2 Economic Profile
Founded in 1998, Tencent now is the seventh largest Internet company in the world, with a market capitalization of over $400 billion. As the company celebrated its 20th anniversary in 2018, Tencent announced a strategic corporate reorganization and upgrade, aiming at better serving enterprise and industrial clients through “the convergence of social, content, and technology trends.” Proudly proclaiming itself an “online lifestyle service” provider, Tencent said it had “brought together China’s largest Internet community.”1
But, what are the scope and reach of Tencent’s businesses? How are its business and finance structured to make the company competitive in so many different areas? What factors contribute to Tencent’s success in China’s Internet industry? These are not just business school “101” type of questions that seek to understand marketing strategies, consumer behaviors, or managing skills but are critical political-economic ones that allow exploration of Tencent as a site of interactions among units of capital within the web of a national and transnational Internet industry.
Some studies touch upon the commercial aspects of Tencent. Haibo Zou discusses how Tencent utilized the network effect aggregated by the massive adoption of QQ to promote other pay services.2 Junjie Zhang argues that Tencent’s successful transformation from a single business to diversifications builds on the network of instant communication.3 More recent studies look into its flagship product Weixin and WeChat.4 Shijie Wang examines the micromarketing strategies on Weixin and WeChat, which took advantage of users’ social networks and location-based information.5 A limited number of studies published in English focus on Tencent’s business strategies as an example for the digital industry.6 While these studies contributed to understanding Tencent’s profit-making mechanisms on micro levels, they did not present an institutional context within which Tencent develops.
This chapter analyzes the basic economic features of Tencent through examining the reach of its business activities and the scope of its product lines. Explored are the broad range and extent of Tencent’s value-added, Internet-related services and the courses of integration and diversification as the company collaborates with other domestic units of Internet capital. Tencent has displayed the intrinsic trends of capital reproduction and expansion in forms of horizontal integration, vertical integration, and diversification. Equally important is the company’s strategic choices in its acquisitions, mergers, and partnerships, as its achievement largely depends on a number of successful alliances with several leading Internet companies and thus mirrors the inter-capital relations in China.
Corporate Structure and Financial Performance
Tencent was founded in November 1998 as Shenzhen Tencent Computer Systems Co. Ltd.7 The five core founders were Ma Huateng, Zhang Zhidong, Xu Chenye, Chen Yidan, and Zeng Liqing. Four of them—Ma, Zhang, Xu, and Chen—were schoolmates and friends who knew each other from middle school and college. Zeng and Ma’s sister were colleagues at Shenzhen Telecom. At Tencent, Zeng was in charge of sales and marketing; the other four were primarily focusing on developing computer programs and products. The government’s requirement for registered capital to start a company was $60,386 (RMB 500,000) back then. These five young men put together their own savings, and each contributed a portion to the seed funding.
The company initially, like many in the infant stage, did not have a clear direction until it started developing an instant messaging system (IM). IM comprised a unique communication format, and it predated the concept of real-time interactive conversation; an early successful prototype came in 1996 when the Israeli company Mirabilis launched the software ICQ.8 In June 1998, with already 21 million users, Mirabilis was acquired by America Online (AOL), the then U.S. Internet giant; in August 1998 Tencent brought ICQ to China with the name OICQ.9
In the late 1990s personal computers and household Internet were not widely accessible in China due to their high cost. Urban working classes mostly went to Internet cafes and net bars—where the owners maintained dozens of computer terminals, paid the Internet service providers (ISP), and charged users based on the time they spent online—for online activities.10 In such an environment, connection speed and security of personal information were users’ primary concerns. Tencent improved OICQ by compressing the size of the software package so that users could download it quickly and store their contacts in their online accounts instead of on the shared computers in Internet cafes. OICQ was officially launched in February 1999, making Tencent one of the first IM providers in China.11 Within half a year, registered users reached one million.12 This laid the foundation for its future success in Internet and mobile value-added services.
| Stockholder | Investment (RMB) | Percentage |
| Ma Huateng | 237,500 | 47.5 |
| Zhang Zhidong | 100,000 | 20.0 |
| Zeng Liqing | 62,500 | 12.5 |
| Xu Chenye | 50,000 | 10.0 |
| Chen Yidan | 50,000 | 10.0 |
Source: Lin and Zhang, Ma Huateng’s Tencent Empire, 33–34.
On November 23, 1999, Tencent incorporated another company, this time in the British Virgin Islands under the name of Keyword Technology Ltd. This later became the parent company of the Tencent group—Tencent Holdings Ltd. In 2004, before its initial public offering, Tencent changed its registration location to the Cayman Islands and its name to Tencent Holdings Ltd.13 To register an offshore parent company was not uncommon among Chinese Internet companies because of the easy registration process, low maintenance cost, and low tax in the British Cayman Islands.14
In February 2000 Tencent established a wholly owned subsidiary company, Tencent Technology (Shenzhen) Co. Ltd.15 The aim was to separate its businesses in software development and value-added services (VAS) to different subsidiary companies so that the company would be able to incorporate foreign investments while running the value-added telecommunications and Internet services.
Tencent’s IM business continued to grow in 2000. By April 2000, registered accounts of OICQ reached five million.16 To promote its brand, Tencent designed a cartoon-penguin icon, which immediately became the symbol of the company.17 However, AOL accused OICQ of violating the intellectual property rights of ICQ.18 In December 2000 Tencent changed the name of its IM service into QQ.19
Also in 2000, Tencent started collaborating with China Unicom and China Mobile’s Guangdong Bureaus as both telecom giants launched their first wireless application protocol (WAP) services and agreed to include mobile QQ as a preinstalled program in their newly issued SIM cards.20 Shortly after, Tencent started working with the local bureaus of China Mobile in Beijing, Sichuan, Jiangsu, Zhejiang, and Shanxi, among others.21 By 2004 Tencent was working with 44 subsidiaries and branches of China Mobile and China Unicom in delivering its mobile and telecommunications VAS.22 The diffusion of the mobile Internet contributed hugely to Tencent’s balance sheet:
In the meantime, Tencent further integrated its corporate framework in prospect of an IPO. In early 2004 Tencent established two more subsidiaries: Shenzhen Shiji Kaixuan Technology Co. Ltd. (Shiji Kaixuan) and Shidai Zhaoyang Technology (Shenzhen) Co. Ltd. (Shidai Zhaoyang). Shiji Kaixuan Technology, incorporated as a private limited company, was designed to provide Internet and telecommunication VAS similar to Tencent Computer.24 Shidai Zhaoyang was registered as a wholly foreign owned entity running software businesses like Tencent Technology.25
On June 16, 2004, after nearly one year’s preparation, Tencent was publicly listed on Hong Kong Stock Exchange (HKSE).26 Tencent enlisted Goldman Sachs as its “global coordinator, lead manager and bookrunner of the offering” in 2003.27 According to Tencent, the collaboration between Tencent and Goldman Sachs was the result of “mutual respect and appreciation.”28 In fact, at the time, Goldman Sachs was the leading underwriter for Chinese companies’ overseas public listings.29 In 2004 alone, Goldman Sachs participated in coordinating and underwriting the IPO of Ping An Insurance (Group) Co.—China’s second-largest life insurer and third-largest property insurer—on the HKSE, Shanda Interactive Entertainment Limited’s IPO on the American NASDAQ, and Tencent’s IPO.30 Tencent’s listing in Hong Kong was especially a landmark because it was the first Chinese Internet company “to be listed on the Main Board of the (Hong Kong) Stock Exchange.”31
Tencent’s reports broke down its businesses into three major areas: Internet value-added services (IVAS), mobile and telecommunications value-added services (MVAS), and online advertising. Both IVAS and MVAS were built on the basic IM platform, which allowed users to “communicate via text messages, images, video, voice, and e-mail.” These services then created an online community for social networking, entertainment, and gaming. Tencent embedded targeted advertisements into different platforms.32
| Year | Total Assets | Revenues | Net Profit |
| 2001 | 66 | 49 | 10 |
| 2002 | 214 | 263 | 141 |
| 2003 | 576 | 735 | 322 |
| 2004 | 2,863 | 1,144 | 441 |
| 2005 | 3,427 | 1,426 | 485 |
| 2006 | 4,651 | 2,800 | 1,064 |
| 2007 | 6,985 | 3,821 | 1,568 |
| 2008 | 9,856 | 7,155 | 2,816 |
| 2009 | 17,506 | 12,440 | 5,222 |
| 2010 | 35,830 | 19,646 | 8,115 |
| 2011 | 56,804 | 28,496 | 10,225 |
| 2012 | 75,256 | 43,894 | 12,785 |
| 2013 | 107,235 | 60,437 | 15,563 |
| 2014 | 171,166 | 78,932 | 23,888 |
| 2015 | 306,818 | 102,863 | 29,108 |
| 2016 | 395,899 | 151,938 | 41,447 |
| 2017 | 554,672 | 237,760 | 72,471 |
| 2018 | 723,521 | 312,694 | 79,984 |
Sources: Tencent, Annual Reports, 2001–18 (revenue year-end of December 31).1
1 For the purpose of accuracy in this table, the RMB is the original data from Tencent’s company reports. For the following charts, which aim to show the growth curve of Tencent’s businesses, the currency has been changed to USD based on World Bank, “Official Exchange Rate (LCU per US$, Period Average),” accessed March 20, 2017, http://data.worldbank.org/indicator/PA.NUS.FCRF?end=2015&locations=CN&start=1998&view=chart.
Figure 2.2 Tencent’s Annual Revenue Growth, 2001–18
Sources: Tencent, Prospectus and Annual Reports 2004–18 (revenue year-end of December 31).
Table 2.3 Tencent’s Revenue by Business, 2001–11
Sources: Tencent, Prospectus, 9; Tencent, Annual Reports, 2004–11 (revenue year-end of December 31).
Figure 2.3 Annual Growth in Internet Value-Added Services, 2001–11 (USD in millions)
Sources: Tencent, Prospectus, 9; Tencent, Annual Report, 2004–11 (revenue year-end of December 31).
Figure 2.4 Annual Growth in Mobile Value-Added Services, 2001–11 (USD in millions)
Sources: Tencent, Prospectus, 9; Tencent, Annual Report, 2004–11 (revenue year-end of December 31).
With the diffusion of smartphones and the completion of 3G and 4G networks throughout China, MVAS were gradually expanded to games, entertainment, and community networking, parallel to the Internet VAS provided on desktops. Especially after 2011 when Tencent launched Weixin and WeChat, a smartphone-based chatting service, the mobile sector was further strengthened through mobile applications.33
In 2012 Tencent reorganized its business structure by “aligning the product development and management” of some core services between PC and mobile versions.34 Its spreadsheet combined the IVAS and MVAS into one column, value-added services. The spreadsheet also included a new column for revenue from e-commerce transactions. Due to some mergers and acquisitions, discussed later, the revenue of e-commerce was grouped into the “other” column after the first quarter of 2015.35
Table 2.4 Tencent’s Revenue by Business, 2012–18 (USD in millions)
Sources: Tencent, Annual Reports, 2012–18 (revenue year-end of December 31).
Figure 2.5 Annual Growth in Value-Added Services, 2012–18
Sources: Tencent, Annual Reports, 2012–18 (revenue year-end of December 31).
Dissecting the Tencent Empire
Tencent encompassed a broad range of domestic and international services. A closer look at each major sector of Tencent’s businesses, focusing on the company’s own product development and processes of diversification, is next in this chapter, with primary attention to the course of Tencent’s growth and outreach rather than its inter-capital relations with other Internet companies. Tencent’s business evolution exemplifies the processes many political-economy scholars term commodification and diversification. Mosco defines commodification as the process of transforming a product’s use value into exchange value.36 In this case, it is to monetize the IM service and gain marketable value—be it user traffic or cash flow—from QQ. Diversification, as will be illustrated later, refers to a strategy to diversify product lines out of a company’s original business in order to maximize market share and thus profit.
Communications Platforms
Tencent’s early success stood primarily on the IM service QQ. Tencent has continuously worked on improving QQ with two important breakthroughs: the launch of business QQ to serve corporate clients for organization communications and the development of Weixin/WeChat on mobile devices in 2011. To avoid redundancy, these most popular products are detailed in Chapter 4 as part of Tencent’s cultural profile.
Social Platforms
Tencent also promoted a set of social networks to strengthen its online community: QZone and real-name social-networking site (SNS).
QZone
QZone, launched in 2005 as a featured product in social networking and online community interactions, was a personal home page “bundled with web blog, photo album and online music.”37 Each QQ user automatically received a QZone with his or her QQ numbers. While users posted blogs and photos on QZone, their QQ friends could view and interact with them. Largely drawing traffic from QQ, QZone has quickly become one of the top three social-networking sites (SNS) in China.38 Another report on global social-network websites put QZone as the third-largest worldwide in 2013, only behind Facebook and YouTube, as it evolved into a major social-networking platform that combined blogging, microblogging, photo sharing, activity posts, and micromarketing promotions.39 By the end of December 2018, QZone maintained 532.4 million active user accounts via smart devices.40
Real-Name Social-Networking Site (SNS)
While QZone is based on QQ accounts using nicknames in the virtual world, Xiaoyou.com, launched in January 2009 by Tencent, is a real-name social-networking site for university students and alumni to make connections.41 The name of the site was changed to Pengyou.com in 2010, which invites a broader scope of users, including university students and graduates and a wider range of professional communities, such as white-collar workers.42 At the end of 2012, Pengyou.com reached 247 million active users.43
Media Platform
The online portal QQ.com was Tencent’s major media portal for news, entertainment, sports, videos, technologies, fashion, automobiles, and shopping, linking to Tencent’s VAS.44 Launched in December 2003, the website served first as an information-distributing center. Tencent launched multiple media campaigns in promoting the QQ.com brand. At the end of 2004, the company put together a one-year anniversary celebration for the website with the slogan, “New life, my style.” Targeting young people, Ma Huateng announced at the event that Tencent aimed to make QQ.com the number 1 website for fashion and entertainment in China.45
Starting from 2006, QQ.com collaborated with provincial news agencies to build regional news portals as subsites of the main portal.46 For example, in March 2006 Tencent worked with the Chongqing Economic Times to launch cq.qq.com as a local-media portal for Chongqing audiences. The Chinese name of cq.qq.com is Da Yu Wang, which means the website for the area of Yu—the acronym of Chongqing—a southwestern metropolis. Shortly after, Tencent established many more local news portals using the acronyms of different regions. These portals became an important content provider for QQ.com and tightened Tencent’s connections to users from different places.
In 2007 Tencent further promoted the QQ.com brand by reporting significant national news and sports events. In 2008 when Sichuan suffered a disastrous earthquake, aside from providing real-time news, QQ.com called for online donations from the audience and ultimately raised more than $3.31 million (RMB 23 million) for the earthquake victims. In 2010 QQ.com worked with the Shanghai World Exposition as the organizer’s exclusive Internet service sponsor.47
For sports news, the portal leveraged opportunities presented by the 2010 and 2014 World Cups, 2008 and 2012 summer Olympics, and regional events. During the 2008 Beijing Olympics, QQ.com reached a traffic record of 1.1 billion page views a day as it provided comprehensive coverage, including live reports in the form of texts, images, and videos.48 In 2014 Tencent signed exclusive partnerships with HBO and the National Basketball Association (NBA) to distribute their TV shows and sports events in China, which further enhanced traffic on Tencent’s media portal.49 The sports channel carries a number of subscription packages that provide subscribers with various levels of access to the NBA, the Premier League, the National Collegiate Athletic Association (NCAA), and the National Hockey League (NHL) games.50 The online streaming portal provides similar services on TV shows and movies, such as early access to newly released movies and the option to skip advertisements when streaming.51
Search Engine
In March 2006 Tencent launched its own search engine: Soso.com.52 Although Baidu dominated China’s search-engine market with more than a 70 percent share, Tencent’s Soso was the second-leading search engine in China’s mobile search market.53 In September 2013, Tencent made a substantial investment in another search-engine company, Sogou.com, and merged its search-related businesses into Sogou.54
Online Advertising
While online advertising has been a foundational profit mechanism in the Internet economy in the U.S., Tencent, unlike the American pioneers of Google, Yahoo, Microsoft, AOL, and Facebook, which “served profile-based targeted advertising and/or collected consumer data across expansive networks,” was not able to take full advantage of its tremendous user traffic for advertising revenue until 2007 when it developed targeted online advertising technology.55 This was partly due to the low diffusion rate of the Internet in China in the early 2000s when “the Internet has not been proven as a widely accepted medium for advertising.”56 According to Tencent’s prospectus, revenues from online advertising only accounted for 4.5 percent of its total revenue in 2003.57 This number grew gradually with the wider diffusion of Internet VAS in China. The large user base of Tencent’s IM platforms and VAS, in particular, put the company in an advantageous position, as a 90 percent coverage of Chinese online users made it easy for Tencent to identify their demography, location, preferences, and online context.58 In March 2011 Tencent further developed a web-based video platform for advertising, which boosted video advertising revenue by 70 percent in the fourth quarter of 2011.59 The growth of online advertising was entangled with the development of the company’s media portal QQ.com, mobile software, and all kinds of VAS.60
Online Games
Online gaming stood out as one of the most important contributors to Tencent’s VAS. In 2018 the revenue VAS generated was $46.6 billion (RMB 312.69 billion), with $19.14 billion (RMB 128.4 billion) coming from online games.61 Of the revenue in online games, smartphone games contributed $11.6 billion (RMB 77.8 billion).62 As another critical element of Tencent’s cultural profile, the genres of Tencent’s games and expanding strategies are detailed in Chapter 4.
E-Commerce and Online Payment
Business was further extended by an e-commerce sector when Tencent launched a customer-to-customer (C2C) auction platform, Paipai.com, in 2005.63 The website attracted 230,000 certified sellers with 300,000 commodities for sale within one month of its establishment.64 Launched together with Paipai.com to assist online transactions was an escrow online payment system, Tenpay.65 Certified by China Information Security Evaluation Center in 2006, Tenpay was further integrated into Tencent’s online system by providing payment services to online phone bills, air flight tickets, and lotteries.66 To strengthen the e-commerce sector, Tencent launched a new business-to-business-to-consumer (B2B2C) platform, Buy.qq.com, in 2011, which incorporated other institutional e-commerce operators into its platform, such as OkBuy, an online retailer for clothing outfits and shoes; Yixun.com, a website selling digital products and home appliances; and Kela, an online jewelry vendor.67
As a latecomer to e-commerce, Tencent faced fierce competition from established players, such as eBay, Alibaba’s Taobao, Yipai, and Dangdang.68 Under such circumstances, in March 2014 Tencent announced a strategic partnership with Jingdong (JD.com)—China’s second-largest online retailer.69 Under the partnership, Tencent transferred all of its e-commerce business into JD.com and embedded JD.com’s services into mobile QQ and Weixin/WeChat.70 This significantly changed both companies’ business layouts as well as China’s e-commerce industry landscape. Tencent was finally able to compete with Alibaba, while JD advanced its weight in mobile e-commerce. In August 2016 Tencent became JD.com’s largest institutional shareholder with 25 percent of its ordinary shares.71 Details of the deal are elaborated in the section “E-commerce” under “Horizontal Integration.”
Research and Development
As an Internet company, Tencent puts a lot of efforts and money in research and development. The expenses in research and development have grown noticeably in recent years.
Tencent established Internet-research academies in Beijing, Shanghai, and Shenzhen in 2007, one year after it announced plans to explore Internet technologies by collaborating with universities in these three cities.72 Each academy focused on one or more of these six areas: data storage, data mining, multimedia, language processes, distribution network, and wireless technology.73
|
Year |
R&D |
|
2004 |
56 |
|
2005 |
162 |
|
2006 |
297 |
|
2007 |
376 |
|
2008 |
710 |
|
2009 |
1,191 |
|
2010 |
1,685 |
|
2011 |
2,684 |
|
2012 |
4,176 |
|
2013 |
5,095 |
|
2014 |
7,581 |
|
2015 |
9,039 |
|
2016 |
11,845 |
|
2017 |
17,456 |
|
2018 |
22,936 |
Sources: Tencent, Annual Reports, 2004–18 (revenue year-end of December 31).
In 2008 Tencent established the Tencent Scholarship for Excellence in Science and Technology at top Chinese universities, including Peking University, Tsinghua University, Shanghai Jiaotong University, Huazhong University of Science and Technology, Harbin Institute of Technology, South China University of Technology, Northwestern Polytechnical University, and University of Electronic Science and Technology of China. The company was the first among Chinese Internet enterprises to reward students’ talents in computer science.74 According to the terms with Peking University, for example, every year three students with distinguished academic performance are each awarded $2,173 (RMB 15,000), and another ten students with merits each receive $724 (RMB 5,000).
Labor Practices
Valuing high-tech human resources, Tencent implements attractive employee benefits and bonuses to recruit and reward talented employees. In 2011 the company proposed a three-year Anju Plan to provide no-interest housing loans to employees. Employees who have been with the company for more than three years and need money to buy their first condominium or house could apply to get a loan up to $46,150 (RMB 300,000) from the company; repayments of the loan were deducted from the employee’s monthly salary over six years.75
Tencent was also very aggressive in its actions against employees leaving for other Internet companies. In November 2008 Tencent filed a legal case against 15 of its former employees who went to 51.com, a leading provider and a competitor with Tencent in social network and game services.76 According to Tencent, these employees violated their contracts, which stated that they could not join a company in a similar industry within a certain period of time after their departure from Tencent.77
In view of the growing competition for talent among high-tech companies, Tencent designed an employee incentive scheme to reward employees with stock shares as bonuses.78 On July 6, 2016, Tencent issued a total of 56,213,500 new shares to reward 10,383 employees for their loyalty.79 Based on the closing price of Tencent’s shares that day, the market value of the rewards was worth approximately $1.26 billion.80
Expansion Through Horizontal and Vertical Integration
Tencent has been actively expanding its businesses through extending control to horizontal and vertical markets, in the form of mergers, acquisitions, and strategic alliances. This section does not aim to exhaustively catalog every single investment Tencent has made but attempts to develop an understanding of Tencent’s synergetic empire by scrutinizing the public documents detailing various types of business expansion. Tencent’s collaborations with domestic partners experienced several distinct stages. During the early stage between 1998 and 2005, Tencent aimed at growing big and tried to extend its business into as many areas as possible. Starting in 2005, Tencent planned large volumes of acquisitions of and mergers with companies smaller than Tencent to strengthen the businesses it had stakes in. After 2010 Tencent turned to strategic investments and alliances with other strong players in the market, and it acquired minority stakes in those companies—instead of buying the whole company or including the company into its kingdom as a subsidiary. Acquisitions and mergers started as occasional and opportunistic choices but after 2010 became a comprehensive strategy that the Tencent’s leadership favored. Altogether, these mergers, acquisitions, and strategic alliances assisted Tencent to horizontally and vertically integrate within the broadly defined Internet VAS.
The analysis is presented primarily by chronicling these stages, and, also organized by tracing Tencent’s roadmap into each business market. For simplicity of analysis, “horizontal integration” is defined here as purchasing other companies that operate in the same product markets and at the same level of production, and “vertical integration” as extending control at different levels of production from input through output.81
Horizontal Integration
E-mail Service
On March 16, 2005, Tencent acquired a leading Chinese e-mail developer, Foxmail Group, which was Tencent’s first formal business acquisition.82 Foxmail, originally developed by Zhang Xiaolong in 1997, was acquired in 2000 by Boda China, a Guangzhou-based Internet service company, for $1.47 million (RMB 12 million).83 The Boda China deal moved Zhang and the whole Foxmail research-and-development team to Tencent.84 Foxmail, occupying the largest share of e-mail service in China, contributed not only 5 million users to Tencent but also its expertise in providing institutional or corporate communication services on a large scale.85 The deal came at a time when Tencent was in fierce competition with Microsoft’s MSN and Hotmail.86 Zhang, the core founder of Foxmail, also became a leading member of Tencent’s research-and-development team and later stood out as the chief architect of Tencent’s Weixin/WeChat service.87
MVAS
In 2006, Tencent acquired a 100 percent equity interest in two mobile and telecommunications service providers: Joymax Development Ltd. established in 2003 and specializing in providing SMS-based VAS and marketing and branding through mass media, and Wangdian Technology, founded in 2000 in Nanjing and also an MVAS provider.88
In 2007 Tencent further strengthened the MVAS sector by acquiring Beijing BIZCOM Technology Co. Ltd. and Beijing Starsinhand Technology Co. Ltd., both of which provide MVAS.89 On March 20 and May 23, 2008, Tencent acquired 100 percent equity interest in two more domestic mobile and telecommunications VAS providers, Guangzhou Yunxun and Tianjin Shouzhongwanwei, for a total of $1.59 million (RMB 11 million).90
Bulletin Board Systems (BBS) and Online Community
In September 2010 Tencent acquired a Beijing-based Internet community software and service provider, the Comsenz Group, as its wholly owned subsidiary for $43 million (RMB 292 million).91 Comsenz is a leading player in providing online community services, such as social-networking software, bulletin-board systems, and cloud servers in China.92
Search Engines
On September 6, 2013, Tencent paid $448 million in cash (RMB 2.741 billion) to Sogou for 36.5 percent of its equity capital.93 By 2013 Tencent’s share in Sogou increased to 40 percent with 24.8 percent of the voting power.94 Tencent president Lau Chi Ping Martin and chief operating officer Ren Yuxin joined the Sogou board of directors.
Sogou stood as China’s third-largest search service provider with a 10 percent share of the market, after Baidu with 63 percent and Qihoo 360 with 18 percent.95 Sogou owned a line of online and mobile applications, including Sogou Pinyin, a top Chinese-language input software; Sogou browser, a web browser with third-largest market share in China; Sogou Web Directory; mapping; and voice search.96
The partnership, coming in a period of a heated competition within China’s search-engine market, not only regrouped both companies’ related businesses but also helped Tencent keep up in China’s Internet industry. At that time, Alibaba and Baidu had just closed a few high-profile acquisitions and investment deals of their own, both marching toward conglomerates. Alibaba, in April 2013, paid $586 million to Sina Weibo for an 18 percent stake in China’s leading microblogging service, provoking a head-on confrontation with Tencent’s Weixin /WeChat.97 One month later, Alibaba invested $294 million for 28 percent of shares in an online mapping company, AutoNavi, which in 2014 became a wholly owned subsidiary of Alibaba.98 Baidu, in July, announced a deal worth $1.9 billion, the largest in China’s Internet industry history, to acquire 91 Wireless, China’s leading mobile app store operator.99 All three Internet giants were expanding their territories.
E-commerce
In March 2014 Tencent and JD.com, the second-largest e-commerce operator in China with a 17.5 percent market share, began a strategic collaboration.100 In the deal Tencent bought 15.0 percent of JD.com for $214.66 million (part of a subscription agreement before JD.com’s IPO) and gave JD.com 100 percent interest in the Tencent B2C platform, QQ Wanggou; 100 percent in the C2C site PaiPai; and 9 percent equity interest in Tencent’s Yixun.com.101 Upon JD.com’s IPO in May 2014, Tencent further purchased 5 percent shares.102 On December 2, 2014, Tencent acquired an additional 0.45 percent of JD.com, which gave Tencent overall a 17.88 percent interest in JD.com.103 Tencent’s president Lau was appointed as JD.com’s director.104 Although possessing a large ownership stake, Tencent only held a 3.7 percent voting stake, with JD.com founder Liu Qiangdong maintaining a dominant voting position.105
Major considerations of the collaboration were to expand JD.com’s mobile market and Tencent’s e-commerce business. These were interpreted as a direct countermeasure to the Alibaba–Sina Weibo alliance formed in April 2013 that would create advertising space for Alibaba’s Taobao retailers to send customized posts and interact with followers taking advantage of the mass user base on Weibo, the leading microblogging platform.106
Vertical Integration
Online Travel Agency: eLong
On May 17, 2011, Tencent formed a strategic partnership with eLong, a China-based, leading online and mobile travel agency listed on NASDAQ, by purchasing about 11 million newly issued shares, which gave Tencent a 16.15 percent equity interest in eLong, at a price of $84.4 million (RMB 548 million).107 The deal made Tencent the second-largest shareholder of eLong, the first being the U.S.-based online travel giant Expedia with a 56 percent.108
As Tencent’s first significant investment in the travel market, the collaboration added another piece to Tencent’s ever-enlarging online lifestyle kingdom with e-Long’s worldwide travel services, such as hotels, flights, resorts, and so on.109 For eLong and Expedia, Tencent’s establishment in Chinese online communities brought users to them.110 With Xiaoguang Wu, Tencent’s senior executive vice president of Internet business, sitting as a member of eLong’s board of directors upon the deal, Tencent maintained significant influence in business decisions on eLong.111
Online Software Security
Kingsoft Corp. Ltd., a Chinese leading software developer and Internet service provider in Internet security, became a Tencent associate on July 6, 2011, when Tencent acquired a 15.28 percent shareholding in the company for $114 million (HKD 892 million).112 Tencent president and executive director Lau was appointed as a non-executive director of Kingsoft on July 28, 2011.113 The alliance came at a time when Tencent was in a cutthroat competition with another Chinese online security firm, Qihoo 360. Bloomberg reported that Kingsoft and Tencent together possessed 20 percent of market share in China’s online-security sector, which was only surpassed by Qihoo 360.114
In June 2013 Tencent purchased an additional 8 percent of the shares of Kingsoft Internet Security Software Corp. Ltd. (KIS), a non-wholly owned subsidiary of the Kingsoft Group, which was renamed Cheetah Technology Corp. Ltd.,115 at approximately $47 million (RMB 290 million) and increased its stakes in KIS to 18.0 percent.116
Ridesharing and Online Taxi Reservation
In April 2013, Tencent invested $15 million in Didi Dache, a mobile application for taxi reservation or ridesharing and later embedded into the Tencent Weixin/WeChat system.117 In January 2014 by further investing in Didi, Tencent aimed to support its competition with Kuaidi Dache, a similar mobile application providing cab-calling services backed by Alibaba.118 The rivalry between Didi and Kuaidi was so fierce that they both rewarded their customers by reimbursing money to customers, Didi through Tencent’s Weixin/WeChat payment and Kuaidi through Alibaba’s Alipay.119 In February 2014 Didi and Kuaidi reached a partnering deal so that they no longer engaged in cutthroat competition with each other.120
Logistics and Trade Service
On January 15, 2014, Tencent teamed up with Chinese logistics facilities operator China South City Holdings Ltd., by acquiring 9.9 percent of its shares for $191.6 million (HKD 1.497 billion).121 Lin Ching Hua (Davis), general manager of Tencent’s strategy development department and social and performance advertisement department, was appointed as non-executive director of China South City in June 2014. In September 2014 Tencent further subscribed China South City’s shares, raising its interest to 11.55 percent.122 The strategic partnership connected China South City’s offline trade services, warehouse, and logistics expertise to Tencent’s online and mobile strengths of e-commerce, marketing, payment solution, and customer reach.123
Online Review Platform
In February 2014 Tencent invested in an online review and transaction platform for local businesses—Dianping.com—that offered such services as “local merchant listing, consumer reviews, money saving deals, online reservation and take out ordering.”124 A Yelp.com-like site, Dianping would connect its service to Tencent’s mobile ports, including mobile QQ, Weixin, and others. The $500 million deal gave Tencent a 20 percent stake in Dianping and strengthened the network effect through mobile platforms and group buying.125 For Tencent, this was another step in building a comprehensive ecosystem that advantages its large online user base to provide offline purchasing information and transactions.126
In June 2014 Tencent formed an alliance with another online and mobile platform that provided information for location-based local merchants and consumers, 58.com Inc.127 Tencent invested $736 million (RMB 4.541 billion) in June and $140 million (RMB 863 million) in September in exchange for a total 24.0 percent stake.128 Tencent’s Wu became a member of 58.com’s board of directors in August 2014.129 In 2015, after some reorganization, Tencent held 22.9 percent of 58.com’s equity interest.130 The partnership added one more piece to Tencent’s online-to-offline services, with 58.com’s specialty in serving local merchants and consumers for classified business information.
Online Real-Estate Service
In March 2014 Tencent made a $180 million (RMB 1.102 billion) investment in Leju Holdings Ltd., a Chinese online-to-offline real-estate services provider, and Tencent’s president Lau was appointed a director in Leju.131 Before the trade, Leju was a wholly owned subsidiary of E-House, a Chinese real-estate company, listed on the New York Stock Exchange since 2007 with services of e-commerce, online advertising, brokerage and marketing, real-estate databases, financing, and community-based VAS.132 On April 22, 2014, Leju was publicly listed on the New York Stock Exchange, and Tencent put in an additional $20 million (RMB 125 million) for Leju’s shares to maintain a 15 percent stake.133 The alliance primarily targeted the mobile-based, real-estate e-commerce market by bringing Leju’s online real-estate service to Tencent’s mobile platforms, promoting Leju’s brand through Weixin/WeChat official accounts and providing mobile payment access to Leju’s users.134
Digital Mapping
In April 2014, Tencent became the second major stakeholder in NavInfo Co. Ltd. by subscribing approximately 11.28 percent of the company’s share capital of $187.6 million (RMB 1.173 billion).135 The NavInfo, China-based and listed on the Shenzhen Stock Exchange, provided geographical information services, such as digital mapping, telematics, instant traffic updates, and location-based big-data applications.136 Owning nine wholly owned companies, 11 holding companies, and six joint-stock companies, the company claimed to be China’s largest and the world’s third-largest digital map provider, supplying a number of automakers’ in-dash navigation systems in China, including BMW, Volkswagen, Mercedes-Benz, General Motors, Volvo, Ford, SAIC Motor, Toyota, Nissan, Hyundai, Peugeot, and Citroen.137
Although Tencent has displayed distinctive expanding strategies by horizontal and vertical integration, some caveats need to be pointed out in these processes. Due to the widely spread scope and categories of online VAS, there are lacks of clear boundaries between different strategies. Different services often coexist within one application, where forms of expansion are also entangled. Tencent’s business expansions, for example, have combined horizontal integration, vertical integration, and a more general process of diversification. The company first expanded into many business areas by diversifying its own business scopes, as discussed in a prior section. Then, Tencent horizontally expanded in some service markets in which it already had a strong presence, such as e-mail, IM, online community and BBS, media portal, search engine, and e-commerce. In other areas that provided online-to-offline connections and tied new apps to Tencent’s messaging and communication portals, the company expanded through the form of vertical integration. With the reach and scale of the businesses becoming so broad now, one particular business move, very often, could entail a number of different strategies. This has actually become a salient feature of the Internet industry, that the breadth and depth of the services very often intersect, and therefore some boundaries get blurred.
Diversification Under Internet Plus
In addition to horizontal and vertical integration, under China’s recent national policy of Internet Plus, which was to build a social economic network around an integrated online to offline platform through the Internet, Tencent also started a more encompassing diversifying strategy around 2013, on a scale much broader and deeper than previous ones.
Investment Advisory
In November 2014 Tencent acquired a 23 percent stake in CITIC Capital Holdings Ltd., an investment management and advisory company with strong ties to the Chinese state, for $263 million (HKD 2.040 billion).138 The deal, under a round of the CITIC Group’s additional share offering, was expected to boost collaboration on Internet finance between the two companies.139 Relying on CITIC’s expertise in investment and finance, Tencent would also enhance its own investment profile. In 2015 alone the two together participated in at least three major investments in Chinese technology companies.140 In 2016 CITIC Capital joined Tencent’s consortium to buy the Finnish game developer Supercell as a co-investor.141
Banking
On December 16, 2014, Tencent, together with other partners including Shenzhen Baiyeyuan Investment Co. Ltd. and Shenzhen Li Ye Group Co. Ltd., were granted a license by the state’s banking regulatory commission to establish a privately owned commercial bank, Shenzhen WeBank Ltd., in which Tencent held 30 percent interest.142 In January 2015 WeBank started to provide loans to small- and medium-size businesses. The move came under China’s government’s relaxation in banking and financial systems, which allowed privately owned lenders to operate banks under a pilot program.143 Tencent was one of the few approved companies to establish private banks, as was Alibaba.144
Media and the Film Industry
Tencent had been preparing for years to set foot in the media and film industries. In May 2011 Tencent made an initial step into the movie industry by buying a 4.60 percent stake in Huayi Brothers Media Corp., a Chinese giant in film production and publicly listed on the Shenzhen Stock Exchange since 2009.145 With an investment of $69 million (RMB 445 million), Tencent became the largest institutional shareholder in China’s biggest nonstate film company.146 The deal was made at a premium of 9.89 percent over Huayi Brothers’ regular stock price, indicating Tencent’s eagerness for entering the market.147 Tencent and Huayi Brothers started their strategic partnership in December 2011 in movie production, content distribution, and online promotion. At the time of Tencent’s investment, the two primary individual shareholders were Wang Zhongjun and Wang Zhonglei, the cofounders of the company, who held 26.14 percent and 8.27 percent stakes, respectively. Meanwhile, Jack Ma, Alibaba Group’s founder and chairman, became an investor in Huayi Brothers in 2006 and sat on the board of directors of the film company as the third-largest shareholder with 5.50 percent shares.148
In the same year, Tencent put another $17.14 million (HKD 132 million), for 5.01 percent stake in the Hong Kong-based film production and distribution company Media Asia Group Holdings Ltd.149
Tencent continued exploring the movie industry in 2012 when it acquired 619,400,000 ordinary shares of ChinaVision Media Group Ltd.150 The deal, worth $31.713 million (HKD 247.76 million), gave Tencent an 8 percent stake in the HKEX-listed and mainland-based television and cinema content producer and distributor.151 Similar to Tencent’s Huayi Brother investments, the ChinaVision deal was made at a premium of 8.7 percent to its closing price.152 However, in March 2014, Alibaba Group bought a 60 percent stake and became the controlling shareholder of ChinaVision, which was renamed Alibaba Pictures Group Ltd. in August 2014.153
In 2015 Tencent established its own movie production unit, Penguin Pictures.154 So far the company has participated in the production and distribution of several Hollywood big-screen movies, such as Warcraft, Kong: Skull Island, Wonder Woman, Venom, Bumblebee, and Terminator 6, among others.155
Conclusion
Tencent’s pattern of business expansion featured a combination of horizontal and vertical integration and a widening diversification. Not many documents indicate the financial sources of these investments. Limited texts from Tencent’s own financial reports and trade journals suggest a majority of these investments were self-funded, while several other deals were done through fund-raising from bank loans and investment partners.156
Tencent’s collaboration with other domestic Internet companies or technology investors demonstrates a strategic choice of acquisitions, mergers, and partnerships. If it is acknowledged that Tencent achieved half of its horizontal integration by its own business exploration, then the other half was strengthened through acquisitions and mergers. For example, in areas of its strength, such as online and mobile VAS and QQ- and mobile QQ-related online-community communication, Tencent mostly took a horizontal-integration approach by acquiring smaller companies in the same area.
Vertical integration was accomplished to different extents where Tencent formed strong alliances with other leading players in various businesses. Especially after 2010, Tencent started massively investing in many segments: online traveling, e-commerce, media and film production, online publishing, search engine, online real estate, digital mapping, online taxi calling and ridesharing, online local life service, online entertainment (video and music streaming), and online banking. While most of these expansions were built around its mobile communication platform Weixin/WeChat, Tencent achieved a comprehensive and seamlessly connected online-offline living complex. In its deals with eLong, Sogou, and JD.com, for instance, is a typical model of vertical integration through the exhibition and distribution of offline services on Tencent’s online platforms.
Diversification has become a priority, shown not only in Tencent’s full-scale investments in the various Internet services but also in its most recent collaborations with investment, finance, and banking businesses. This is not only about Tencent’s collaboration with other banking or financial institutions to provide their services via Tencent’s platforms; it is more of a sign of Tencent’s ambition to become a major player in investment and financial service provision. Such an ambition not only corresponds to the trend to diversify one’s business in a media industry but also reflects the special context in China, where the overall political economy now is expected to restructure around the central pivot of the Internet—a national strategy referred by the Chinese state as Internet Plus. Under such context, Tencent no longer binds itself to the businesses that are only online in the traditional senses and starts building a complex of one-stop style in online-offline living and incorporating all the living necessities for individuals. For the moment, a large portion of this plan is synergized entirely on the single mobile application, Weixin/WeChat, which, in turn, reinforces a network effect and reconsolidates Tencent’s ability in capturing users.157
Tencent’s pattern of expansion through horizontal and vertical integration and diversification is parallel to those of U.S. Internet giants.158 Though initially and still disproportionately bred in China, the outline of Tencent’s growing businesses is similar to those of Google, Facebook, and Amazon.
Last but not least, a roadmap of Tencent’s growth also indicates the dynamic inter-capital relations in China’s Internet industry.159 The company’s achievement largely depends on its successful alliances with a number of leading Internet companies in China. These collaborations also have to be understood under the dynamics of fierce rivalries within China’s Internet industry as responses to competitors. The inter-capital collaboration and rivalry, always going hand-in-hand, must be analyzed as two sides of the capital and power reproduction process.