QQ, one of the most successful and essential product of Tencent, has an adorable penguin to be its logo. “Penguin” Empire, 15 years of after its birth, attracted 800 million users globally. Another top-rated “Penguin” Empire product, Wechat, soon accumulated 300 million users in a little more than two years. Wechat gives Tencent more dominance and control in internet and mobile internet fields.
When Tencent was listed on Hong Kong stock market in 2004, its market value was merely USD 1 billion. At present, Tencent’s market value has surpassed USD 100 billion, second only to Google and Amazon in global internet industry. Baidu only has half of its market value. Tencent’s revenue grew from 1.14 billion yuan (USD 186.77 million) to 43.89 billion yuan (USD 7.19 billion), with 158% compound annual growth rate. Although Tencent entered online leisure game market in 2003, two years later than SNDA and other Chinese online games enterprises, it now accounted for approximately 50% of Chinese online game market and 5 times more than SNDA.
How Did “Penguin” Achieve All This?
Tencent started from a free online instant messaging software-QQ-gradually accumulating high quantity, activity and interactive frequency users as its core resource. Its products may vary in business model and in cash flow structure, however, strategically, Tencent always revolved around QQ and remained consistent in product top-level design. These different products all shared the core resource, which is QQ’s traffic distribution, and gained revenue in various ways such as game, portal websites, music, blog, and Wechat. For its successful top-level design of QQ, Tencent could always come to the first and make breakthroughs.
Since the launch of Wechat 5.0 on August 5 in 2013, Tencent’s stock price had been soaring. On September 3 in 2013, Tencent’s market value hit HKD 779.9 billion, this was the first time a Chinese internet company to break USD 100 billion. Tencent’s market value on that very day was second only to Google and Amazon, and its CEO Pony Ma cooperated with Sohu CEO Charles Zhang to purchase 36.5% of Sogou’s stake with 448 million dollars and Soso.
The emerge of Wechat drew much public attention both from investors and industry insiders on Tencent. The astounding growing speed and high user stickiness was said to challenge many traditional industries or even overthrow.
Making Money from Large Traffic
Tencent is one of the few companies which experienced every crucial phases of Chinese internet development, quite different from other internet giants like Baidu and Alibaba, Tencent did not miss any one of the turning points. Tencent was involved in SP (Service Provider), portal website, e-commerce, search engine, online game, online video, SNS, mobile internet.
Since Yahoo first offered free internet services, increasing websites traffic and making money from these traffic became challenges for all internet companies. Numerous of enterprises failed to make profits though they had huge site traffic, Netscape, My Space, Kaixin001.com, 51.com and even ICQ. Facebook was once troubled for its low efficiency of business model.
Tencent owned over 20,000 employees and expensive server groups to offer free IM QQ, along with other products such as QQ music, QQ portal website and WeChat. How did Tencent achieve USD 7 billion annual revenue?
Early Stage: Survival
First imitate successful product, then make subtle adjustments to improve user experience. This is Tencent’s enterprise philosophy concluding from its own dark days at the very beginning. For many years, Tencent had high user increasing rate but without proper business model. It taught Tencent to be patient entering new market, with no rush to build business model at the early stage.
Pony Ma imitated ICQ and created Chinese version OICQ in 1998, made small changes catering to the habits of Chinese users. OICQ registered users reached 200,000 within two months of launch in February 1999. Later in November, the users broke 1 million. The explosive growth caused fast increasing of cost, yet Tencent did not now how to charge users then. In 2001, Tencent renamed OICQ to QQ due to intellectual property litigation with ICQ, QQ already achieved 50 million users but was still looking for business model.
The survival struggle in the early stage forged the source of Tencent’s unceasing search of business model.
First Pot of Gold
Tencent began to try its three main business models, SP,Virtual Goods and Freemium dependent on its large user base and high user interactive. In 2004, Tencent’s net profit reached 450 million yuan (USD 73.71 million) and it was listed on Hong Kong stock market successfully. Its high profitability in primary business enhanced Tencent’s confidence in focusing on user growth and experience.
In December 2000, China Mobile first embraced mobile value-added service and cooperated with Service Providers. China telecom enterprises were in charge of channels reaching out to mobile users, SP could provide contents and services to users. SP model saved lots of Chinese internet companies which had no clue how to charge users then. Tencent followed the trend and developed mobile QQ, China Mobile would charge mobile QQ user 5 yuan (USD 0.82) per month. Tencent gained 20% of the charge. In 2004, Tencent’s mobile QQ value-added service brought 600 million yuan (USD 98.28 million) revenue, with over 60% gross profit rate.
SP market shrank for China Mobile strengthened its control over mobile value-added service, still, Tencent’s SP kept improving and its revenue in 2012 reached 3.7 billion yuan (USD 606 million). SP model was the first pot of gold for Tencent, but it’s highly dependent on third party. Therefore, Tencent explored other business models.
In April 2004, the number of QQ users hit 300 million. As a social network, QQ learned from South Korean enterprises to create online virtual image-QQ show, satisfying Chinese internet users’ needs to show off their public images online. Product like QQ show had a very low marginal cost. Combined with QQ large user base and social interaction needs, QQ show became the popular virtual goods and Tencent was the only company in China that could sell virtual goods.
Based on the successful experience with Virtual Goods model, Tencent tried to charge for QQ service. Meanwhile, Taobao defeated eBay China with free services; MSN wanted to enter into China market; China Mobile launched Fetion. Under the fierce competition, Tencent promoted Freemium model, that is free plus premium. All QQ users could enjoy free services, while some could choose to increase their experience with premium services.
Tencent started by expanding free QQ services, including QQ group, cloud storage, QQ show, emoticon, QQ game, QQ music, QQ download, QQ browser, etc. When these free services ranked top three in their fields, Tencent had an abundant categories and value-added services which were the base for promoting Freemium model. In the principal of not harming 99% users and attracting 1% paid users, Tencent kept increasing paid users’ stickiness by membership hierarchy system. Read How Tencent Made Billions with QQ membership to find out about QQ membership hierarchy system.
Tencent is not the only internet company to use Freemium model, but it is by far the most accomplished one in China. The key to Freemium model is large quantity of users and a variety of services and products. MSN or Fetion had few featured products and attractive services, Freemium would harm the experience of most users or be least interesting for premium users at all. In comparison with Thunder and other internet companies adopted Freemium model, Tencent excelled at managing different services and products and supported each other in traffic and segment services. What’s more, the many different categories of products and services laid a foundation for future strategic expansion.
Expansion to Portal Site, Online Game and Blog
SP, Virtual Goods and Freemium have relatively limited market space, while entertainment, advertising and e-commerce are more close to netizens daily needs therefore more likely to form a giant. If Tencent satisfied with three business models, it might face growth ceiling in the next few years. Tencent expanded to portal site, online game and blog around 2004.
QQ tried to place advertisements to millions of users, due to its interface size, it could hardly achieve advertising without affecting user experience. Tencent started its own portal site in 2001, domain name used to be www.tencent.com which fell far behind three biggest portal websites (Sina, Sohu and NetEase) in China. In 2003, Tencent changed its domain name to www.qq.com. With strong financial strengths and promotion across QQ and other products, soon Tencent’s portal site caught up with and even surpassed three biggest portal sites in 2004, till now, Tencent portal site ranked second in Chinese websites in Alexa, second only to Baidu.
The huge breakthrough on portal site encouraged Tencent to expand on vertical portal, weibo, video, client advertising and search engine, and integrate its media resources to build internet media.
In 2003, Tencent launched QQ leisure game client to test the water. By promoting via pop-up ads and portal site, QQ game surpassed the market leader Ourgame. Tencent combined QQ game with Freemium and Virtual Goods and realized profits as QQ game users increased. In August 2004, QQ game online average concurrent users reached 620,000 and rose to be the biggest leisure game portal in China.
During 2004 to 2007, Tencent launched a series of leisure games and some more competitive games with stronger user payment willing, either through self-development or purchase. Online game developing team or business model could be easily copied by Tencent, which left the deciding factor in market competition to be promotion channel. Tencent owned QQ as client portal and portal website, had unique advantage and low cost in promotion.
Blog was all the rage in 2005. Sina and Sohu successfully grasped the opportunity and their celebrity blogs were attractive for Chinese netizens. Tencent was forced to take a defensive move in the blog era, its strategy was pretty simple: directly open a Qzone for every QQ user on its panel. Hence, Qzone users easily surpassed 100 million and grew to be the largest blog in China.
However, QQ users tended to by young people, Qzone merely led in the number of users and could not compare with Sina blog in quality. Blog as an independent business never found its proper means of making profits, and declined after the birth of weibo.
Qzone’s development differed as new competitors such as renren and kaixin001.com joined the market. Qzone added QQ farm and other games except for diary and music, becoming Tencent’s SNS immediately. For a long time, Qzone users was above Facebook and ranked as the largest SNS globally. Qzone, together with pengyou.com were the base of Tencent open platform, which is an important revenue source. In 2011, Qzone and the other two popular Tencent online games became the top three revenue sources.
Read The Story of China’s Biggest Social Network: Qzone to know more about the development of Tencent open platform.
Tencent was not invincible and could conquer any market. In search and e-commerce, Tencent was strongly confronted by two competitors: Baidu and Alibaba. Although Baidu and Alibaba dominated their markets and were far ahead of Tencent in technology and user experience, Tencent still was looking for opportunities. Tenpay and Soso became the supports in Tencent’s development in e-commerce and search. The merge of Soso and Sogou also showed Tencent’s resolution in search.
600 Million Active Users
In 2009, Tencent grew to be the number one in market value in China and number three in global internet industry. QQ active users hit 600 million. Tencent had built up its core business model and developed expanding strategy. Once a new business proven to be valuable by other companies, Tencent would gather its first-class product manager and research staff to develop a high quality product and distribute through recommendations in QQ and other relative products. It would no doubt surpass competitors in number swiftly. Tencent would integrate the product into its product net once it ranks top in its market.
3Q Battle Revelation
The enterprises philosophy of Tencent, which is imitate, exceed and copy others creative idea, interrupted creative environment of internet industry and caused many complaints and reproach. Therefore in 2010, the battle between Qihoo 360 and Tencent QQ outbroke. The battle soon escalated into war by making users choose between QQ and 360 on their computer. The war ended under the mediation Ministry of Industry and Information Technology (MIIT), Tencent enterprise image was damaged and lost some users.
Though Tencent had a lot of products, but they all depended on the distribution channel of QQ. Once the number of QQ active users dropped, it will shake all business models built upon it. 3Q battle made Tencent feel the threat, and the coming mobile trend and SNS transition forced Tencent to transit from product to a platform company.
Tencent Open Platforms
There are three reasons why Tencent chose to open public platforms. First, its expansion into new business would crush other small start-up enterprises which required Tencent to change its development. Second, Chinese internet users’ needs were more diversified and personalized, Tencent could not meet all their needs by developing products itself. Last, Tencent’s competitors Baidu, Alibaba, Qihoo 360, Sina, SNDA and renren all opened their platforms to attract small enterprises.
In June 2011, Tencent launched 8 open platforms, which were pengyou.com, Qzone, Tencent weibo, Tenpay, Tencent e-commerce, Soso, cb.qq.com and QQ. Later, the number of open platforms increased to over 30.
A typical Chinese developer could use Tencent cloud to be server, and distribute product via Qzone, pengyou.com, Tencent weibo, Qplus, QQ game platforms, take advantage of QQ, Qzone, Tecent weibo and other SNS to do social marketing. The developer could also use Tencent advertising system to promote the product and use Tenpay to receive and pay. QQ yellow diamond system offers value-added services tool for developers, and Tencent also provides data analysis for developers to analyze user behaviors. All the developer need to focus is to develop the product, Tencent open platforms could help with the rest.
Tencent also set up a Corporate VC to support enterprises developing on Tencent open platforms. The fund size reached 10 billion yuan (USD 1.64 billion). Cooperation with Gree, DCM and KDDI to launch Android-focused fund helped Tencent to utilize its capital and resource, improve investment success rate and expand investment range.
Tencent’s multiple open platforms covered every links in internet application development chain, it played a positive role in improving competitiveness of the whole ecosystem. First, aggregation of multiple platforms’ traffic allows developers to distribute products at different platforms. Second, Chinese open platforms were not well developed as the US, there were no competitive third parties in cloud, unified account, marketing and payment which limited the growth of open platforms. Tencent took advantage of its own resources and opened these services to developers, hence it was more attractive than Sina Weibo and renren open platforms. Compared with Baidu, SNDA and Qihoo 360, its unified login account and social marketing and abundant products gave Tencent unique advantages.
Along with the transition came the change in strategies, Tencent stopped expanding its own business and helped building healthy and profitable open platforms. It guaranteed basic platform services and encouraged the innovation from developers. Tencent acquired yixun to replace its own B2C platform QQ mall.
Tencent has developed QQ, QQ game, QQ music and QQ news for mobile to continue its success in PC end. Besides, Tencent also developed many mobile only apps, such as app store, QQ contacts, QQ reader and mobile end games. Though Tencent has developed almost 100 products in mobile end, they contributed few revenue to Tencent. Tencent tried to grasp the entrance to mobile traffic and cultivated another application like QQ. Wechat was the most extraordinary and unexpected application.