Tencent Holdings (00700.HK) posted record results in the second quarter. Both its earnings and share price seemingly has no upside limit.
Online games remain the largest revenue source of Tencent. The sector generated 46.7 billion yuan in the first half, representing 44 percent of its total income.
In fact, China has tens of thousands of mobile companies. Why is Tencent able to capture the lion’s share of the market?
The secret lies not in games but in the unparalleled access to clients through Tencent’s social networking platform.
There are tons of game developers in China, and game players are constantly searching for new excitement. Keeping customers’ attention has always been a very difficult task. However, Tencent has managed to tackle the issue by leveraging its social media platforms.
Whenever there is a new game, Tencent can directly market it to its 960 million-strong user base. Players can also compete with their friends and show the rankings on WeChat platform. Points or rewards earned in one game can largely be transferred to another Tencent game.
In other words, the secret to Tencent’s hugely successful online game business is the support from its social media platform.
Tencent has been trying to apply the same trick to other businesses, with success.
Its social media revenue surged 51 percent o 12.9 billion yuan in the second quarter, mainly from selling lifestream, music and digital content.
Online advertising revenue jumped 55 percent to 10.1 billion yuan in the second quarter.
The above two segments have combined revenue close to the 23.9 billion yuan and have become new growth engines.
The key question investors should ask is whether Tencent’s social media platform will remain the favorite choice of mainlanders.
It’s hard to imagine that instant messaging software like ICQ and MSN would one day become irrelevant 10 or 20 years on.
But the fading out of these social media indicates such risk is real.
Both ICQ and MSN had lured hundreds of millions of users. As new functions were added to maximize profit, users became increasingly annoyed by endless ads and promotions. When a better alternative came along, people quickly migrated to the new platform.
To avoid such risk, Tencent should strike a balance between profitability and user experience.
So far, the company has been doing a good job. Yet, investors should always keep a close watch on the WeChat platform, where Tencent’s core competitiveness lies, in order to ensure things are still on the right track.
This article appeared in the Hong Kong Economic Journal on Aug. 18
Translation by Julie Zhu
[Chinese version 中文版]
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