Internet & Tech

Soul searching

Is China’s most profitable internet firm still capable of innovating?


From Pony to bear? Tencent’s shares declined in February, March and April

After a market research firm reported earlier this month that short video app Douyin was the most downloaded non-game app in Apple’s App Store in the first quarter of this year, Zhang Yiming made an announcement on his social media account to celebrate the milestone.

But the chief executive of Bytedance, the parent company that owns Douyin along with popular news aggregator Toutiao, couldn’t help but take a dig at Tencent. He boasted that despite the tech giant blocking Douyin on WeChat, Tencent’s ubiquitous social media platform, and mimicking its features, such tactics haven’t hampered Douyin’s growth in short video.

The comment quickly sparked a war of words between Zhang and Pony Ma Huateng, chairman of Tencent, on WeChat.

Ma was obviously annoyed withthe suggestion that Tencent has been plagiarising Douyin’s features, describing Zhang’s accusation as “defamation”. Zhang riposted immediately that legal experts were being called upon to provide an independent judgement.

Ma is agitated not only because short video has become a key battleground for his firm’s expansion, but also because Tencent has become a hot topic in its own right after it was criticised by a prominent blogger for not innovating enough.

The lengthy article was titled “Tencent has no Dream” and in it Pan Luan, a former editor at tech portal Huxiu, opined that Tencent now spends too much of its resources seeking investment opportunities instead of developing its own applications.

“This 20 year-old company has quickly become overly utilitarian and short-sighted. Its strength is no longer in product development, but as a savvy investor in technology. However, the core competitiveness of a tech firm should come from innovation,” the blogger wrote.

Responding to the article, Martin Lau, Tencent’s president, countered on WeChat: “Tencent is an entity greater than the writer described. Every part of the company plays its role and pursues its goal. Tencent cannot be reduced to a product, a strategy or a person’s will.”

With a large war chest – the tech giant operates the world’s largest video games business by revenue – Tencent is one of the most acquisitive companies in China. In 2017 alone, it completed 66 deals involving direct investments and M&A, according to Bloomberg data.

The Wall Street Journal reckons that since 2013 Tencent has invested in 277 start-ups (two thirds of which are in China and nearly a quarter are in the US), spending $45 billion on the stakes. The US newspaper wrote this week Ma’s firm has “quietly become one of the world’s largest and most active technology investors”, rivalled only by Softbank.

And the deals keep coming. Earlier in May, it led an $820 million round of funding in Shenzhen-based UBTECH Robotics, making the start-up one of the world’s most valuable in the artificial intelligence sphere with an estimated worth of $5 billion.

Then again, Tencent was never especially known for its creativity. When Ma’s firm first started in late 1998, its core business was an instant messaging software called OICQ, a Chinese version of ICQ. Later that platform would become what is known today as QQ.

Tencent went on to mimick other internet trends. It launched the QZone social media network, which was inspired largely by Facebook. A lot of its game titles were also licenced from game developers overseas, rather than self-developed. And when rival Sina Weibo exploded in popularity, it quickly launched a near-identical service called Tencent Weibo.

“To sum up Tencent’s public image around 2010: it is a formidable and aggressive plagiarist. Leveraging on QQ’s huge user base and traffic, Tencent has dominated mobile games, content and other areas, easily toppling the previous leader in the sector,” wrote Economic Weekly.

But not everything it touches turns to gold. E-commerce and search have remained elusive. It has also failed to make inroads in short video (a trend WiC first covered in issue 383). Tencent launched its short video platform, Weishi, back in 2013. But after two years, with little traction, the company abandoned the product and the whole development team was disbanded. It finally shut down the platform in April 2017.

Tencent certainly did not expect that the short video market would explode in popularity so soon after. Thanks to short video sites like Douyin (see WiC405) and Kuaishou, the industry generated Rmb5.3 billion ($901 million) in revenues last year, almost triple that of the previous year. (Tencent bought about 10% of Kuaishou in its round D fundraising in 2017.)

Recognising its mistake, Tencent resurrected Weishi, with the new version bearing striking similarities to Douyin. It has recently earmarked Rmb3 billion to lure celebrities to post content on its video service.

“In the past we used to complain about Tencent’s Online Media Group [which is responsible for its digital content], saying that it did not understand products or technology, and has no strategic capabilities. But if you look closely, its social media platforms are not doing any better than online media. It signals that Tencent has lost its ability to react quickly to new trends,” Pan concluded in his blog critique.

But Tencent’s defenders say that just pointing out its failures is not fair. Even Alphabet, which owns search giant Google, has failed repeatedly to make any inroads into social media.

“At its core, Tencent is a social networking company and a gaming company. So while it is true that Tencent was reactionary in certain areas and losing in others, when you look at the two things that are closely related to social networking and gaming, Tencent has always been relentless in its pursuit,” says CyZone, a website on entrepreneurship.

Certainly where WeChat is concerned, the company has been especially innovative. When we first wrote about the product in 2012 its main application seemed to be to help users hook up in bars by shaking their phones (see WiC145). Since then it has evolved into one of the world’s most comprehensive social media and payments ecosystems. That was one reason why we ran a Talking Point a year ago that carried the headline: “China’s most admired firm?”

On Wednesday, the company posted another set of expectation-smashing results, reporting that its first quarter net profit had grown 61% t0 Rmb23 billion.

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