Tencent HLDG (HKG:700)

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Tencent QQ Instant Messenger logo.
Tencent QQ Instant Messenger logo.

Business Overview

Tencent (HKG:700), founded in 1998 and is headquartered in Shenzhen, has grown into one of China's largest and most used Internet service portal. Since its establishment over the last decade, Tencent has maintained steady growth under its user-oriented operating strategies. Tencent, engages in the provision of Internet value-added services, mobile and telecommunications value-added services, and online advertising services in China. The company offers community and online gaming services across various Internet platforms. It also provides mobile instant messaging; mobile chat; and various other mobile value-added services, such as mobile interactive voice response, ring back tone, music and image/picture downloads mobile news, information content services, and mobile game services. Its Internet platforms comprise QQ Instant Messenger, QQ.com, QQ Games, Qzone, 3g.QQ.com, SoSo, PaiPai, and Tenpay. In addition, the company provides online advertising services through Websites, instant messaging windows, and game portals in the form of banners, links, and logos. As of March 31, 2010, the active QQ users’ accounts for QQ IM amounted to 568.6 million while its peak concurrent users reached 105.3 million. On June 16, 2004, Tencent Holdings Limited (SEHK 700) went public on the main board of the Hong Kong Stock Exchange.

The Economics of the Business

Business Segment

A unique business model combining both telecom services and gaming has been set up by Tencent in the emerging markets. They offer their own communication, instant messaging (IM) service named QQ which is based on the popular IM-service of the mid ninetees ICQ. QQ holds room for popular chat rooms, personal avatars, games, internet storage, and internet dating services. Most of the services are free and therefore very popular among the youth. By the way, next to the popular QQ IM service, Tencent also offers a tailored office (TM) and enterprise edition (RTX) or their instant messaging service. [1]

Product Portfolio

Tencent Holdings is a provider of internet service, mobile value added services and online advertising services in China. The group offers Instant messaging services, online media services, Wireless internet value added services, Interactive entertainment services, Internet, value added services, E-commerce services, Online advertising services.

The core IM platform enjoyed continued growth which enhanced user activity and engagement through cross-platform integration. Usage of our IM service via client software installed on Internet-enabled mobile devices also contributed to the growth. QQ 2009, a new generation of IM service, was successfully launched to enhance the overall user experience, and better address different needs of the large user base. QQ.com continues to generate the highest traffic among portals in China. The brand image and awareness further improved by advertising and promotional activities.The community value-added services, Qzone registered robust growth and further consolidated its position as the largest SNS platform in China. Online advertising business achieved above-industry revenue growth, on the back of increased customer recognition of the effectiveness of our advertising platforms as well as the enhanced operations.

Strategic & Competitive Analyses

SWOT Ananlysis

Strengths

  • Diversified business portfolio, providing various services

Tencent has a diversified business portfolio, which enables it to offer various communication and media services to different market segments. The group, through its subsidiaries, is engaged in the provision of diversified services including internet value-added services, mobile and telecommunications value-added services, online advertising, and other services such as online payments and trademark licensing. Services business provides services such as mobile instant messaging services, mobile chat services, mobile interactive voice response services, ring back tone services, music and image downloads, mobile news and information content services and mobile game services. It sells advertising space on the group's websites, instant messaging windows and game portal in the forms of banners, links and logos; and offers search-based advertising. The group also develops and operates interactive entertainment services and is the largest online game operator in China.

  • Strong position in instant messaging domain

The group has a strong position in the instant messaging (IM) domain, with huge market share. Tencent offers various IM services and platforms for online communication functions including text messaging, and video and voice chat. The group's IM offerings include Tencent QQ, which provides total solution for internet-based IM platform; QQ Enterprise, a customized service to connect business entities with QQ user base; Tencent Messenger, an IM platform; Real Time exchange, an IM platform for enterprises; and Tencent Traveler, a multi-page webpage browser.Tencent started and grew on its instant messaging service QQ, and built various services around this thriving (780 million active user strong) ecosystem. The communities together have a market share of 73% of active users in China, clearly dominating the market. [2]

Weaknesses

  • Concentrated operations

The operations of Tencent are geographically concentrated in China which makes it vulnerable to risks associated with this region. The group lacks geographic diversification and derives majority of its revenues from China. During 2009, Tencent generated over 99.9% of its revenues. The group has operational investments in various regions such as US and Other Asian countries. However all these regions accounted for less than 0.1% of the total revenues in 2009. This demonstrates the group's geographic concentration with majority of its revenues from China. This geographic concentration increases the group's business risk. Further, the company's international operations and future geographic expansion plans faces strong competition with EBay, Yahoo! and Google that all with wide portfolio of services and huge operations. These competitors can restrict and limit Tencent's penetration into their markets. Concentrated operations increase the business risk to the group and restrict its growth opportunities.

Opportunities

  • Growing internet usage in China

The e-commerce market in China is expected to grow in the coming years. The Chinese e-commerce market is expected to reach $220 billion by 2014. Tencent offers services in e-commerce domain including online trading and payment services. Its online trading platforms include Paipai.com, which is the fastest growing e-commerce website in China; and Tenpay, which offers online payment application and services. With significant presence in expanding e-commerce market, the group is able to gain increasing revenues from this segment in future. Furthermore, the emerging online advertising in China is creating growth opportunities for the group. Tencent sells advertising space on its websites, instant messaging windows and game portal in the forms of banners, links and logos. The group also delivers search based advertising by various means throughout the community created. The growth in online advertising will provide the group with steady revenues and new business opportunities.

  • Strategic business expansion

The group has been expanding its business capabilities strategically through investments and alliances. Business expansion through strategic investments and partnerships will improve Tencent's operational capabilities and service portfolio.

Threats

  • Intense competition

Tencent faces strong competition from various companies including Sina, TOM Online and Sohu.com. The group also competes with large global competitors such as Microsoft, Yahoo!, eBay and Google in the e-commerce domain. Increasing competition may negatively impact the demand for the group's services thereby decreasing its revenues and market share in the coming years.

Financial and operating metrics

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Efficiency Image:Eff.png

References

  1. Five inspiring Business Model Innovations in the Telecommunication Industry
  2. MobiSites blog: "Amazing growth of Tencent"
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