Interview: How China’s giant Tencent makes users pay

The online services company Tencent is launching new initiatives to improve its advertising outlook, as the segment’s Chinese boom growth finally shows signs of slow-down.

But, regardless of advertising, Tencent looks enviably well-placed. The company has turned its 14-year-old IM network in to the connecting tissue for a host of paid services, Tencent GM for national ad planning Sophia Ong tells paidContent

Chinese boom slowing

Chinese broadband adoption has exploded in recent years and, with it, online services’ prospects. But economic indicators now point to slower growth. “Since this year, we’re starting to sense the signs of a slowing down,” Ong cautions.

To compensate, the company has broadcast live, ad-supported daily video interviews from London with 39 Chinese Olympic athletes, plus a P&G-sponsored Olympics show that was also syndicated to Chinese satellite TV stations. Ong says Tencent will seek marketing partners for future video shows around other large events. And it will launch a self-service ad-buying platform, so that small- and medium-sized enterprises can more easily by ads.

“We face some of the pressures but we are confident of our growth,” Ong says. “We are not only investing ourselves in one certain category – we are multi-platform, multi-dimensional – so we are relatively safe.”

Strength in numbers

Tencent’s service offering is diverse, encompassing its QZone and Pengyou social networks, Weixin mobile chat, its own Weibo microblog service, online games and more. But the secret sauce is uniting everything through its QQ instant messaging protocol, launched in 1998. Now claiming 752 million active users, QQ reaches over half of the world’s most populous nation. It is that core scale on which all Tencent’s initiatives are positioned; the company is increasingly integrating its many user account types and ad sales operations.

“We have a connecting synergy for all of the platforms – to leverage the power of the huge userbase to deliver resource and original content online to users,” Ong says.

Paying with IM

“Our business model relies on services to end users,” Ong adds. “Our revenue mainly comes from users, which is very different from online media – and it’s different from Sina (Tencent’s big local rival). We started from a very basic product, IM – but we already have over 700 million active accounts.

“How we do we make money from that? If you want to register for QZone, which is similar to Facebook, you don’t pay anything. But, once you want to upgrade your service or add something to your identity like changing your QQShow avatar from the default or buy clothes, you pay with our QB currency. One QB equals one RMB.

“Most of the end users are using the basic service, but we have over 30 million users are that are paying QQ members. So, multiply 30 million by 10RMB per month.” Doing the maths, that’s $47 million per month in direct user payments.

More than 80 percent of Tencent’s earnings come via this channel. That is impressive when you consider that only 16 percent of Facebook’s money comes from Facebook Payments. What’s more, considering how China’s high rates of online piracy should correspond to a poor outlook for payments, it is, perhaps, even more impressive. Tencent placed #9 in this year’s paidContent 50 list, higher than both Microsoft and Facebook.

Competing with Sina

Photo: Flickr / Jawen

The rival Sina portal’s Twitter-like Weibo microblog service has attracted headlines for its explosive growth. But, despite launching around the same time, Tencent’s own Weibo has gathered more users. But don’t think of it as a standalone service, or a Sina copycat…

Everything starts from QQ,” Ong explains. “We have over 90 percent penetration of the online population – that’s a very strong foundation over every other media product. Tencent Weibo will be very much starting from that strong force.

“The big differentiation from Sina Weibo will that all your contacts on your IM list will be someone you know (from QQ). It’s different from only following celebrities like on Sina.

“Sina’s strategy is mostly the media type of operation, everything from the top down. They recruit lots of celebrities and key opinion leaders to spread their messages (on Weibo). Our strategy is bottom-up.”

Making money from social

Sina recently introduced both premium payments and kick-started a nascent, Twitter-like advertising platform for its Weibo. Ong says profiting from Tencent Weibo is “not our first priority but we are making some attempt” through social ads between friends. She claims results are encouraging but: “We are still just trying to make a better user experience right now.”

The revenue model will primarily be advertising. So strong are the links between Tencent’s Weibo and QQ, its paid services will essentially be those of QQ.

Going global and going open

After gobbling up so much of China already, where does Tencent go next?

“We do have some international outstanding plans,” Ong says. “There are certain areas we are really putting effort on like gaming.” Last year, the company acquired two U.S.-based game studios to help out its large-scale online multiplayer gaming business. But Ong is prioritising “emerging markets” for future Tencent expansion (time was, Tencent’s homeland itself was considered an emerging market).

Tencent’s product line-up is already diverse. “There are very few areas that Tencent is not in already,” Ong tells paidContent. So she suggests Tencent’s future role may be in establishing itself as the fabric or underpinning of a host of new third-party services…

“It’s not the case that only the strongest should survive – everybody should share the same sky. As the largest technology company in China, we would love to play that role. We have started to open our API to many of the players in this industry – everybody can leverage that resource in terms of the payments service, or streaming technology – all of the benefit can be shared with our partners.”