbiosis built on the internet and the mobile internet, creating a fan economy around star IP. In plain terms, a work will no longer exist in a single form. Around a core IP, it will spawn novels, comics, animation, games, films and other products, and combining these forms organically will add to the IP's value.

Cheng Wu, a Tencent vice president, sketched the industry chain they have in mind in an interview with QDaily. "Literature, games, anime and comics, and film and television are content platforms that differ only in channel and form of expression. If we combine these forms organically rather than simply stitching them together, we can make an IP richer and strengthen its emotional impact on people, and the IP will live longer too."

(Cheng Wu, vice president of Tencent)

That fashionable word, IP, came up again and again, both from Cheng Wu and throughout the launch event. It stands for "intellectual property." An IP can be a novel, a comic or a film, and it covers not just the work itself but also the brand power of its characters. If you have followed this industry long enough, you will remember that Shanda once made this the core of its own "entertainment empire." Back then, the word simply wasn't as hot as it is now.

The two do have things in common, and Shanda's chain looked much the same. Starting from games, it bought Ku6 for user-generated video and partnered with Hurray! on film and television content; it bought literature sites such as Qidian and signed writers to develop them; it launched devices such as the Shanda Box and the Bambook e-reader... It tried to knit games, music, video, literature and film into a single online entertainment industry chain. But after more than a decade, Shanda still failed.

Cheng Wu remains confident.

That confidence comes from Tencent's many years in games. Games bring in more than 50% of Tencent's revenue every year, and they will remain the most profitable link in the whole "pan-entertainment" chain. Cheng Wu told QDaily that in the short and medium term, games are still the biggest opportunity both to make money and to reach users.

"The internet has shaped games for longer than anything else. The games industry has been developing for 15 or 16 years. It has fought off piracy and come this far on the internet model, so it already makes money well. Because games charge for in-game items, users can try them very easily, and since people carry their phones everywhere, they can play in spare moments. I think that is where the industry stands today," Cheng Wu said.

According to the 2015 Global Games Market Report released by the research firm Newzoo, China's games market will reach US$22.2 billion in sales in 2015, overtaking the United States' US$22 billion to become the world's largest, with annual growth of 23%, far above America's 3%. By 2018, Newzoo forecasts, the global games market will reach US$113 billion. This is certainly good news for Tencent.

The anime and comics unit, which began operating independently this year, is meant to be the next engine of IP development. Tencent Comics has signed agreements with several Japanese publishers, including Shueisha, Shogakukan and the Kadokawa Group, to bring in 500 licensed hit Japanese comics and 200 light novels. This year Tencent Comics plans to spend more than 100 million yuan on rights. Notably, buying content in bulk has defined Tencent's overall strategy over the past year: video rights from HBO and the National Geographic Channel, NBA live-streaming rights, a licensing deal with Sony Music, and more.

Seen across the whole industry chain, the point of building up anime and comics is to turn these original works into a source of intellectual property for further development. Animation and comics have a built-in advantage: they come with ready-made characters, stories and fictional worlds, so they are easy to spin off into other products, such as games or films, and to turn into money.

Besides buying foreign IP, Tencent also wants home-grown content. This year Tencent Comics put 50 million yuan into a fund to support Chinese comic artists. Modeled on online literature sites, it has set up a similar system of pay and support. Artists are signed and paid for their work. Once a work builds up a following and some influence, paid extras such as monthly tickets and tips are built around it, and the income is shared with the artist. For works at the top tier, it goes on to produce licensed spin-offs, such as animated series, films and games.

(Zou Zhengyu, general manager of Tencent's anime and comics business)

"If we take well-known anime and comics, adapt them and put them on Tencent's platform, we can certainly make money easily. But I have always felt that is a fairly short-term thing," Zou Zhengyu, general manager of Tencent's anime and comics business, told QDaily. "Besides, home-grown cultural works may suit Chinese people better, or suit more of them. For the long-term development of the cultural industry, leaning too heavily on foreign works is not a good thing. One day that well will run dry or hit a ceiling. To keep this going, we have to make the things Chinese people know best and understand best."

Over the past two years, Tencent has had a taste of success with Chinese comics. Of the 21,437 comics on the Tencent Comics platform, 6,336 are signed titles; 39 of them have passed 100 million clicks, and 201 have passed 10 million (not counting those past 100 million). Its flagship title, Zombie Brother (《尸兄》), has more than 5 billion clicks and ranks in the top three on Baidu's anime and comics chart (the other two are Naruto and One Piece). The 50 million yuan paid for its mobile game rights is the highest price ever paid to adapt a Chinese comic into a mobile game.

Cheng Wu's argument is this: more than a decade ago, who would have imagined that online literature would produce writers earning tens of millions of yuan? The implication is that original comics could go the same way. "When an industry reaches a certain point, it can take off explosively. In future the internet may bring new ways of creating comics, film and games alike, and how the industry will make money then is wide open."

Still, you can sense Shanda's shadow. Not least because Tencent IEG has also absorbed Shanda Literature, which was built around the old Qidian team. At the start of this year, Tencent Literature set up a new company, China Literature, to operate independently as a subsidiary. Its CEO is Wu Wenhui, Qidian's founder. Now the former Qidian team, too, seems to have become a source of IP for Tencent IEG's grand plan.

(Wu Wenhui, CEO of China Literature and founder of Qidian)

Chen Tianqiao planned for Shanda to become China's Disney. Ten years ago it had a foothold in every area of entertainment, and the shape seemed to be taking form. But in the end it never got past the outline.

Shanda may have missed one thing: a hit online novel does not guarantee that the TV series, films or games adapted from it will be hits too. Take the tomb-raiding novel Ghost Blows Out the Light (《鬼吹灯》), which took off on Qidian in 2006. Filming of the movie did not start until 2014, and it has still not been released. When a popular novel is turned into another kind of work, it often loses value because development drags on and interest fades. Meanwhile the unpredictable factors multiply: the quality of the final product depends on many things, and the original novel does not carry decisive weight. By the same token, you have surely seen bad films made from classic novels (the widely mocked new Dream of the Red Chamber, for one), and you have probably played bad games made from classic anime and comics (many games based on Marvel IP are seen as cash grabs).

"Combining literature with games" or "combining literature with film and television" is harder than it sounds. Combining different fields needs a complete industry chain behind it, and in that chain the only link Shanda controlled was buying the rights. In the end Chen Tianqiao had to admit that Shanda's games were never platform products to begin with, so Shanda could not grow, as Baidu and Tencent did, into a company that expands fast on the back of a platform product (such as a social network or search).

What makes or breaks a game may be the ability to promote it through distribution channels. An industry that looks as if it can be linked together through character IP in fact demands specialist investment at every link. In the board-game era, Shanda Games had the first-mover advantage. But in the mobile internet era it failed to win the advantage in channels and was gradually left behind. Disney's success rests on its expertise in every field, and that was not built overnight. As the chart below shows, Disney seized the market opportunity at almost every key moment, moving step by step through animation, film, television, theme parks and stage musicals to the entertainment industry chain it has today.

Another problem Shanda never solved was how to run the company itself. From the mass departure of Qidian's senior executives to Hou Xiaoqiang, Shanda Literature's former CEO, becoming a Buddhist monk, Chen Tianqiao's rather autocratic management style is seen as the main cause of Shanda's personnel turmoil.

Today, Shanda Games has been delisted, taken private and sold to a new owner. At Shanda Literature, President Wu Wenhui first walked out with Qidian's core team, and this year Shanda Literature itself was taken over by Tencent. Ku6 sold a 41% stake to Sky Profit and now faces an uncertain future as it tries to reinvent itself... And so Shanda, which once dreamed of owning the "full industry chain," ended up selling off its core businesses one by one and, sitting on 60 billion yuan in assets after delisting, turned itself into an investment company. The "Shanda entertainment industry chain" chart we drew below shows the ups and downs of its journey.

Tencent IEG now has an ambition much like Shanda's back then. But Tencent clearly believes that more than a decade of expertise and hands-on experience in games gives it more power to integrate. Games are Tencent's biggest profit center, so it is better placed to pull resources together. And the biggest difference from Shanda is that Tencent is much better at sustained development. Shanda Games, by contrast, has lived off the Legend of Mir series that made its name for almost ten years, and growth from its in-house games has gradually stalled.

One common criticism of Tencent is that it buys or takes stakes in small game companies and then turns their products into its own new game projects. Of course, seen another way, this also shows how well it can absorb outside resources.

Then there is a trump card that may hold even more promise: its social platforms. The game entry points on WeChat are already fairly mature, and they give a sense of how powerful games become when combined with social networking.

The latest move is the tie-up between anime and comics and mobile QQ. Of QQ's more than 800 million users, those born in the 1990s and 2000s make up 50.3%, and Tencent sees mobile QQ as the main home for the social needs of its future core users. Users can now find most of Tencent Comics' titles on mobile QQ, and Tencent's internal research shows a large overlap between the users of mobile QQ and those of Tencent Comics. Wu Qisheng, assistant general manager of Tencent's Instant Messaging Application Department, has said that mobile QQ will take up more of users' spare moments and will build in many entertainment features. Tencent IEG happens to be just the content supplier it needs.

According to the same Newzoo report, of China's games market, which will reach US$22.2 billion in 2015, smartphones (and smartwatches) will account for 19%, up 50% from last year, far faster growth than PCs, televisions, consoles and other devices.

A full-industry-chain strategy needs more than good IP and content; it needs a good business model that ties the content together. Here, Tencent's trump cards are still its two powerful social platforms, QQ and WeChat, whose huge ability to drive traffic guarantees content an audience. The fan economy that the "pan-entertainment" strategy depends on can also be pushed furthest through social platforms. In the interview, Cheng Wu said plainly that social platforms are Tencent's built-in advantage in pan-entertainment.

"Marvel wants to do this too, but Marvel is an offline company at heart. Offline costs are high and it can't find users to interact with, so it is still stuck with one-way creation, and getting feedback from users is slow. Tencent is an internet company. Once everything is connected, we can link up people in different fields, whether they create games, literature, film and television, or anime and comics, and we can also bring creators, works and users together. Five films a year is already a lot for Marvel, but Tencent can keep users together every day," Cheng Wu told QDaily. The chart below shows where Tencent's entertainment industry chain stands today. It still has a long way to go.

Shanda announced its dream of building a "Chinese Disney" around 2004 or 2005, and ten years have passed since. The numbers tell the story: at the end of 2005, China had 111 million internet users, a penetration rate of 8.5%. Today it has 649 million, a penetration rate of 47.9%, nearly five times higher. The full entertainment industry chain that could not be built then now has a market to support it, thanks to a much larger audience.

So Tencent seems to have better timing than Shanda did. What it must face next is whether it can pull resources together inside the company. This is exactly where big companies seem to have the advantage but in fact easily run into trouble.

Games, anime and comics, literature, and film and television sit in different business units. Their strength varies enormously, and games are by far the dominant one. In such circumstances, conflicts of interest arising from cooperation across units are quite common.

For example, Tencent Comics sold the mobile game rights to Zombie Brother to Zhongqing Longtu rather than to its in-house sibling, Tencent Games. Zou Zhengyu, head of Tencent Comics, has explained on many occasions that they valued Longtu's resources on mobile and its ability to develop and promote games. When licensing IP, Tencent Comics wants to keep its platform open, not limited to partners inside Tencent. Following market principles, it weighs which partner fits best, brings the most useful resources and can do the most to raise the IP's value, and then chooses the route that best suits that IP's development and spin-offs.

In other words, the path from Tencent Comics to Tencent Games is not the given that outsiders imagine. Each unit's own interests have to be weighed along the way.

In the second half of last year, Tencent IEG restructured its in-house development units, reorganizing its original 8 studios into 20 smaller ones grouped under 4 studio groups. Whether this reorganization makes work more efficient, responses faster and the structure flatter, as Tencent IEG says it will, may directly shape how Tencent IEG develops internally from here.

About Top 15

In every era, a few companies gather the most capital and the best talent and shape how society as a whole develops. QDaily believes that the companies shaping how we live are the core of today's business world.

So we have picked the 15 most important lifestyle companies in the world and in China: Apple, Google, Baidu, Alibaba, Tencent, Amazon, Disney, McDonald's, Starbucks, Nike, Xiaomi, IKEA, Uniqlo, Wanda and Vanke. This list will change as the companies' fortunes, the market and trends change. We will follow them, and their competitors and partners too.

Over the next month, we will publish a series of reports on how these companies are doing.