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Tencent’s Moment: The Marketing and Financial Implications of WeChat’s Transformation from a Messaging Platform to a Virtual Wallet
By
Scott DeVoy Su
A Thesis Submitted to the Business School
in Partial Fulfillment of the Requirements for the Bachelor’s Degree in Marketing
at the University of International Business and Economics
UIBE, BEIJING, CHINA
2015
© 2015 Scott DeVoy Su
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Tencent’s Moment: The Marketing and Financial Implications of WeChat’s Transformation from a Messaging Platform to a Virtual Wallet
by
Scott DeVoy Su
APPROVED BY:
______________________________________________ Professor Xie Yi Business School
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DECLARATION OF ORIGINALITY
I hereby certify that I am the sole author of this thesis and that no part of this thesis has been published or submitted for publication.
I certify that, to the best of my knowledge, my thesis does not infringe upon anyone’s copyright nor violate any proprietary rights and that any ideas, techniques, quotations, or any other material from the work of other people included in my thesis, published or otherwise, are fully acknowledged in accordance with the standard referencing practices. I certify that I have obtained a written permission from the copyright owner(s) to include such material(s) in my thesis and have included copies of such copyright clearances in my appendix.
I declare that this is a true copy of my thesis, including any final revisions, as approved by my thesis committee, and that this thesis has not been submitted for a higher degree to any other University or Institution.
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ABSTRACT
In just four years, Tencent’s WeChat application has managed to revolutionize the social landscape of China. What started off as a simple messaging application has now transformed into an all-encompassing mobile platform. The incorporation of a payment system in WeChat has effectively monetized the app, placing it in direct competition with Alibaba’s Alipay Wallet. Both Tencent and Alibaba have since been engaged in a bitter virtual war, the skirmishes of which have seemingly altered countless business models, including that of China’s taxi industry.
This dissertation postulates that as of March 17, 2015, Tencent is an undervalued company. This is in large part due to: WeChat’s social features, which give it an inherent competitive advantage over Alipay Wallet; Tencent’s headway into the financial services industry; the sale of lottery tickets and sports betting; and WeChat’s Official Accounts and sponsored Moments.
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ACKNOWLEDGEMENTS
I am grateful to all the educators I’ve had the privilege of studying under - both in the Business School and the School of International Education. The knowledge and insights I’ve garnered throughout my undergraduate studies at UIBE have no doubt shaped my understanding of the business world, especially when pertaining to the complexities of the Chinese business environment. Special thanks go to Professor Xie Yi, my thesis supervisor, who graciously sacrificed her own time in helping me make the most out of this dissertation.
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TABLE OF CONTENTS
DECLARATION OF ORIGINALITY.............................................................................. iii
ABSTRACT....................................................................................................................... iv
ACKNOWLEDGEMENTS.................................................................................................v
CHAPTER 1: INTRODUCTION.......................................................................................1 Background & Significance .........................................................................................................1
Main Study Content .....................................................................................................................2
Methodology of this Study ...........................................................................................................3
CHAPTER 2: MARKET OVERVIEW..............................................................................3 Global Mobile Messaging App Market: Overview & Potential...................................................3
CHAPTER 3: TENCENT’S STRATEGIC POSITIONING ..............................................6 Tencent’s Strategic Objective: Turning WeChat into a Cash Cow..............................................6
Monetizing WeChat: A Confrontation with Alipay ......................................................................7
Red Envelopes and Taxi Apps......................................................................................................8
CHAPTER 4: CRUCIAL POINTS.....................................................................................9 WeChat’s Competitive Advantage over Alipay Wallet ................................................................9
Tencent’s foray into the Financial Services Industry ................................................................10
Lottery Tickets and Sports Betting.............................................................................................11
Official Accounts and Sponsored Moments ...............................................................................12
CHAPTER 5: CONCLUSION .........................................................................................13 Tencent’s Underrated Market Value .........................................................................................13
BIBLIOGRAPHY..............................................................................................................15
APPENDICES ...................................................................................................................17 Appendix A: Chapter 3 Supplementary Images ........................................................................17
Appendix B: Chapter 4 Supplementary Images.........................................................................19
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CHAPTER 1:
INTRODUCTION
Background & Significance
In late June of 2007, Apple Inc. released a product that would inexorably change the world we live in: that was, of course, the first generation iPhone. Fast forward to 2015, now smartphones, and the bevy of manufacturers that make them, have altered not just the way individuals communicate, but also how we stay informed, share media, are entertained, and more recently, how we shop.
The impact of smartphone technology – and the application software that powers it – on society as a whole has been profuse. Even for those who don’t own or use a smartphone, it’s difficult not to acknowledge the effect this technology has had. Now, more than ever, our offline physical environment is being shaped through the happenings of our online virtual world; in Beijing, alone, for example: commuters riding the city’s subway system are bombarded with advertisements depicting the conveniences of ecommerce; convenience stores, like Haolinju, now tout their ability to receive in-store mobile payments; and well-known retailers and small businesses alike offer promotions to customers willing to scan QR codes at traditional points of purchase. Smartphone technology is quite clearly the catalyst behind all this dynamic change; and there is no bigger smartphone market in the world than in China – in the first quarter of 2014, approximately 40% of smartphones shipped worldwide were intended for Chinese consumers.1
China’s importance in the smartphone market extends beyond its massive consumer base; innovative Chinese technology companies - some state-owned – are at the forefront of both smartphone manufacturing and app development. One company in particular, Shenzhen-based Tencent Holdings Ltd., through its ubiquitous mobile messaging app WeChat (known phonetically in Mandarin as Weixin), has emerged as a dominant force in the industry. According to digital consulting company China Internet Watch, as of September 2014, WeChat was the most popular mobile app in China with 377.92 million monthly active users (MAU). For comparison sake, WeChat’s MAU in China is greater than the entire population of the United States of America. Moreover, WeChat is catching on globally as well; in a quarterly press statement issued by Tencent, as of September 30, 2014, WeChat had a total of 468 million monthly active users (MAU) – using the prior figure as the subtrahend, we can deduce that WeChat has roughly 90 million MAU outside of China.2 The data speaks for itself: WeChat’s position in the Chinese market is secure, and its presence internationally is only growing stronger.
1 Data according to the International Data Corporation (IDC) Worldwide Phone Tracker, April 30, 2014. 2 Note: Monthly average users (MAU) is different than registered users; as of August 2013, WeChat had over 100 million registered users outside of China.
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When Tencent first launched WeChat in 2011, the app, like Facebook-owned WhatsApp, gained traction because its messaging service gave smartphone users a more convenient and economical alternative to SMS text messaging. However, unlike WhatsApp, which was released in 2009 and has seen relatively few changes aside from aesthetic ones, WeChat has evolved into much more than just a messaging platform. Early features, namely the “Shake” and “People Nearby” functions, allowed users to spontaneously connect with strangers. Then came the “Moments” feature, which allowed users to share their musings in a more social media-like platform.
Yet, the most important of all the updates for WeChat came with version 5.0, which was released in August of 2013. That update saw the inclusion of social gaming and a sticker store (for emoji that can be inserted into conversations), but the real focal point of the update was the incorporation of a mobile payment function – marking a watershed moment not just for WeChat, but Tencent as a company. The payment function, which gives users the ability to tie their bank cards with a WeChat account, monetizes an otherwise free app. Soon afterwards, the functionality of the app expanded as more features – many of which will be described in detail in later sections of this paper – were developed and integrated, building upon the ability to make monetary transactions.
Main Study Content
The primary focus of this dissertation is twofold: this paper will examine the potential of WeChat to alter existing business models through its payment system; further, it will analyze the app’s growth and profit potential – while taking into consideration its ongoing rivalry with competitor Alibaba Group Holdings Ltd.
It’s relevant to point out that WeChat’s payment system gives Tencent a unique platform to market services and products, especially through online-to-offline (O2O) business channels. O2O commerce is different from other ecommerce marketing channels, such as business-to-consumer (B2C) or consumer-to-consumer (C2C), in that online services supplement the offline experience, and sometimes even vice-versa. As a platform, O2O commerce has significant potential in changing the marketing landscape; hence, many of the examples used in this paper pertain to this nascent, yet promising, marketing channel.
The framework of this dissertation is relatively straightforward: Chapter 2 will provide a terse overview of the global mobile messaging app market – showing where WeChat stands amongst other big-name apps; Chapter 3 is dedicated to illustrating Tencent’s current strategic positioning; whereas Chapter 4 will identify certain key attributes within WeChat’s functionality, marking the potential to propel Tencent’s value as a company; Chapter 5, lastly, will be the conclusion for this dissertation.
It’s important to note that the scope of this paper is primarily limited to WeChat in the Chinese market (with exception to Chapter 2). This is because most of the unique
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features offered through WeChat’s payment system are currently only available within China. And although WeChat has huge growth potential overseas, its profit potential is still anchored within its domestic market.
Methodology of this Study
The majority of the information garnered for the research of this dissertation was taken from secondary sources. This includes major news outlets, including the Financial Times, Bloomberg, and the Wall Street Journal; market research firms, such as the International Data Corporation; and digital consulting companies, such as China Internet Watch. One secondary source in particular, technology media company Tech in Asia, proved incredibly valuable – many of its articles pertained exclusively to certain subjects that this dissertation is based upon. The charts provided in Chapter 2 are adapted from a featured Tech in Asia article published on Dec. 11, 2014, entitled: “Race to the top: the state of chat apps in 5 charts.” As for primary sources, the information taken was compiled from Tencent’s press releases and quarterly earnings reports.
CHAPTER 2:
MARKET OVERVIEW
Global Mobile Messaging App Market: Overview & Potential
When examining the competitive landscape WeChat operates in, it’s hard to pinpoint exactly which mobile applications Tencent is competing against. That’s because WeChat is no longer just a mobile messaging platform. Its continued evolution makes it uniquely different from WhatsApp, Kaokao Talk, or Line; thus, a straight-up comparison with other messaging apps doesn’t properly illustrate Tencent’s strategic positioning. However, it’s still necessary to examine how the app fares in comparison with what many deem as “similar apps” from a global standpoint.
Internationally, WeChat isn’t the most widely used mobile messaging app – that title belongs to WhatsApp, with approximately 600 million monthly active users (MAU). (Note: MAU is the most accurate metric when evaluating the user base of an app; going by other metrics, such as registered users or number of downloads, isn’t as reliable.)3 WeChat is, however, the second most popular messaging app globally; with Viber, Facebook Messenger, Line, Snapchat, and Kaokao Talk all trailing respectively.
The chart on the following page shows a graphical breakdown of MAU figures for all the major messaging apps:
3 According to Steven Millward, Chief Editor, China, for technology media company Tech in Asia.
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Although WeChat’s MAU figures are impressive, it by no means has the same worldwide appeal that WhatsApp has. WhatsApp has managed to do what few mobile apps have done – to have a larger user base internationally than it has in its own domestic market. Line, which originated in Japan, also has a strong presence in Southeast Asia, Taiwan, and in a handful of Spanish-speaking countries, but its stronghold is still in Japan, which is a market they dominate.4 Likewise, Kaokao Talk, which originated in South Korea, is a staple app in the pockets of millions of South Korean smartphone users. The evidence seems to show - that much like tangible goods and services - marketers of virtual apps need to understand that a divide exists between foreign and domestic markets.
India, which is potentially the second largest market due to their enormous growing population, is an excellent barometer of sorts, illustrating how WhatsApp is primed to quickly dominate the mobile messaging app market in developing countries. (In this context I consider China not as a developing country, but as an emerging or newly industrialized country.) Tencent’s strategy to expand WeChat in India has included endorsements by local celebrities. One advertisement in particular showed actors Parineeti Chopra and Varun Dhawan flirting in a manner that all too resembled a Bollywood spot - all the while touting WeChat’s voice messaging ability. Yet, despite all the advertising Tencent has spent in India, and even with competition from local messaging app Hike, WhatsApp has remained dominant in India, with over 70 million MAU as of November 2014. What exactly is WhatsApp’s appeal in these developing countries? What does WhatApp have that WeChat doesn’t? The answer, perhaps, is the
4 Information from an Oct. 9 2014 press release showed that Line had a combined 63 million registered users in Thailand & Indonesia; 18 million in Spain; and 17 million in Taiwan. However, I was unable to ascertain how those figures fit in with Line’s reported global 170 million MAU.
0
100000000
200000000
300000000
400000000
500000000
600000000
700000000
WeChat WhatsApp Viber Facebook Messenger
Line Snapchat Kaokao Talk
MAU Figures
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very opposite, in that, WeChat has more features and functions than is necessary. The simplicity WhatsApp provides is important. A no frills app typically requires less storage capacity on a smartphone, and many times it is perceived as more reliable than an app that is seemingly more complicated. This falls in line with WhatsApp’s overall credo as stated by its co-founder, Brian Acton: “No ads. No games. No gimmicks.”
And, although, WhatsApp is winning in terms of global market share, it by no means is winning in terms of profit. The lack of features also means a lack of potential revenue, which is reflected in its paltry annual average revenue per user (ARPU) figures. The chart below illustrates the discrepancy between WhatApp’s ARPU figures and that of other leading chat apps.
Having a large user base, but not being able to able to capitalize on it - in other words, not being able to translate high MAU figures into high gross revenue figures - means that WhatsApp isn’t performing on the same level as WeChat. Nevertheless, it’s still too early to predict what will happen in the near future for WhatsApp. There is a very real possibility that WhatsApp will make similar functional adjustments to monetize the app once it has acquired what they might deem as “enough” users globally. This is in line with Facebook CEO Mark Zuckerberg’s strategy of not having a product being entirely profit orientated until reaching a billion users.5
Lastly, the Indian market reflects the rest of the developing world in that millions of consumers are transitioning away from feature phones and buying smartphones for the
5 In an October, 2014, quarterly conference call, the Facebook CEO was quoted saying: “For us, products don’t get that interesting to turn into businesses until we get about a billion people using them.”
$-‐ $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50
Kaokao Talk
Line
ARPU Figures (in US dollars)
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first time. This is buoyed by the fact that retail prices for smartphones have steadily decreased over time (especially for lower-end and previous models). All this means that as smartphones transition from a luxury item to a necessity, the entire world population may someday be viewed as a potential customer base.
CHAPTER 3:
TENCENT’S STRATEGIC POSITIONING
Tencent’s Strategic Objective: Turning WeChat into a Cash Cow
Tencent is in the business of all things related to the internet. This is evidenced by their mission statement with the aim “to enhance people’s quality of life through Internet services.”6 Over the years, the Shenzhen-based company has maintained an eclectic mix of internet-related products and services. However, in order to truly corner the market, there must be some form of integration between these said products and services. Hence, the theoretical strategic objective for Tencent has been to create an all-encompassing platform which provides this integration. In many regards, Tencent has already accomplished this through the continual expansion of WeChat’s features and functions.
Tencent, is also no different from any other corporation, in that it's a profit-driven entity that seeks to maximize the interests of its stakeholders – and especially of its shareholders. The majority of Tencent’s products and services, including its instant messaging and online media services, is offered freely to the general public. (Some of Tencent’s lesser-known services, such as QQ Enterprise, are specially made for other businesses - grossing revenue on a subscription basis.) However, for its better-known free-to-use software and applications - such as WeChat and many of the QQ-related brands – profit levels aren’t yet as lucrative as one may expect. This, of course, is a problem many internet-based technology companies face: where selling advertising space is the only viable means of making money. The burst of the dot-com bubble in 2000, for example, could be partly attributed to irrational expectations placed upon tech companies that really didn’t have the means of turning in substantial profits. Likewise, one could argue that Tencent’s lackluster P/E (price-to-earnings) ratio shows that although future expectations are high for Tencent, it simply doesn’t yet have the established revenue streams. That is, of course, until now.
WeChat’s payment system is the transformative feature that will turn WeChat from “a great social-app” into “a great social-app that earns huge profits.” Within the past eighteen months new unconsidered revenue streams have emerged (revenue streams that are only beginning to show on Tencent’s financial statements). And the linchpin that holds the system together, and the key to monetizing the app: getting WeChat users to link their bank accounts to their existing WeChat accounts. Herein, Tencent’s strategic
6 According to the Corporate Culture section of Tencent’s official website.
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imperative is: how do you go about incentivizing your massive user base to adopt a process that links one’s bank card to their WeChat account?
Monetizing WeChat: A Confrontation with Alipay
The viability of Tencent’s future doesn’t necessarily depend on a global showdown for market share between WhatsApp and other mobile messaging apps. Instead, a more pressing strategic quandary is outdoing Alibaba Group’s Alipay (known phonetically in Mandarin as Zhifubao) in becoming China’s preeminent mobile payment system.
Alipay has been an integral component of Alibaba Group’s massive online retail empire, acting as an escrow service for its different platforms (including Alibaba.com; Taobao.com; and Tmall.com). Although having been in service since 2004, Alipay wasn’t as widely recognized as its own brand until the mobile application Alipay Wallet came along in November 2013. Now the mobile payment systems of both Alipay and Tencent are in the midst of a virtual war, vying for additional users. The key, as mentioned earlier, is having a prospective user link their banking information to the given app.
In September 2013, just a month after WeChat released its version 5.0 update, the first real campaign to integrate WeChat users’ bank accounts with the app took place throughout Beijing’s subway system. The initiative involved “smart” vending machines, operated by Ubox (known phonetically in Mandarin as Youbao), allowing users to make typical vending machine purchases through their smartphones. (Photo images of the Ubox vending machines are shown in Figure Compilation 1, in Appendix A.) Other than the novelty, the appeal from a consumer prospective was that beverage prices were marginally cheaper when compared to more traditional coin- and paper bill-based vending machines. As of February 2015, Ubox’s vending machines remained scattered throughout Beijing’s subway system, however Tencent no longer has a firm competitive advantage over this unique marketing channel. Ubox now also accepts mobile payments through Alipay along with other upstart mobile payment systems (including payment systems from Baidu and Sina).
The next major initiative to generate exposure and interest from the public happened on November 27, 2013. This time, Tencent managed to collaborate with Xiaomi, the makers of what many Chinese consumers perceive as low-priced, yet decent quality smartphones. Xiaomi has a unique business model in that it only sells its products through online channels, hence a partnership with WeChat seemed fitting. The event was a flash sale of Xiaomi’s Mi3 smartphone – altogether, 150,000 devices were sold in less than 10 minutes. The rationale behind the flash sale was that users could reserve their Mi3 smartphone on WeChat, but in order to finalize the purchase, the linkage of a bank account was needed via WeChat Payment.
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Red Envelopes and Taxi Apps
The initial campaigns mentioned in the prior section were successful, but the Spring Festival and so-called “taxi-war” that followed more rapidly increased the number of people linking their banking and WeChat accounts. The Spring Festival promotion brilliantly merged traditional Chinese customs – the gifting of cash-filled red envelopes – with the social and mobile facets of WeChat. The feature allowed anyone to gift either a specified amount to an individual, or random amounts to multiple individuals, which worked well in group chats, and added a unique twist to the traditional Chinese custom. All the while, the gifting and receiving of money was done through an interface that prominently displayed the red envelope – giving the feature a somewhat authentic feel. (Figure Compilation 2, in Appendix A, captures this display through screenshots taken from a smartphone.)
The campaign saw 5 million WeChat users gift over 20 million red envelopes within only the first two days of the Spring Festival. The new feature was such a success that Jack Ma, founder and Executive Chairman of Alibaba Group, was compelled to issue a public response. In fact, Ma posted a comment on his Laiwang account (Alibaba’s own mobile messaging app), likening the red envelope gifting initiative to a Pearl Harbor-styled attack against Alibaba Group. A partial translation of his post, provided by Tech in Asia, is as follows:
“… Almost overnight, everyone under the sun suddenly believes that Alipay has been beaten because of WeChat’s red envelopes… It was really impressive! This year’s ‘Pearl Harbor attack’ was indeed beautifully planned and executed. Thankfully, Chinese New Year is almost over, and the days are long ahead. But we definitely learned a lesson.”
The above post couldn’t have been more of a premonition as both tech companies were soon engaged in a bitter battle in a completely different business sector: taxi apps. Taxi hailing apps are naturally compatible with smartphones, as GPS chips embedded in those devices help prospective passengers and drivers locate one another. Moreover, taxi drivers wanting to go in a specific direction can now more easily locate suitable customers wishing the same.
The two taxi apps in question are Didi Dache and Kuaidi Dache, part-owned by Tencent and Alibaba Group respectively. The so-called “taxi app war” saw billions of renminbi in subsidies being doled out to taxi drivers and customers alike – all, of course, with the aim of gaining an advantage in market share over the other. In fact, in a recent Financial Times article, expert Wang Jian estimated around 2 billion RMB was spent promoting the two taxi apps, all within a six-month period: between January and June of 2014.7 Perhaps the most intriguing aspect is that neither Didi Dache nor Kuaidi Dache gained a firm advantage over the other.8 Both companies used up considerable amounts
7 Wang Jian is an expert with Beijing consultancy firm Analysys International; her background is in ecommerce. 8 As stated in the Financial Times article; nevertheless, both companies have declared victory.
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of money, escalating a price war to the levels of irrationality. The only true benefactors were the users of the app: the customers and taxi drivers.
If there is any strategic lesson to be learned, it is this: Tencent and Alibaba executives need to implicitly understand that implementing an aggressive pricing strategy will be seen as an encroachment of sorts on the others’ market share. This holds true not just for taxi apps, but the gamut of other mobile services offered that seem to overlap between the two tech companies. At the very core, this deals with the principles of game theory: Tencent and Alibaba can either tacitly deescalate the situation – in the case of taxi apps, to gradually minimize the subsidies – or both companies can continue to lose heaps of money for the benefit of the customer.
CHAPTER 4:
CRUCIAL POINTS
WeChat’s Competitive Advantage over Alipay Wallet
The service offering provided by both WeChat and Alipay’s wallets are uncannily similar. This is made apparent simply by observing the features - in the form of icon tiles – shown in the root menus of both payment systems. (Screenshots comparing these features are shown in Figures 3 & 4, in Appendix B.) Upon further examination, we can see that there isn’t much discrepancy between the two apps in terms of functionality. Both apps share a litany of common features, including but not limited to: topping up the balance for a prepaid SIM card; transferring money - either to oneself or to another individual; buying movie tickets; buying airplane tickets; ecommerce (JD.com for WeChat; and Taobao.com for Alipay); and a feature that makes it easier to split the cost of a meal. In fact, one could speculate that the apps are deliberately adding features tit for tat, copying features that work well for their competitor. For example, WeChat’s innovative red envelope gifting idea was fully utilized by Alipay Wallet for the 2015 Spring Festival. Furthermore, Alipay’s variation included more unique ways to gift the red envelopes; so, to a degree, Alipay Wallet didn’t just replicate the feature, they improved upon it.
Thus, if we examine both apps purely from a functional standpoint, neither payment system has an edge over the other. Instead, WeChat’s inherent competitive advantage lies in the fact that it is used mainly as a chat app. This is vitally important, because most consumers tend to use their smartphones more for socializing than anything else. This means WeChat is more than likely to be the first point of contact with the mobile internet when compared to Alipay Wallet. Also, it’s easier to navigate within an app than switching between apps; hence, from a convenience standpoint, users who already adopted WeChat’s payment system, and don’t yet have an Alipay Wallet account, have no reason to set one up – especially if the features between the apps are identical. This, however, isn’t true in reverse, meaning users who already use Alipay Wallet, but
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don’t yet have a WeChat account, still have a reason for getting WeChat because of its ability to connect socially with others. Undoubtedly, Jack Ma and the rest of Alibaba Group’s strategic planners are aware of this. Their efforts, however, to challenge WeChat’s dominance in China’s mobile messaging app market, through their Laiwang app, have proved unsuccessful. And without a chat app that catches on with the public, Alipay Wallet will never be the all-encompassing platform WeChat is turning into.
Tencent’s foray into the Financial Services Industry
Tencent’s strategic plan of luring enough users to bind their bank cards with their WeChat accounts – whether it be through Ubox’s vending machines, red envelopes, or taxi apps – was by many estimates successful. However, in order to make the app truly lucrative, WeChat needed services that compelled its users into making monetary transactions; and what service is more profitable than financial services? The notion of a mobile messaging app acting as a financial intermediary can be somewhat bizarre, however Tencent is just one actor in a larger mix of companies that is slowly transforming China’s banking sector.
The precedent was set by Alipay in June 2013, after it launched Yu’E Bao, a type of money market fund which users could deposit their idle cash into. What made Yu’E Bao distinctive was that it was paying interest rates that were substantially higher than what was offered by traditional banks. Additionally, there was no minimum threshold investors needed to deposit, and perhaps more appealing, investors could withdraw their money at any time. The concept caught on quickly with the public: within 9 months, Yu’E Bao had over 81 million individual investors – a figure that was greater than all the investors in China’s equity markets.9
Tencent - being consistent with matching successful services offered by competitors – created a “wealth” section in WeChat’s payment system. The section, launched in January 2014 and named Licaitong, offered an annualized yield similar to that of Yu’E Bao. (Screenshots showing Licaitong’s home screen and service offerings are shown in Figures 5 & 6, in Appendix B.) Currently, Licaitong’s seven-day annualized rates of return are slightly below 6%.
According to a recent article by the China Daily USA, Licaitong has over 10 million users, with a combined value of over 100 billion Renminbi deposited. In contrast, China Internet Watch reported that Yu’E Bao had 149 million users by the third quarter of 2014, and more importantly had amassed over 578.9 billion Renminbi in funds – significantly more than Licaitong. Despite being behind Alipay in this regard, Tencent is still in theory making significant amounts of money from the difference in borrowing and lending rates – known as the “net interest rate margin.” Moreover, most of the money is
9 The figure of “81 million” individual investors is according to data from Tianhong Asset Management Co., the company that manages the funds deposited in Yu’E Bao.
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being siphoned off to other banks, hence the risks involved with lending money are somewhat more manageable.
Tencent is looking beyond internet-based money market funds and is setting its sights on more legitimized banking. After receiving approval by government regulators, Tencent launched China’s first solely online private bank in a joint venture with several other firms. The bank, known as WeBank, began a trial period in January of this year behind the full backing of Chinese premier Li Keqiang. Li was on site for the bank’s opening ceremony in Shenzhen and was quoted by the Financial Times saying:
“We will lower costs for and deliver practical benefits for small clients, while forcing traditional financial institutions to accelerate reforms. It’s one small step for WeBank, one giant step for financial reform.”
The small clients Premier Li Keqiang referred to are small and medium-sized businesses (SMEs) that have in the past routinely struggled to secure loans from the bigger state-owned banks.10 In this sense, WeBank may be more than just gaining an additional revenue stream; it may in fact be alleviating systemic problems within the Chinese economy. WeBank has the potential to expunge China’s notorious – and largely unregulated – shadow banking system, which in the past played the role of lending money to SMEs.
Lottery Tickets and Sports Betting
The 2014 World Cup, held in Brazil, was a watershed moment for sports betting in China in that betters were able to legally wager money on soccer games through mobile apps. Although gambling is illegal in China, there is one exception to that law: the state-sponsored lottery system, which is comprised of the China Welfare Lottery and the China Sports Lottery. This system allows individuals to purchase not only traditional lottery tickets, but also to bet on both professional soccer and basketball matches. (Placing bets on China’s domestic sports leagues, however, is seemingly restricted – presumably to avoid corruption within those leagues.) The way Tencent and Alibaba Group profit from lottery tickets and sports betting is by brokering agreements with provincial lottery venders who seek to exploit the mobile and social platforms WeChat and Alipay Wallet provide.
Helping facilitate the purchase of lottery tickets and wagers on sporting events is definitely an intriguing new source of revenue for WeChat. And although Tencent is in effect playing the role of a bookkeeper, the business model carries surprisingly little risk mainly because the odds are greatly in Tencent’s favor.
For example, when betting on professional basketball games, such as NBA (National Basketball Association) games, a point spread is typically utilized so that each
10 According to the Financial Times: “Economists say small and medium-sized businesses provide about 60% of China’s gross domestic product and about 75% of new jobs.”
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team has an equal chance of winning. This means, a team might lose the actual game, but because of the point spread, you can still win the bet. Las Vegas bookkeepers and other legal sports gambling intermediaries typically charge a fixed fee for these sorts of bets. Typically the payout for winning such a bet is the amount wagered multiplied by 1.909 – so if an individual wagered $110 and won, the payout would be $210. Betting on NBA games through WeChat, however, entails more risk for the better. The payout for winning typically is the amount wagered multiplied by 1.75; however, sometimes the payout fluctuates in order to keep the aggregate money wagered balanced between both teams.
The best example to illustrate how Tencent fluctuates such payouts in order to hedge the risk of an unequal balance of aggregate bets is through the AFC Asian Cup, which was held in January of this year. Notably, the Chinese Men’s National Soccer team took part, winning in its group stage and advancing to the quarter-finals of the tournament against host Australia. Naturally, most individuals who place sports bets through WeChat would be inclined to bet for one’s own team. Hence, we can assume that the aggregate money wagered in those games was in favor of China winning. In China’s game against Australia, WeChat opened bets on January 21 with a payout of 6.15 in favor of China winning; 1.44 in favor of Australia winning; and 3.75 in favor of a draw.11 A day later those figures changed dramatically, no doubt in response to more betters wagering money on China than Australia; the payout shifted to 4.5 in favor of China; 1.56 in favor of Australia; and 3.85 in favor of a draw. (Screenshots illustrating this fluctuation are shown in Figure Compilation 7, in Appendix B)
It seems that through the selling of lottery tickets and sports gambling, Tencent has found an infallible way to generate profit. WeChat has enabled sports betting to reach the fingertips of its 377.92 million monthly active users in China. The risk, however, lies in the social harm this might bring. Gambling can be a form of addiction, and when the source of one’s addiction lies within the convenience of a smartphone, problems will arise.
Official Accounts and Sponsored Moments
Managing money market funds and selling lottery tickets are both promising sources of revenue, however these are services that aren’t solely exclusive to WeChat. As discussed earlier, Alipay Wallet and WeChat’s payment system are almost identical in terms of features – the important exception is that Alipay Wallet cannot replicate the social features commanded by WeChat. Tencent’s ability to rely on its vast social networks gives WeChat two unique features: the ability for its users to subscribe to Official Accounts and the inclusion of paid advertising in WeChat’s Moments.
Official Accounts, set up by approved businesses and organizations, provides distinct and direct channels to communicate with interested individuals/customers. In
11 The payout figures are based on the conclusion of regulation time; it doesn’t take “extra time” into account because theoretically a draw in the quarter-finals couldn’t happen.
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fact, after subscribing to such an account, the business or organization is filed as a contact – much like a family member or friend is. For big-name brands and smaller businesses alike, Official Accounts offers an unparalleled form of interactive marketing. Many businesses leverage the medium to advertise special promotions, collect customer feedback, communicate important information, and manage loyalty programs. Importantly, Official Accounts can also be utilized as virtual stores, whereby customers can finalize their purchases through WeChat’s payment system. The significant benefit Official Accounts provides Tencent has less to do with the fees it can charge businesses, and more to do with the fact it’s vying to take away market share from Taobao and Tmall’s mobile platforms.
On January 26, 2015, Tencent finally broke the mold on its Moments feature in WeChat, allowing for paid advertisements by a select group of companies. The advertisements, by BMW, Coca-Cola, and Vivo, targeted only a specific number of WeChat accounts. Nevertheless, it still managed to capture a lot of attention even from WeChat users who didn’t receive any of the ads. Targeted ads, like those on Facebook, can be an incredibly lucrative source of revenue for WeChat. Purportedly, BMW paid 5 million Renminbi for its right to be amongst the first advertisers on WeChat.12 Perhaps the only downside to such targeted ads is potential backlash from the way Tencent collects user information. In fact, many WeChat users felt slighted after receiving ads from Coca-Cola and not BMW – presumably after they realized that they were being classified into a lower socioeconomic group.
CHAPTER 5:
CONCLUSION
Tencent’s Underrated Market Value
The findings presented in this dissertation clearly corroborate the fact that Tencent is not only poised to further bolster an already robust strategic position, but is also in the midst of altering countless business models. As mentioned earlier, WeChat is so much more than just a mobile chat app; the incorporation of a wallet feature has morphed the app into a multifaceted platform - whether it be through purchasing a movie ticket or managing investments in Licaitong.
It may still be too early to ascertain the influence WeChat’s payment system has on Tencent’s profit margins or P/E ratio, but it shouldn’t be by any means insignificant. In fact, Tencent is very much still an undervalued company, especially when compared to the market value commanded by Alibaba Group. More than a month after Alibaba’s record breaking September 19 initial public offering, its market capitalization soared above 247 billion US Dollars, making it easily one of the world’s most valuable
12 As reported by financial news website Yicai.com.
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companies.13 On the other hand, according to Tencent’s 2014 Third Quarter Results released November 12, 2014, Tencent’s market capitalization was slightly less than 135 billion US dollars – a far more modest valuation when compared to that of Alibaba Group’s.
Although Tencent cannot compete with Alibaba when it comes to the scale and scope of their ecommerce activities, WeChat does give Tencent an immeasurable advantage in a spectrum of other internet-related activities. And in today’s fast-paced world dictated by the smartphone, having an advantage in “just” ecommerce isn’t going to be good enough. Consumers desire a platform that can do it all; a platform that can integrate the most-sought after features into one mobile application – and that platform is WeChat. Hence, as of March 17, 2015 (the day before Tencent releases its 2014 Fourth Quarter Results), this dissertation surmises that the intrinsic value of Tencent is far greater than what its current market value is.
To conclude, Tencent may be doing more than just altering business models – it perhaps is helping reshape the way Chinese companies are perceived around the world. After all, China has long been stigmatized as a place where creativity and innovation don’t normally thrive. Nevertheless, that may soon change. WeChat has already accomplished so much in its mere four years of existence, so imagine what the future holds for this pioneering app and the titanic company behind it.
13 This market valuation is based on Alibaba Group Holdings Ltd.’s October 28, 2014 share price, which closed at $100.5.
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APPENDICES
NOTE: All the screenshots and photographs featured in the following appendices are images taken by this dissertation’s author using a Samsung Galaxy S5 smartphone.
Appendix A: Chapter 3 Supplementary Images
Figure Compilation 1: Photographs of the Ubox Vending Machines
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Figure Compilation 2: Screenshots showing the red envelope interface displayed when gifting money and receiving money.
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Appendix B: Chapter 4 Supplementary Images
Figures 3 & 4: A side-by-side screenshot comparison (Wechat’s on the left; and Alipay on the right) showing the root menus of both Tencent and Alibaba’s mobile payment systems. Notice that both apps are formatted somewhat similar, also both have icon tiles that display similar features.
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Figures 5 & 6: The screenshot on the left shows Licaitong’s home screen; the screenshot on the right gives an overview of the various investment products and their corresponding interest rates.
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Figure Compilation 7: Both screenshots show the payout figures for an AFC Asian Cup quarter-final match between Australia and China. The screenshot on the left was taken on January 21, 2015; the screenshot on the right was taken on January 22, 2015.
