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The amazing growth of Tencent

This blog post is an outlook to the upcoming Gport monthly, issued by the Great Wall Club to all of it’s members.

Tencent started and grew on its instant messaging service QQ, and built various services around this thriving (780 million active user strong) ecosystem: QQ mail, traveling services, real time exchange information, and the web portals QQ.com (regular and entertainment news) and Soso.com (search engine). The company also employs a gaming portal with over 4 million users and game types from both casual gaming to a full multiplayer desktop experience. The communities together have a market share of 73% of active users in China, clearly dominating the market.

In addition to its existing value-added services, the company moved forward into two of Alibaba’s main business segments with Tenpay, an online payment services, and paipai.com, a portal offering online trading services similar to alibaba.com. The company groups its operations into three segments: Internet VAS (IVAS, 79% of the revenues), Mobile VAS (MVAS, 14% of the revenues) and online advertisement (7% of the revenue). There are great efforts made to further develop the MVAS revenues from currently over 20 mobile applications, and the company just announced plans to release a smartphone together with its partner Huawei.

With the strong growth around microblogging platforms in China in 2010, Tencent microblogging has been tightly integrated with its QQ messaging system, hence easily gained an impressive users base. QQ users are able to post entries through the QQ messenger and the QQ.com portal. The total amount of registered users may already surpass the total number of users of Sina’s microblog, but does not have as by enmany active users as Sina can currently account for.

Growth with group purchasing and mobile gaming

The announced partnership of Tencent with US-based Groupon earlier this year will have a big impact on Tencent’s revenue structure. Group purchasing could be one of the biggest growth potential stories in the Chinese Internet in 2011, and the combination of the well-known US brand with an influential Chinese enterprise like Tencent could be the ideal combination to succeed on the currently very fragmented market. The group purchasing market in China started to flourish in 2010 in China and produced over 1000 little and middle-sized companies. By the end of 2010, group purchasing became the second most trafficked type of service in the Chinese Internet market, with over 70 million users and over 1.7 billion RMB transaction volume.  It is expected to surge by 10 times to 17 billion RMB in 2011, according to iResearch.

The Chinese groupon clone TuanBaoWang (团宝网), which saved the domain rights on groupon.cn before the actual US company was able to, just launched a marketing campaign to strengthen its brand name and prevent the group consumption community to switch over to the US joint-venture.

Tencent also recently acquired a majority stake in Riot Games, an independent US-based company, for more than 350 million USD. Online game developer Riot launched its first and only online game League of Legends (LOL) in 2009. The awarded session-based multiplayer game reached a strong user base in US and Europe and is to be launched by Tencent this year in China.

With key earnings from community VAS, online games and online advertising, and a stronger focus on mobile VAS, Tencent is expected to grow constantly in 2011. The expansion of the 3G user base in China will bring additional community users and probably result in stronger revenue from Tencent’s mobile VAS.

In December 2010, Tencent officially announced its plan to start an open platform for third-party developers to support the mobile services. Currently, the SNS platform only employs “like” functions in cooperation with other websites, but is now forming a strategy to expand its user base by opening the mobile platform to externals. The opening is expected to increase the number of users and add further value to the community. In return, mobile value added services will profit from these plans in 2011. Concrete plans are expected to be announced at the Global Mobile Internet Conference 2011 in April in Beijing.

Sources: Tencent, GWC internal sources, Thomson Reuters, DB research, RBS, Mirae Asset

About the Author

Arndt FockeResearch and Consulting Manager at GWC, Arndt is also the author of the organization’s GWC Insights and GPORT reports. His past experience includes innovation and technology management, and technology strategies in the ICT industry.

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