Home' Trinidad and Tobago Guardian : September 26th 2013 Contents BG28 | THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt SEPTEMBER 2013 • WEEK FOUR
Is Tencent one of the world s greatest Internet firms? There
are grounds for scepticism.
The Chinese gaming and social-media firm started in the
same way many local Internet firms have, by copying Western
success. QQ, its instant-messaging service, was a clone of ICQ,
an Israeli invention acquired by AOL of America. Furthermore,
unlike global Internet giants such as Google and Twitter, Tencent
still makes its money in its protected home market.
Nonetheless, the Chinese firm s stock-market valuation briefly
crossed the $100 billion mark this week for the first time. Given
that the valuation of Facebook, the world s leading social-media
firm, itself crossed that threshold only a few weeks ago, it is
reasonable to wonder whether Tencent is worth so much.
However, Tencent now has bigger revenues and profits than
Facebook. In the first half of this year, Tencent enjoyed revenues
of $4.5 billion and gross profits of $2.5 billion, whereas Facebook
saw revenues of $3.3 billion and gross profits of $935 million.
The Chinese firm s market value reflects the phenomenal
rise in its share price. A study released this week by the Boston
Consulting Group found that Tencent had the highest shareholder
total return---share-price appreciation plus dividends---of any
large firm globally from 2008 to 2012, topping Amazon and
Tencent has created a better business model than its Western
peers. Many Internet firms build a customer base by giving
away things ranging from search results to social-networking
tools. They then seek to monetize their users, usually turning
to online advertising: Google is a glorious example. Other firms
try to make e-commerce work, but---as the case of revenue-
rich but profit-poor Amazon suggests---this also can be a hard
Tencent does give away its services: QQ is used by 800
million people, and its We Chat social-networking app, which
initially resembled America s Whats App, has several hundred
million users. What makes it different from Western rivals is
the way it uses these services to peddle online games and
other revenue-raising offerings.
Once users are hooked on a popular game, Tencent then
persuades them to pay for "value-added services" such as
fancy weapons, snazzy costumes for their avatars and online
VIP rooms. Whereas its peers still make most of their money
from advertising, Fathom China, a research firm, reckons that
Tencent gets 80 percent of its revenues from such sales.
This year China has overtaken America to become the
world s biggest e-commerce market in terms of sales. It also
is now the biggest market for smartphones. This means that
it may soon have the world s dominant market in "m-com-
merce," purchases via mobile devices.
Tencent s main rivals in Chinese m-commerce are Baidu,
which---helped by the government s suppression of Google---
dominates search on desktop computers, and Alibaba, an e-
commerce giant now preparing for a huge share offering. All
three have gone on acquisition sprees, in an attempt to lead
the market. The big worry for investors is the cost of this
Alibaba recently invested $300 million in Autonavi, an
online-mapping firm, and nearly $600 million in Sina Weibo,
China s equivalent of Twitter. Baidu has been even more ambi-
tious, spending $1.85 billion to buy 91 Wireless, the country s
biggest third-party store for smartphone apps, and $370 million
for PPS, an online-video firm.
Tencent may have an edge on its two rivals in m-commerce
because of the wild popularity of We Chat, which is used on
mobile telephones. To ensure it stays in the race, however, it
also is spending heavily. On Sept. 16 it announced that it will
spend $448 million to acquire a big stake in Sogou, an online-
search firm, planning to merge its own flagging search engine,
aptly named Soso, into the venture. It previously had invested
in Didi Dache, China s largest taxi-hailing app, and is rumored
to be interested in online travel and dating firms too.
The three Goliaths are buying up innovative firms because
they are too big and bureaucratic to create things themselves,
mutter some entrepreneurs, presumably not those being bought
A more pressing worry for Tencent s shareholders is that
its lavish spending, on top of heavy investment in improving
its unimpressive e-commerce offerings, will eat into profits.
Worse, the m-commerce arms race risks distracting it from
gaming and value-added services, the cash cows that are
paying for everything else.
A $100 billion valuation might then seem too rich.
@2013 Economist Newspaper Ltd. (Distributed by the
New York Times Syndicate.)
A new approach to e-commerce
Links Archive September 25th 2013 September 27th 2013 Navigation Previous Page Next Page