Tencent Bets On WeChat Games

By newsdoug on May 9, 2013

Tencent’s (HKEx: 700) colorful but low-key Chairman Pony Ma is suddenly losing his shyness at a major Internet conference in Beijing, where he is clearly in his preferred environment mixing with lots of other Internet geeks and techies. Media have been buzzing these last few days with words from the head of China’s biggest Internet firm, with much of the talk centered on Tencent’s hot mobile instant messaging platform called WeChat or Weixin in Chinese. Ma has addressed 2 of the key questions facing WeChat, both centered on how the service can generate profits for Tencent from its base of 300 million users.Let’s start with the lighter, quirkier piece of news, which has media reporting that an anxious airport security guard questioned Ma during a routine check on his way to the conference. The fact that a security guard would even recognize Ma speaks to his growing celebrity status, not only among Chinese computer geeks but increasingly among the general public. It seems the guard was less concerned about airport security, and more worried about whether or not his own WeChat access would remain free. (Chinese article)

That issue has been in the headlines for several months now, after a high-profile dispute broke out between Tencent and China Mobile (HKEx: 941) over WeChat. China Mobile complained the popular service was a major user of its network capacity, and wanted Tencent to sign a revenue sharing agreement. The only problem was that WeChat didn’t have much revenue to share, since the service is largely free. The debate prompted many, including China’s telecoms regulator, to speculate that Tencent would soon start charging for the service, leading to angst among its millions of users like this airport security guard. Tencent President Martin Lau clarified last month that the service would remain free (previous post), and Ma apparently repeated that pledge to the worried security guard.

From this lighter airport encounter, let’s move to some of Ma’s weightier comments, led by his prediction that mobile games will become one of the big future breadwinners for WeChat as it tries to become profitable. (Chinese article) This sounds like a relatively safe bet, since Tencent used a very similar approach for its other popular social network service, QQ, back in the days before the mobile Internet became popular. In that instance, Tencent leveraged QQ to build a major gaming platform, and quickly surpassed more established rivals to become China’s biggest online game company.

Tencent also apparently has big hopes for a new “official account” function that it’s adding to WeChat, which Ma detailed at the conference. The function lets official organizations like companies and government ministries open accounts, which WeChat users can then monitor for updates. Presumably Tencent would charge owners to open these official accounts. The system sounds very similar to official “verified” accounts on microblogging services like the one operated by Sina (Nasdaq: SINA) Weibo, which is also looking for ways to monetize its popular but largely free social networking platform.

Ma’s plans for WeChat sound well conceived, especially the gaming plan, since Tencent was so successful following that strategy for QQ. Generally speaking Tencent does have a very strong record for good execution in social networking applications, even if its forays into other areas have had more mixed success. Accordingly, I’d give these new money-making initiatives from WeChat a relatively good chance of success and expect we’ll see a steady stream of other innovative new features in the year ahead. As a result, we could ultimately see WeChat become profitable in the next couple of years and possibly even enter some strategic tie-ups with one or more of China’s major telcos.

Bottom line: Tencent’s plans to make money from WeChat through games and other innovative features stand a good chance of success, based on its similar success with QQ.