Where is Tencent Going?

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China’s Tencent Raises $600 Million from Note Offering
Josh Ong
The Next Web
August 29, 2012

Chinese Internet giant Tencent Holdings Ltd. (TCTZF.PK) is raising some $600 million from a senior note offering this week. Given that in the second quarter they posted $492 million in profit on $1.7 billion in revenue on top of having some $3 billion in cash, the question has to be “why?”

There could be several reasons, one of which could be a desire to buy back the shares of one or more major shareholders. Keep in mind that South Africa’s NASPERS Group is a major shareholder, and in a volatile regulatory environment policy could shift against foreign holdings in Chinese internet companies at any time. A full or partial buyout of foreign shareholders could insulate Tencent from that problem quickly.

What I think is more likely, and what I told Josh at TNW, is that the company will use the money to support expansion in two non-core but highly strategic areas of its business.

Fighting the China E-commerce War

First, the money will go to e-commerce. The company has already made a huge push into the area, and told analysts at the end of Q2 that it was planning on expanding its effort.

As Amazon discovered when it reached a certain point in its growth, to be truly competitive in e-commerce you need to make major investments in logistics infrastructure. That is especially the case here in China. Being an online e-commerce platform with lots of online bells and whistles is not enough: you have to support merchants and customers with a logistics infrastructure.

At the risk of getting too granular, Bill Schereck, who was the driving force behind the founding of Australia’s TV Shopping Network and its expansion across Asia in the 1990s, defined e-commerce logistics as the effort to surmount five challenges:

1. Get the signal to the customer (i.e., get your portal online, and get people to find it.

2. Get the customer to place an order.

3. Get the order to the customer.

4. Take the payment from the customer

5. Be able to take a return in a way that is both convenient for the customer and economical for the firm.

For Tencent, the first challenge is a matter of having a good website, and the second a matter of marketing and the quality of merchandise being sold.

In many parts of the world, the last three are easy. In certain parts of China, like the downtown areas of major coastal cities, this is all relatively simple, especially if scale is modest. But Tencent wants to sell to users in all of China, and it wants to scale to a point that is likely to exceed the capacity of locally-available package couriers. That is going to mean investments  well into the hundreds of millions of dollars, especially if they want to match Alibaba‘s Taobao.

Tencent’s leadership also understands that Taobao will not be standing still, and that to pass the market leader they will need to outpace Alibaba’s rate of investment, innovation, and improvements in customer service.

For these reasons, I suspect that if this new war-chest is allocated to capex and not buyouts, this is the largest direction that the allocation will take.

Tencent on the Street

The second direction is mobile. Tencent has made some excellent progress in this area with its Weixin/WeChat messaging service, which in its most recent iteration also incorporates much of the functionality of Instagram.

The challenge with mobile is that nobody has quite figured out how to turn a great mobile experience into revenue. People are using the services, but somehow the industry has yet to figure a way to get someone to pay for it all.

Tencent has the sheer mass of users, and it has them engaged not only in social media and chat, but most of the top online games as well. They need to create a mobile platform that replicates their PC experience, and I would wager that is where they are going to focus their efforts.

A case can be made that the future of mobile involves finding a way to mix three technical capabilities: fourth generation wireless broadband networks (4G); the ability to make web pages to essentially become powerful applications that is implicit in version 5 of HTML; and a new, slick version of rule set that governs how the web operates, IPv6. I know that might sound like a lot of technical hogwash, but together these three technical changes mean that the smart phones of the future may be web-based rather than based on apps running on a computer-like operating system.

If and when that change happens, it will give companies like Tencent a phenomenal degree of control over the experience they can offer on a mobile device, and, by extension, the things that they can do to turn that experience into cash. Tencent understands this, as does search giant Baidu, portal/socials Sina and Sohu, and e-commerce leader Alibaba. Each is investigating how to offer web-based mobile operating systems.

The stakes are immense for Tencent. If it can create an immersive, sticky mobile experience, it can tie that into its e-commerce infrastructure and bring both merchants and advertisers to its half-billion plus users via the mobile phone. This looks tiny now, but it could be what makes the difference between decline (as users shift from desktop to mobile) and dominance of mobile social media, mobile commerce, and mobile advertising in the country with the most mobile users of any in the world.

If that’s not worth taking out a little $600 million loan for, I’m not sure what is.

Update: Peter Schloss, who in over two decades in China has been in the middle of some of the most interesting and complex deals in the media and internet industries, makes an excellent point about why Tencent is doing this deal now. “Tencent was able to tap the markets at a good time for the company, and getting money was cheap,” Schloss noted. “They also wanted to break new ground for Chinese issuers.”

I think Peter offers a reasonable explanation for Tencent’s timing. I do not think the company intends for the money to sit idle, however, hence this post.

Michael A. Robson

Tencent getting into eCommerce… seems like a weak move, especially from a branding standpoint. But I suppose it’s one way to monetize their mammoth SNS properties (cuz ads that no one will ever click on ain’t it).

So..

Step 1. Build another Amazon.com clone
Step 2. Integrate QQ and TCWB and Weixin
Step 3……..?????
Step 4. Profit!

David Wolf

They’ve got four e-commerce platforms already, but they’re now looking to deepen their commitment in that business. But I agree, while the potential is huge, it’s not going to be easy, and I’m not certain Tencent realizes what they’re facing in terms of a learning/investment curve.

Michael A. Robson

Sounds like they have recently been investing in other sites (or buying them outright), but for the most part, Tencent is still synonymous with ‘Chat/QQ’… that’s why I thought it was a strange branding move. The vast majority of Tencent’s users have zero interest in spending any money (unless you count the Zynga-like addictive qualities of virtual goods), and most of Tencent’s services are free. It will be interesting to see who can come up with a real business model first: Twitter or Tencent.

Source: http://www.buybuychina.com/tencents-e-commerce-from-socialism-to-consumerism/

David Wolf

I don’t see it so much as a “branding move” as a long-term Hail Mary effort to monetize. They’ve got social down. If they can extend that into mobile (and this is still a BIG “if,” hence the other direction of investment I discussed,) they can probably hang onto their social leadership for another five years. The key will be monetizing. Mobile advertising in the OS/App world is formative at best possibly hopeless. Tencent is hoping they can kludge instant-gratification retail into the social-mobile mix. I can see several ways to do it, but it demands detailed execution, and they haven’t got the management chops to pull it off…yet.

Michael A. Robson

How about instead of integrating shopping into social sites, we integrate social into shopping sites (not exactly rocket science). The problem with the former is… I don’t log into Facebook to buy something… This doesn’t really help QQ Much, but certainly QQ, etc will be integrated right into whatever eCommerce site TC buys.

gregorylent

the closer technology gets to replicating what a developed awareness can innately do by itself (see yogis) the less people will pay for it, and the less it should be charged for.

new paradigm businesses will figure this out, and adjust. the old ones will crash.

wrap your head around this, this is how much “reality” will change this century.