6 things you may not know about Tencent

Thomas Clayton is the CEO of Bubbly, a social media startup backed by Sequoia Capital, SingTel Innov8, and JAFCO. 

China’s Internet giant, Tencent, is a dominant force in the online and mobile market across China, with a market cap above $100B.

The company is best known for its top social offerings:

• QQ – its online instant messenger with 818 million monthly active users, which has remained the standard way for Chinese to stay in touch over the past 15 years
• Weibo – its Twitter-equivalent in China that is particularly popular in Tier-II and Tier-III cities
• WeChat – its most recent service that has experienced even more rapid adoption than the prior two flagship services and become the main way to send free voice and text messages over mobile in China

These social communication platforms also allow Tencent to funnel users into a myriad of other services across a variety of industries including online gaming, e-commerce, and web portals.

Although Tencent’s influence over social technology is growing (people in the U.S. can feel its impact on messaging apps with features like stickers and voice messaging integrated into messaging apps), there’s a lot to the company that many of its loyal users – and those outside of China – are not aware of in terms of how it has gotten this far.

Here are a few intriguing facts about the Internet juggernaut that are not well known:

1. A digital revenue stream very different than any of the valley stalwarts

For a typical Internet company, advertising and e-commerce of physical goods are the commanding sources of revenue. This is actually how top companies like Google, Facebook, and Amazon generate a disproportionate amount of their earnings.

But Tencent doesn’t see much money from either of these routes, only pulling in nine percent of its total revenue from advertising.

Instead, it has found a gold mine in virtual goods. These goods can range from ways to personalize your online gaming avatar with clothing and makeup to new wallpapers and ringtones for your phone.

Although these purchases may seem silly to some, the company rakes in billions of dollars through these types of transactions.

2. A handful of hit games fuel most of its revenue

The most important virtual good purchases for Tencent are those that occur in its games, which contribute over half of the company’s revenue.

According to Barclays Bank research, CrossFire and Dungeon and Fighter are the two games that make up 60 percent of the company’s gaming revenue, and it’s the fanatical users, who are willing to pay up to improve the skills of their avatar or acquire new weapons, that really keep the money flowing.

This is similar to the cash cow that Farmville was to Zynga, allowing it to go public.

A potential issue is this massive revenue stream is contingent on a relatively small amount of people playing a few of Tencent’s games. Therefore, it runs the risk of having too much of its “solid” revenue coming from such a minute and fragile area. After all, we saw what happened with Farmville and Zynga’s market cap.

As quickly as trends change and new exciting games are released, users can burn out and lose interest, leaving Tencent with a massive blow to its pocketbook.

encent has certainly dipped its toes in several different revenue pools, but not one has stuck quite like this one. I think we will see the company stretch itself even further in attempts to offset this risk.

3. Soon, Tencent will be bigger than Facebook

Tencent is much closer to overtaking Facebook as the world’s top social network than most people think. Currently, the combined number of users for WeChat and QQ is estimated at 1.054 billion, which is only around 200 million less than Facebook’s worldwide user base.

Also worth noting is the fact that WeChat has almost tripled its active users from last year’s 85 million to its current 236 million users, whereas Facebook’s monthly active user increase has slowed to 18 percent year-over-year.

Support from China’s massive population has certainly contributed to Tencent’s rapid growth, but WeChat’s overseas users recently reached 100 million, doubling in just the four months between May and September 2013.

Unfortunately for Facebook, the company isn’t seeing the same kind of growth numbers in its own territory as it struggles to capture the interest of young teens.

4. It’s coming to the U.S. with a flanking strategy rather than head on

There’s been a lot of playing nice recently between Tencent and Snapchat, two potentially competing companies, and even rumors that Tencent was a silent investor in SnapChat’s Series B funding round. Those rumors seem to be true.

This investing relationship would prove beneficial for both sides. It would allow SnapChat to gain one powerful partner, which would particularly come in handy if the service tries to break into Asian markets.

Since this would mean competing with Tencent’s own WeChat, it makes Tencent look even smarter for having stake in them, creating a nice win-win scenario.

It also allows Tencent to maintain its reputation for staying up on the latest online communication trends. This is the exact same play they made in Asia, when they invested in KakaoTalk in Korea, which is now a dead-on competitor of WeChat.

Coming in as a “silent” investor is a key piece to Tencent’s strategic move. It provides Tencent with a relatively cheap ticket for entry into the U.S. market, whereas if it came in with a big bang, it would be rather politically sensitive for the company.

Now it is a true insider into one of the rapidly growing dominant players in the U.S. without having to worry about all of the political scrutiny the company would otherwise undergo.

Tencent also recently launched a new WeChat promotion that targets the U.S. through a roundabout approach: tapping into Google’s user base. Per the promotion, if Google users connect their accounts to WeChat and are able to get five of their Google contacts to do the same, they are rewarded with a $25 Restaurant.com gift card from Tencent.

The company will likely try many variations of this until something seems to stick.

5. WeChat serves as a “booty call” app in much of the world

WeChat is the only messaging app in the space with an age requirement of 17 years or older for download. There is a very clear reason for this. It has a popular “Shake” function, which displays photos and whereabouts of nearby users wanting to meet new people.

Of course, the primary use case for this is to try and “hook up” with those around you.

In China, often when you land in an airport and turn your phone on, it is common for prostitutes working WeChat to immediately send you messages. This separates WeChat from the other friend-to-friend messaging apps quite a bit.

Recently in China, the rapid growth of a competing app called Momo, focused solely on this use-case, has allowed WeChat to grow beyond this reputation. However, it is still a very common use for the app in the rest of Asia.

It has also been a big factor in its growth. I guess this is no different than why the Internet first grew at the pace it did. Sex sells – plain and simple.

Unfortunately, this could come back to haunt the service in the long-term. Just look at MySpace in the U.S. and what ultimately happened to them. Sex may be the fastest path to growth, but it can also tank a company overnight.

6. China’s reputation could hurt Tencent’s global outlook

China has upset a few of its neighbors recently and has become aligned with actions like hacking, censorship, and Internet piracy, which could limit Tencent’s prospects overseas.

These trust issues are nothing to take lightly and could potentially halt international growth if Chinese-linked brands can’t shake such a negative reputation.

Americans’ love of free speech and the exercise of such on social networks on a daily basis could also cause WeChat’s luster to fade on U.S. soil, due to the service’s international censorship of “sensitive” words.

Given Americans’ skittishness towards what the NSA may be monitoring, there is little doubt they would be even more skeptical of any service “made in China.” This will surely give Tencent an uphill battle stateside.

While Tencent remains a huge force primed for global success, there are definitely some potential unexplored factors that could derail its prospects. Only time will tell how the Chinese company will navigate these and if it is able to come out on top.