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China Mobile and Tencent do battle over Weixin and the telco’s SMS losses

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Tencent, China’s largest internet company by market capitalisation, launched Weixin, a mobile instant-message application in 2011. The application, with a name that translates into English as “micro message”, has turned out to be anything but tiny.

In just over a year the number of Weixin users reached 100 million. That total jumped to 200 million within 18 months of launch. And the company expects to make the leap to 300 million users by the end of this month.

Why is Weixin so popular? In addition to standard text messaging, it offers instant voice messaging, as well as some ground-breaking location software. It is also a social network, allowing users to share conversations and even to meet new people in the surrounding area by shaking phones at a similar time (useful in bars, apparently).

Weixin’s success has now attracted the attention of China Mobile, China’s largest mobile carrier, which has been losing SMS business, as users send messages for free by routing them over the internet via services like Weixin’s. According to the telco’s financial data, SMS revenue has been in steady decline. In 2007, text messages accounted for nearly 12% of the company’s total revenue. In 2011, that percentage dropped to 8%.

China Mobile now feels that Tencent is offering it a raw deal. Reports from the Ministry of Industry and Information Technology (MIIT) suggest that users of Tencent applications like Weixin now account for 40% of data traffic over China Mobile’s mobile network.

So perhaps it shouldn’t come as a surprise that the mobile carrier has complained that Weixin is behaving like a rival telco. “Their business [instant messaging systems like Weixin] has become a serious threat to telecom operators – not only in text messages – but also to traditional voice services, including international telephone services, which is a big revenue contributor for us,” China Mobile’s chief executive Li Yue, warned last month.

One response has been to try to beat Weixin at its own game. China Mobile previously had a partnership with a service called Fetion (also known by its Chinese name of Feixing) offering similar mobile-based instant messaging services over the internet. But Fetion has failed to compete strongly, leading to media reports last November that China Mobile was thinking of scrapping the tie-up.

For the time being, China Mobile wants a larger share of Tencent revenue earned across its own data network, says Sohu IT. Last week the MIIT confirmed that the two companies had entered talks. Sohu IT reckons that Tencent will have to find a way to lower its consumption of internet bandwidth or it will have pay the mobile operator a bigger share of its revenues.

Tencent has a lot riding on Weixin. Last year the Shenzhen-based company experienced the second-slowest growth in annual profit since it listed in Hong Kong in 2004. The problem: a shift in internet usage from personal computers to mobile devices like smartphones and tablets, moves which hit advertising and online gaming revenues.

Of course, Weixin could help reverse that trend. The mobile messaging service is helping Tencent win new business among users who don’t use its other services, including its desktop messenging service QQ,

As a result, most analysts say Tencent will not want to offend the telco giants. Back in 2004, internet companies like Sina, Sohu and NetEase all felt the wrath of China Mobile when it unilaterally suspended access to some of their services in an effort to clean up ‘spam and other undesirable content’.

It looks unlikely that the telco operator will take such extreme action this time, as it would risk alienating millions of its subscribers who use Weixin, says Doug Young, author of Young’s China Business Blog.

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