Tencent: Growth of a “King Penguin”
From ICQ to MSN messenger, IM giants had come and gone, even more been forgotten. Why did Tencent survived? And more importantly, why did it prospered?
Introduction
Established in 1998 as a copycat of online instant messenger software ICQ, Tencent chose a pengu
in as the logo of its only product, OICQ (Yes, the name was lame.). 27 years later, this penguin, listed in Hong Kong Stock Exchange, has hit a market value of $200Bil [1], transforming into a “king penguin”.
To achieve so, Tencent has repeatedly revolutionized itself and reached beyond IM business, into online gaming, social media, e-commerce, advertising, financial service and investment.
Business model
Regardless of being a big conglomerate, Tencent has continued centering its business model on social media and user base. This strategy paid off. Of the top four social media websites/apps in China, three, i.e. QQ, Qzone and WeChat, are under Tencent, accounting for nearly 1 billion users combined.[2]
Based upon this user base, Tencent has built an elaborate ecosystem around its social media products.
The core is its “freemium” membership model, which offers free service to basic users, and tiered subscription-membership that offers customized services on both intra- and inter-platform levels. The services were so well designed and tailored that Tencent gained extraordinary adherence from both free and subscribing members.
The second layer of revenue comes from value adding services. This sector contributes the bulk of Tencent’s cash flow, with the main offering including music (QQMusic), mobile messages, and online gaming (QQGame), all of which are far ahead competitors.
Tencent also successfully channels its users out to the services it offers on many aspects of daily lives. For example, it is a leading player in e-commerce (QMall, and a joint venture with JD.com, another leading e-commerce site in China), mobile cab hailing app (Didi Dache, Uber’s counterpart), and online payment system (Wepay, Alipay’s chief competitor)
In addition, Tencent offers many softwares, such as QQ internet browser, that will easily integrate into and strengthen its ecosystem.
Operation model
Adaption and improvement
This has been a highly controversial operating model, but it greatly contributed to Tencent’s success. Tencent is very skillful in adapting new ideas and innovations that are new to the market. It will digest and quickly improve the products. With a better copy of the product and its giant user base, Tencent will easily defeat competitors. In recent years, due to public pressure, such practice has been curbed and the new products are more of innovation than copycat.
Focus on user experience
Another aspect that links to the success of “adaption and improvement” strategy is the attention to user experience. Tencent has a large and renowned product managers team, which has been highly effective in collecting users needs and coming up with good product designs, therefore making the copycats always better than the original.
Agility and openness
Tencent divides its business into six business groups (BGs), with each focusing on one sector. This decentralized approach ensures the BGs operate as small to medium companies, therefore preserves the spirit of entrepreneurship, and enhanced the creativity and agility within the team.
Meanwhile, Tencent opened up the developing platforms between all the BGs, as well as to external developers. This move greatly strengthened the collaboration internally and externally. By 2012, the registered developers reached 300,000, consolidated Tentent’s leading advantage among ISPs. [3]
Human resource
Tencent has long boasted as one of the most sought employers in China. It offers outstanding in service training and opportunities to empower its employees. Meanwhile, it was also one of the earliest Chinese high tech companies that introduced employee stock ownership plan. In 2015 H1, Tencent was ranked as NO.1 best employer in China.
Investment
Leveraging its high cash flow, Tencent has proactively acquired and invested dozens of companies, most of which have been leaders in certain niche markets. This has effectively expanded its territory and eliminated competitors.
Blockading competitors
This has been the new focus of accusation on Tencent recently. Given the lack of enforcement of regulations, Tencent has more or less abused its dominance in social media and blocked its competitors’ access. The list of victims are long: Netease, Alibaba, Baidu, and the most recent one, Uber. [5]
Conclusion
Although sometimes surrounded by controversies, Tencent has done an excellent work in threading its company mission, business model and operation model. Marching towards the company mission of meeting all needs from users, it built an ecosystem which continuously offered the best products and services in the market. Meanwhile, demand of feeding such product and service stream further shaped an effective operation model that relentlessly harnessed endogenic and exogenic innovations.
References
- Tencent Valuation. http://www.reuters.com/article/us-tencent-valuation-idUSKBN0N40WN20150413#7uuWDptvzqBFLrPh.97
- China Internet Watch. http://www.chinainternetwatch.com/12809/tencent-2014/
- Tencent Internal documents. http://hr.tencent.com/news_detail.php?id=94 (Article in Chinese)
- Tencent defended No.1 best employer in China in H1 2015. (Article in Chinese). http://finance.sina.com.cn/roll/20150814/211022970669.shtml
- In Uber’s Quest to Win Over China, Tencent Blocks the Way. http://www.bloomberg.com/news/articles/2015-08-23/in-uber-s-quest-to-win-over-china-tencent-blocks-the-way
Thanks Henry for the post. I think the focus on original innovation and continuous improvement is key to Tencent’s success. Having seen a number of Chinese internet companies that copy Western ideas and technologies come and go, Tencent really stands out as an outperformer given its ability to innovate and adapt based on evolving consumer preferences.
Henry, I really enjoyed reading this post – thanks so much for sharing!
What I find particularly fascinating about Tencent is the competitive context in which it operates. Many consider Baidu, Alibaba, and Tencent to be the three tech “giants” in China (with Baidu often compared to Google and Alibaba comparable to Amazon). As you note in your post, as the three have expanded, they frequently come into competitive conflict with one another as they each seek to stake out as much market share as they can in various tech-related fields (e.g., e-commerce, online payments, messaging, etc). Do you believe that, given its business model, operating model, and currently existing competencies, Tencent is well-positioned competitively relative to these other two tech titans? If so, what do you think gives it a leg up against its equally deep-pocketed competitors, who are going after many of the same markets and products that Tencent is?
Henry, this was a fantastic write up on Tencent! It was interesting to read about the “me too” business strategy and their improvement over existing business models. While it seems a little suspect, leveraging loose Chinese regulation to improve upon winning ideas is in itself a great concept for the geography. Using the strong brand also helps I’m sure (I chuckled at your “OICQ” line). It will be interesting to see what happens with the changing legal environment in China and the ever-morphing business environment and economy. I feel better educated thanks to your post!