Always ready for a chat

Ma Huateng stands next to the iconic penguins used in Tencent’s logo

During a routine baggage check at an airport, an anxious security guard stopped Tencent’s co-founder and chief executive Ma Huateng in his tracks. There was nothing wrong with Ma’s baggage, the guard explained, but he wanted to know whether WeChat, Tencent’s popular mobile messaging system, would be offered free for much longer.

Responding, Ma reassured the man that WeChat wouldn’t cost anything, says Caijing magazine. The assurance was soon being circulated in cyberspace, to the delight of many of WeChat’s 350 million users.

The fact that an airport security guard would even recognise Ma says something about his growing celebrity status. He now runs one of China’s most powerful internet firms and the biggest by market capitalisation. Tencent is the fourth largest internet brand globally by market value – only Google, Amazon and Facebook stand above it.

Ma, 41, was born in Guangdong province and studied computer science at Shenzhen University. In 1998 he came across AOL’s chat service ICQ. He realised there was no Chinese language equivalent and decided to design one, founding Tencent with Rmb1 million ($163,000) of capital.

Since then the company has grown at a blistering pace. Ma made his next move by leveraging the popularity of his chat service QQ to drive traffic to other product areas like online games and social networking sites. But it is the introduction of WeChat that has tightened Tencent’s stranglehold as China’s king of chat. WeChat combines elements of WhatsApp and Facebook in its design but analysts have been struck by the innovative manner in which it packages so many features, as well as by its ease of use. All told, it marks a first for China’s internet: a homegrown product with a competitive edge over the offerings of its Silicon Valley rivals.

As a result, since its introduction in 2011, WeChat has grown with staggering speed, particularly in allowing users to send text, photos and audio messages for free to other subscribers. Tencent has also added some distinctly Chinese features: for example, in issue 145, we reported that many WeChat subscribers use its “look around” function, which helps singles hook up in bars (the initial chat-up line being digital). The most recent addition is e-commerce (more of which later).

Then again, Tencent’s growth doesn’t please all. For example, there has been a dispute with China Mobile, the country’s largest telco. The mobile carrier complained that WeChat was threatening its revenues from traditional text messaging system and that heavy WeChat usage on smartphones was overburdening its network. It then demanded that Tencent enter into a revenue sharing agreement.

The move stirred a furious response from China’s mobile users, with many accusing the telco of looking for a scapegoat for its own lacklustre performance. Soon after, China Mobile backed down and stopped pressuring Tencent to charge fees (see WiC188) – the issue that so worried that airport security guard.

But WeChat’s success has now made it a target for other rivals too. Worried about Tencent’s move into online shopping, Alibaba Group’s Jack Ma orchestrated a deal with internet firm Sina shortly before stepping down as the company’s chief executive in May (Ma is staying on at Alibaba as executive chairman). The deal saw Alibaba pay $586 million for an 18% stake in Sina Weibo, China’s most popular microblogging platform. It also includes the option of increasing Alibaba’s stake to 30% at an unspecified price (see WiC191).

Alibaba, China’s leading e-commerce firm, hasn’t been able to keep pace with Tencent in products and services for mobile phones – a problem given that more online shoppers are making purchases through their smartphones. Buying a stake in Sina Weibo, with its over 500 million registered users, will help boost Alibaba’s efforts to defend its turf in the e-commerce sector.

Alibaba isn’t used to playing catch-up. Last year more than $200 billion was spent online (not including food and travel). That’s 10 times as much as in 2008. The company’s shopping sites Taobao and TMall dominate the e-commerce market and last year’s Singles Day (China’s equivalent to the shopping frenzy on Black Friday in the US) saw more than 213 million shoppers flood the two sites, spending $3.1 billion in a single day (see WiC94).

The impact of China’s e-commerce boom has been profound. Beneficiaries include ancillary industries like the courier companies that deliver all the online purchases. But the phenomenal growth in online sales has also led to speculation about the outlook for bricks-and- mortar retailers. Alibaba’s founder Ma even had a public bet with a shopping mall tycoon on when online sales will overtake those in traditional stores.

Tencent is hoping to take a chunk out of the online pie itself, increasing investment in its own e-commerce functions. In the first quarter of this year, its e-commerce sales efforts accounted for Rmb1.9 billion, up 10.3% quarter-by-quarter.

Meanwhile, search giant Baidu is another to look nervous at the changing landscape. The Beijing-based firm dominates China’s PC-based internet search market, making it the local equivalent of Google. But it doesn’t enjoy a similar share of search on smartphones. In fact, Baidu’s market share of search on mobile devices is only 35%, says Beijing Daily. And less than 10% of the company’s total revenue came from mobile ads last year.

Nor has Baidu done as well as Tencent in diversifying from its core business. Last year it shut down its e-commerce platform, a joint venture with Japanese firm Rakuten, only two years after it began operations. Similarly, its ventures in social networking and online recruitment service have not delivered as Baidu bosses hoped.

Still, Baidu is not giving up. Just last month it announced its acquisition of online video platform PPS for about $350 million. The plan is to combine PPS with its own iQiyi video sharing service, a move that apes Google’s purchase of YouTube. The combination of PPS and iQiyi delivers market share of 17% in advertising revenue in online video, rendering it the second-largest player after Youku Tudou, another combination of two former rivals.

What is clear is that China’s internet is moving into a new stage of development. In the past 199 issues WiC has chronicled the growth of the country’s internet firms. They’ve thrived largely in the absence of foreign competitors – for example, Facebook and Twitter have been denied access, while Google opted to withdraw from the search business on Chinese soil in 2010 (after a fairly laboured process, see WiC54).

What’s emerged is a triumvirate of dominant domestic brands: Tencent, Alibaba (plus Sina) and Baidu. One key trend is the new competitive dynamic among the trio as they seek to invade each others’ turf. Of the three, Baidu seems to have lost the most ground (see WiC59).

But there is another question too: can these online giants ever become as big outside China? So far Tencent has had the most success. It says there are over 40 million users of its WeChat platform in countries like Indonesia, Malaysia and the Philippines. It has also opened an office in the US to promote the product. Meanwhile Alibaba is said to be preparing for an IPO later this year which could exceed $15 billion. Then its own plans for going global may become clearer too.

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