INTERNET: Tencent Adds Ads To Popular WeChat Function
Bottom line: High-spending advertisers could provide a major new revenue source for Tencent, as it rolls out new ad-based services on its popular WeChat Moments function.
Internet stalwart Tencent (HKEx: 700) is revving up its drive to monetize its popular WeChat mobile messaging platform, with word that it’s rolled out advertising services for one of the platform’s most popular functions. The move will start inserting ads into WeChat’s popular Moments function, known as pengyuouquan in Chinese, in a gamble that risks alienating many of the hundreds of millions of platform’s users.
The Moments function is one of WeChat’s most distinctive features, allowing users to share their thoughts, photos and links to other articles and video with some or all of their friends on the service. The function makes WeChat unique compared with global rivals like WhatsApp, which are mostly for one-to-one communication between friends. WeChat also has such one-to-one functionality, but the Moments function makes it also similar to Facebook (Nasdaq: FB) by allowing users to easily share material with groups of their close friends.
According to the latest headlines, Tencent has just rolled out its advertising services for Moments, introducing a cost structure that is based on the number of views an ad gets. The ad services cover a wide range, starting at 40 yuan per 1,000 views in smaller cities, going all the way up to 140 yuan per 1,000 views in major cities like Beijing in Shanghai. (English article; Chinese article) Ads are valid for 7 days, and the service “pushes” one ad out to each Moments user every 48 hours. Larger ad campaigns are much more expensive, reportedly starting at around 5 million yuan. ($800,000).
The same reports also include some of the latest figures for WeChat use, as Tencent tries show off its reach to advertisers. The platform now has a whopping 1.12 billion registered users worldwide, and 440 million of those — or more than a third — are considered monthly active users. Around three-quarters of active users check their Moments feeds, testifying to the function’s popularity.
Now that we’ve covered the basics, let’s examine this latest monetization strategy for WeChat and its chances for success. A look at the experience of rival service Sina Weibo (Nasdaq: WB) might be helpful, since it also has been experimenting with advertising in its own search for profits. Weibo originally flooded users with e-commerce advertisements shortly after it sold a stake of itself to industry giant Alibaba (NYSE: BABA) 2 years ago.
But then it quickly cut back on the number of ads after negative backlash from users, putting a major damper on the new revenue source. As a result, Weibo’s revenue growth hasn’t been as quick as many had hoped, and 5 years after its founding and a half year after its New York IPO the company is still searching for its first-ever profits.
Tencent’s new advertising plan appears to be two-pronged, testing the waters at the high and low ends of the market. At the high end are advertisers who don’t mind spending 5 million or more for big, national Moments campaigns, while more cost-conscious advertisers can opt for cheaper services aimed at much smaller groups of users. This kind of approach looks prudent, as it will allow Tencent to gauge user reaction and focus on one or both types of advertising based on response.
The low-cost ad services should attract lots of smaller companies that lack big advertising budgets. But those advertisers will also end up bombarding WeChat with millions of ads for products that users probably don’t want or need, and will also prompt many users to scale back their Moments viewing. Instead, I suspect that Tencent will quickly learn that the big advertisers provide the best returns with the least user resistance, and that these large companies could quickly become major buyers of Moments-based advertising.
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