The Tencent Story (Part 3 of 3)
Hello investors, welcome to my Substack, where I study the best Investors and businesses from around the world. In this week’s article, we’ll go over The Tencent Story. This is a three part series since I wasn’t able to fit the rich history of Tencent in just one article. This third and final article will cover Tencent’s Empire. Before I start, I want to make a quick note, Poly Ma’s real name is Ma Huateng, but for the sake of ease, I’ll be using Pony Ma throughout these articles on Tencent. In the last article, Tencet went public in the hong-kong stock exchange, with Naspers owning 32.8%, and has a hit IM product called QQ. We’ll pick up from there.
Dissecting the Tencent Empire
Tencent hired Martin Lau, the Goldman Sachs investment banker who helped it go public, after it completed its IPO. Lau had the credentials - Chinese-born, Michigan undergrad, Stanford engineering masters, and Kellogg MBA - as well as a skill set that was complementary to Ma's. Lau became the company's English-speaking face, as well as the master capital allocator, a role that the shy Ma despised. As Chief Strategy Officer, Lau's initial focus was on acquiring studios in order to expand the company's burgeoning games business. Ma promoted him to President the following year.
Tencent has also focused on competitive threats to the portal business, such as Microsoft's growing presence in China through MSN. To counter the threat, it bought rival Foxmail in 2005 and built QQ Mail. The product was a success, but Tencent also acquired Allen Zhang, the developer behind Foxmail.
Tencent grew quickly with Lau and Zhang on board, thanks to desktop games and the QQ platform. From $200 million in 2005 to $2.9 billion in 2010, the company's revenue increased by 15 times. However, it was in 2011 that Zhang and Lau truly made their mark.
Zhang noticed the popularity of Canadian messaging company Kik in 2010, early in the rise of mobile, and persuaded Ma to let him build a Chinese version for Tencent. The company's trajectory changed dramatically over the next seven years.
Zhang launched Weixin in January 2011 after working around the clock with a small team. WeChat is how English speakers refer to it. WeChat pulled away from Xiaomi's Mi Chat early on by tapping into QQ's existing user base and then launching "Friends Nearby," which was a precursor to Tinder. WeChat started gaining 100,000 users per day. Tencent also bought 92.8 percent of Riot Games, the creators of League of Legends, for $400 million in 2011. They acquired the remaining 7.2 percent in 2015. The following year, in 2012, it paid $330 million for a 40% stake in Epic Games, a game developer based in Cary, North Carolina.
Today, Epic and Riot are two of Tencent's gaming crown jewels. League of Legends is the cornerstone of a gaming division that generated $5.5 billion in revenue in just one quarter.
WeChat surpassed 100 million users in 2012. It took 433 days to reach that milestone. In comparison, it took ten years for QQ, 5.5 years for Facebook, and four years for Twitter. WeChat launched the Moments newsfeed and Official Accounts in April, allowing publishers and businesses to distribute content and products and services. It had 300 million users by the end of the year.
In 2013, Tencent launched WeChat Pay to enable payment through the platform. And in 2015, WeChat crossed half a billion users.
WeChat introduced Mini Programs in 2017, allowing businesses to create full-featured apps on the platform. Pinduoduo, for example, builds on WeChat and taps into all of its customers' existing social and professional networks. WeChat's Mini Programs turn it into a "super app," and they're the inspiration for Snap Mini. For all intents and purposes, WeChat is China's mobile operating system.
It's worth noting that Chinese users use WeChat for everything. They use WeChat to communicate with friends, coworkers, and clients. Official Accounts are used by businesses to communicate with their customers. They can also use those accounts to sell things. WeChat has seen the launch of tens of thousands of businesses, including ridesharing (Didi) and food delivery (Meituan Dianping). WeChat is primarily monetized by Tencent through transactions rather than advertisements.
Tencent has been aggressively expanding its business through mergers, acquisitions, and strategic alliances, extending control to horizontal and vertical markets. This section does not attempt to catalog every single investment Tencent has made, rather, it examines public documents detailing various types of business expansion to gain a better understanding of Tencent's synergetic empire.
Tencent's partnerships with domestic partners went through several stages. Tencent aimed to grow big in the early years, between 1998 and 2005, and tried to expand its business into as many areas as possible.
Tencent began planning large-scale acquisitions and mergers with smaller companies in 2005 in order to strengthen the businesses in which it had stakes. After 2010, Tencent focused on strategic investments and alliances with other market leaders, purchasing minority stakes in those companies rather than buying the entire company or incorporating it into its kingdom as a subsidiary.
Acquisitions and mergers began as sporadic and opportunistic decisions, but by 2010, they had evolved into a comprehensive strategy favored by Tencent's leadership. Tencent was able to horizontally and vertically integrate within the broadly defined Internet VAS as a result of these mergers, acquisitions, and strategic alliances.
Tencent's massive empire spanned the Internet as well as a broad range of media and communication services. Tencent began by diversifying its businesses in the realm of online and mobile value-added services, and then gradually made investments in other companies that allowed it to integrate horizontally and vertically in various markets. If you’re interested in learning more about these horizontal and vertical businesses, I suggest you check out my next article that covers Tencent’s massive portfolio.
Of course with their amazing gigantic portfolio, Tencent is well positioned to gain from the Metaverse universe that Facebook envisions. Tencent believed Beijing is “not fundamentally averse to the development of metaverse,” as long as the user experience is “provided under the regulatory framework.” But it’s hard to know what those regulations would look like when the country’s metaverses are still in their infancy.
The most obvious path to the metaverse is video games, which is Tencents largest revenue driver. It could be highly interactive games, multiple games under one common IP or infrastructure that enables users to make games, according to Ma.
Some of these ideas have already started to take shape at Tencent’s portfolio companies, such as Epic Games, Roblox and Discord. Although Tencent doesn’t try to do everything itself but has backed hundreds of businesses in which it finds strategic value.
So it’s Fortnite together with Rocket League in the Epic example, or multiple different so-called game experiences within the Roblox example.
The second pathway, according to Ma, could be a social network that is “gamified and supports much more programmable experiences.”
As Martin Lau the president at Tencent says - “The driving force [of metaverse] will still be software-driven and the technology that really helps us to provide the user experience, be it engine technology, be it the ability to provide better, real experience, high-fidelity experience across many — a large number of concurrent users, AI technology, for example, in order to customize the different experience for different people,”
So what do you think of Tencent’s positioning for the future? Let me know if you think that Tencent has any moat around it’s company.
This concludes the Tencent Story. If you’re interested in a further deep dive, I'll leave a link below links to my sources, namely - The Acquired podcast, Not Boring by Packy McCormick, and Tencent the book by Min Tang, and the book - Tencent - Survivor, Challenger And Leader from Wu Xiaobo.
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