Tencent, the global tech giant few might have heard of

Unless you're Chinese or a gamer this company's name might not be as well known to you than, say, Facebook or Amazon

Tencent's WeChat internet giant is set for an overhaul. AFP

It is one of the world's largest internet and technology companies, and the first company in Asia to exceed the $500 billion (Dh1.84 trillion) valuation mark.

But unless you’re Chinese or a gamer, this company’s name might not be as well known to you as, say, Facebook or Amazon.

In its native China, Tencent is a household name responsible for an app that has become a part of daily life – it's called WeChat ("Weixin" in Mandarin).

“It’s the universal connector in China,” says Matthew Brennan, who is writing a book on the history of WeChat, and regularly gives presentations about the app. “It’s the pipework for information. Everyone uses it, and people open WeChat around 40 to 50 times a day.”

WeChat has more than a billion users and has features such as messaging, video conferencing, a social news feed, e-commerce, payment functions, smart city apps and transport booking, and much more.

Mr Brennan believes it's a common misconception – reported recently in the likes of The Guardian newspaper in the UK for example – that WeChat came to dominate in China because of state censorship of Western social media like Facebook and Instagram.

“If you look at Line in Japan, or Kakao in South Korea, or Zalo in Vietnam, it’s been strong local competitors in Asia that have won,” Mr Brennan says, referencing the dominant messaging apps used in different Asian countries.

“It’s winner takes all, and WeChat won [in China],” he says.

Tencent is the world’s fifth-largest tech company by market capitalisation, overtaking Facebook this year and sitting behind only Apple, Alphabet, Microsoft and Amazon. It has flourished, mostly domestically, through the likes of WeChat, its app store and content provision with Tencent Video and Music, but in another important domain it has become a powerful player on a global scale.

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“Tencent is behind three of the biggest games companies,” says Eric Chou, a longtime games industry observer with a focus on China.

“Because of the games, they’re already a global company.”

Tencent’s profits more than doubled in 2017 to 21.6 billion yuan (Dh12.39bn). It reported 10.5bn yuan for the previous year. This exceeded analyst earning estimates with adjusted net profits of 20.8bn yuan in the last quarter to end December, a year-on-year increase of 98 per cent.

Tencent derives much of its revenue from gaming, which it dominates domestically with the vastly profitable Honor of Kings (also known as Arena of Valor), but also globally through companies it has invested in or acquired, such as Riot Games and Supercell.

And the profits are substantial. Finland's Supercell, maker of mobile game Clash of Clans, made a profit of $810 million (Dh2.97bn) in 2017, despite not releasing any new games globally.

Riot's League of Legends is another hugely popular and profitable game, and a major feature in the rapidly growing e-sports scene. Tencent has stakes in two of the biggest current phenomenons in gaming: PlayerUnknown's Battlegrounds (developed by PUBG Corporation) and Fortnite (developed by Epic).

Tencent also has stakes in Activision Blizzard, whose stable includes Call of Duty, World of Warcraft and Candy Crush Saga. It acquired a 5 per cent stake in French games giant Ubisoft in March. In the $109bn global video game market, it is the world's largest games company, yet many people have never heard of it.

But gaming is not the only jewel in its crown (even if it is the biggest).

The aforementioned WeChat gives Tencent enormous leverage in China, the world’s largest internet market.

Bhavtosh Vajpayee, senior Asian internet research analyst at Sanford Bernstein, believes Tencent is perhaps one of the great consumer companies.

“It’s understanding of consumer preferences is nuanced and has repeatedly proven handy in the way it has approached business expansion – be it music, video, news, social, payments or gaming,” he says.

"The other thing unique about Tencent is that WeChat is fast becoming an operating system, to which all manner of service providers, brands and platforms want to bolt on their offerings."

The ubiquity of WeChat has allowed Tencent to gain a 40 per cent market share of China's $4.7 trillion mobile payment market, according to Beijing consultancy Analysys International. Tencent's rival in this market is the older Alipay, from China's other internet and tech giant, Alibaba, which has a larger share of 53 per cent. But analysts say Tencent's mobile payments have more potential for growth.

Tencent Music, which is far bigger than Spotify and Apple Music in China, is expected to make a US stock listing that could exceed $25bn later this year. Tencent owns 7.5 per cent of Spotify, while Spotify has a 9 per cent stake in Tencent Music in a swap deal from late 2017.

Tencent Video, which has over 62 million paying subscribers, is the country's equivalent to Netflix, with exclusive content such as Game of Thrones.

But the company has had setbacks.  

Co-founder Ma Huateng, 46, also known as Pony Ma, lost out to Facebook in the purchase of WhatsApp in 2014. The acquisition of the messaging app could have made Tencent a global internet power, but Mark Zuckerberg swooped in with a gargantuan offer of $19bn, more than double what Mr Ma had offered.

Tencent has gone on to gain a wide portfolio, owning stakes in Tesla (5 per cent) and Snapchat (12 per cent).

It led a round of funding in April last year, along with Microsoft and eBay, for FlipKart, an e-commerce company in India, and has another interest in that country via Hike, a messaging service.

It has invested in Didi, China’s equivalent of Uber, and has stakes in JD.com, one of China’s biggest e-tailers.

The latter is a major competitor to Alibaba-backed Tmall.

Alibaba is China's biggest e-commerce company and was the second Asian company to reach a valuation of over $500bn.

It has started its own games division to compete with its major rival.

Another player in this sector is NetEase, a smaller company that is responsible for many popular mobile and PC games in China.

With the bulk of Tencent’s profits derived from gaming, can it sustain itself in China’s gaming market?

"We think mobile games probably has the largest growth potential among all content types, including drama, movie, music, etc," says Liu Zhijing, an analyst of China media and internet at UBS Securities.

“This is because of mobile games’ interactive features and deeper player engagement.”

Lisa Cosmas Hanson, managing partner of Niko Partners, a market research and consultancy company focused on Asia's games market, estimates that China's mobile gaming revenue will surpass PC online gaming revenue this year.

“Mobile gaming revenue will in fact double from 2017 to 2022,” she says. “Our forecast for mobile gaming revenue in 2022 is $24.7bn, and our forecast for PC online gaming revenue in 2022 is $17.4bn.”

She attributes this growth to the increase in smartphone users, declines in the price of mobile data, the widening range of mobile games to attract more diverse users and the rise of mobile e-sports.

Of Tencent’s future, Ms Hanson says: “They have more than 40 per cent market share in China for PC and mobile games, they are constantly investing in more platforms and genres, including serious games and educational games, and they have invested in at least 50 companies globally, ranging from small ownership to 100 per cent ownership.”

“The company will certainly sustain profitability in gaming, though I suspect there will be variance in the profit margin from year to year.”But in one way, Tencent still has a way to go: “Tencent is global in its investments, but its brand recall is not yet global in the way Google or Facebook is known, which is a shame. This will change over time, I am sure,” says Mr Vajpayee.