How Tencent became the World’s Most Valuable Social Network Firm – with Barely any Advertising

By Salvatore Cantale and Ivy Buche

 

The Chinese technology giant Tencent recently overtook US rival Facebook to become the world’s most valuable social network company, with a market capitalisation of US$540 billion. Yet it is sitting on an advertising goldmine. Just 18% of its total revenue in the 2016 fiscal year came from online advertising. Compare this with Facebook’s model: advertising makes up 98% of its total revenue. So why hasn’t Tencent yet made the most of its advertising potential?

To answer this, we need to understand Tencent’s monetisation strategy – and its philosophy on user experience. And to do that we need to go back to the company’s early days.

It was only in 2001, following the launch of the MobileQQ messaging platfrom for mobile phones, that Tencent turned its first profit: US$1.2M on sales of US$5.9M. Three years later, Tencent was listed on the Hong Kong stock exchange.

Co-founded in 1998 by Ma Huateng (better known as Pony Ma) and four friends, Tencent launched its first product in 1999 – a free PC-based instant messaging service called OICQ, later renamed QQ. It secured one million users in the first year but the company remained unprofitable. It was only in 2001, following the launch of the MobileQQ messaging platform for mobile phones, that Tencent turned its first profit: US$1.2m on sales of US$5.9m. Three years later, Tencent was listed on the Hong Kong Stock Exchange.

In 2005, it introduced Qzone – a multimedia social networking service. By 2010, thanks to Pony Ma’s decision to open up Qzone to apps from third-party developers, Qzone was the largest social networking platform in China with 492m active users.

Capitalising on the growing importance of mobile, WeChat was born in 2011. Since then, Tencent has added official accounts, payment services, a game centre and even an office chat app to WeChat. The app has become a central part of modern Chinese life.

Investors rewarded the company for its successful growth. The company’s market capitalisation grew with a five-year compound annual growth rate of 40% for 2011-16 and it broke into the league of the top ten most valuable listed companies in the world in April 2017.

 
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About the Authors

Salvatore Cantale, (left) Professor of Finance, IMD Business School

Business Transformation Project Manager, IMD Business School

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of All China Review.

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