Why Facebook Should Worry About Tencent

From the moment Facebook announced in February 2014 that it had bought the mobile messaging service WhatsApp, everyone’s been talking about the price that CEO Mark Zuckenberg parted with for the acquisition. Nineteen billion dollars (albeit $4 billion in cash and the rest in Facebook shares) is one of the largest sums ever paid for a venture-capital-backed start-up that is just five years old.

What’s really significant, though, is that by buying WhatsApp, Facebook has signaled its intention of taking on Tencent, China’s biggest Internet company, which is trying to become the global leader in the instant messaging market. Tencent’s mobile messaging service, WeChat (known as Weixin in China), has over 300 million users worldwide, and standalone, it is already valued at around $30 billion compared to WhatsApp’s $19 billion price-tag. The Chinese giant also owns QQ, an instant messaging program used on PCs, which had over 818 million users last year.

For the first time, the market leaders in the US and China are going head-to-head in a bid to dominate the global instant messaging market. Mobile services such as WhatsApp and WeChat cross borders more easily than most other Internet services can. In fact, Facebook acquired WhatsApp partly because the majority of the latter’s users live outside North America while the former is concentrated in the US.

Competing with Tencent should give Facebook pause, though. Founded in 1998, Tencent is a profitable company that has created a rich ecosystem of services. Its rise is the story of Tony Ma and Pony Ma, China’s first Internet moguls, as I describe in a recently co-authored book, The One Hour China Book.

According to VentureBeat’s Dean Takahashi, Tencent is “a little like what you would get if you combined AOL, Facebook, Skype, Yahoo, Gmail, Norton, and Twitter — under one roof.” Facebook should be worried about taking on Tencent for several reasons:

• Tencent has benefitted from the evolution of the Chinese Internet. The country’s rapid economic growth and protective regulatory environment have enabled some start-ups to become world-beaters by combining government connections, low-cost engineering talent, aggressive innovation — and a global vision. Besides, Tencent is just starting out; Internet penetration is around 40% in China as compared to the US’s 80%.

• Tencent enjoys the advantages of a giant social network as well as a history of innovation. It has repeatedly fought off competitors including messaging apps such as AOL Instant Messenger, Confide, Glide, GroupMe, iMessages, Instagram Direct, Kik Messenger, Line, Popcorn, Tango, MessageMe, Snapchat, Shots, Skype, Twitter direct messages, Telegram, TigerText, Viber, which Japan’s Rakuten recently bought for $900 million, Whisper, Wut, and ooVoo.

• Tencent is cash rich, with a war chest of over $5.5 billion. It sells content such as games, in-game content, and emoticon sets to WeChat users, and charges companies that want to create their own channels on the messaging service. Consumers use the platform to find deals in shopping malls, buy airline tickets, and shop for financial products.

• Tencent is pushing into markets outside China; it is keen to become the world leader. It has expanded into Southeast Asia, Latin America, and South Africa with a campaign starring the Argentinian and Barcelona FC football player, Lionel Messi. It is moving into the US and Europe, where WeChat recently launched a promotion offering a $25-gift card to anyone inviting five friends to join the service.

• Tencent has learnt how to penetrate overseas markets. In the online gaming industry, for instance, it has become a player by buying equity stakes in Riot Games for $400 million; Epic Games for $330 million; Activision Blizzard for $1.4 billion; mobile gameplay recording service Kamcord; and in Level Up, a Singapore-based online game operator for $26.95 million. In February 2012, Tencent also announced a partnership with market leader Electronic Arts.

By comparison, I would say that Facebook has enjoyed a rather protected existence since its founding a decade ago. It has not had to fight too many meaningful rivals, substantially change its basic service, or even launch major new services.

The battle between Facebook and Tencent could well end by reflecting how it began: Facebook purchased WhatsApp at a huge price because it couldn’t, or didn’t, build a mobile messaging service internally while Tencent pioneered WeChat like so many other innovative products. Which do you think has the greater chance of success in this global battle?