Ciw-tencent-empire

Tencent Empire
The Story of the Rise of Tencent Empire

ChinaInternetWatch.com
A China Online Marketing Blog

COPYRIGHT © 2014 ChinaInternetWatch.com

Table of Contents
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.

Chapter 1: How Did “Penguin” Achieve All This
Chapter 2: Making Money from Large Traffic
Chapter 3: Early Stage: Survival
Chapter 4: First Pot of Gold
Chapter 5: Expansion to Portal Site, Online Game and Blog
Chapter 6: 600 Million Active Users
Chapter 7: Transition
Chapter 8: Mobile Strategy


Chapter 1
How Did “Penguin” Achieve All This

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.


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


Chapter 2
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, ecommerce, 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?


Chapter 3
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.


First imitate successful product, then make subtle
adjustments to improve user experience.

“

Imitation is the safest innovation.
-Pony Ma


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.


Chapter 4
First Post 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.

SP Model
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.

Virtual Goods
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.


The operation system of SP model

Shared
revenue

Telecom
operator

Payment

China Internet Watch
Source: xcf.cn, 2014

Channels

Tencent

Mobile QQ

Services (such as
mobile game)

Copy online
relationship

QQ IM

Free use

Netizen


Freemium
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.


Chapter 5
Expansion to Portal Site, Online Game
and Blog

SP, Virtual Goods and Freemium have relatively limited
market space, while entertainment, advertising and ecommerce 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.

Portal Site
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.

Online Game
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
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.

Chapter 6
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.


Chapter 7
Transition

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 valueadded 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.


Chapter 8
Mobile Strategy

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.


GET FRESH INSIGHTS ON
CHINA INTERNET

Click The Link Below to Read More
Articles about Tencent
http://ciw.me/1iUeHgK


Ciw-tencent-empire

Recommended

Recommended

More Related Content

What's hot

What's hot (19)

Viewers also liked

Viewers also liked (20)

Similar to Ciw-tencent-empire

Similar to Ciw-tencent-empire (20)

More from ChinaInternetWatch

More from ChinaInternetWatch (7)

Recently uploaded

Recently uploaded (20)

Ciw-tencent-empire