The Rise of Tencent Empire

QQ, one of the most successful and essential product of Tencent, has an adorable penguin to be its logo. "Penguin" Empire, 15 years of after its birth, attracted 800 million users globally. Another top-rated "Penguin" Empire product, Wechat, soon accumulated 300 million users in a little more than two years. Wechat gives Tencent more dominance and control in internet and mobile internet fields.

When Tencent was listed on Hong Kong stock market in 2004, its market value was merely USD 1 billion. At present, Tencent's market value has surpassed USD 100 billion, second only to Google and Amazon in global internet industry. Baidu only has half of its market value. Tencent's revenue grew from 1.14 billion yuan (USD 186.77 million) to 43.89 billion yuan (USD 7.19 billion), with 158% compound annual growth rate.

Although Tencent entered online leisure game market in 2003, two years later than SNDA and other Chinese online games enterprises, it now accounted for approximately 50% of Chinese online game market and 5 times more than SNDA.

How Did "Penguin" Achieve All This?

Tencent started from a free online instant messaging software-QQ-gradually accumulating high quantity, activity and interactive frequency users as its core resource.

Its products may vary in business model and in cash flow structure, however, strategically, Tencent always revolved around QQ and remained consistent in product top-level design. These different products all shared the core resource, which is QQ's traffic distribution, and gained revenue in various ways such as game, portal websites, music, blog, and Wechat. For its successful top-level design of QQ, Tencent could always come to the first and make breakthroughs.

Since the launch of Wechat 5.0 on August 5 in 2013, Tencent's stock price had been soaring. On September 3 in 2013, Tencent's market value hit HKD 779.9 billion, this was the first time a Chinese internet company to break USD 100 billion.

Tencent's market value on that very day was second only to Google and Amazon, and its CEO Pony Ma cooperated with Sohu CEO Charles Zhang to purchase 36.5% of Sogou's stake with 448 million dollars and Soso.

The emerge of Wechat drew much public attention both from investors and industry insiders on Tencent. The astounding growing speed and high user stickiness was said to challenge many traditional industries or even overthrow.

Making Money from Large Traffic

Tencent is one of the few companies which experienced every crucial phases of Chinese internet development, quite different from other internet giants like Baidu and Alibaba, Tencent did not miss any one of the turning points. Tencent was involved in SP (Service Provider), portal website, e-commerce, search engine, online game, online video, SNS, mobile internet.

Since Yahoo first offered free internet services, increasing websites traffic and making money from these traffic became challenges for all internet companies. Numerous of enterprises failed to make profits though they had huge site traffic, Netscape, My Space, Kaixin001.com, 51.com and even ICQ. Facebook was once troubled for its low efficiency of business model.

Tencent owned over 20,000 employees and expensive server groups to offer free IM QQ, along with other products such as QQ music, QQ portal website and WeChat. How did Tencent achieve USD 7 billion annual revenue?

Early Stage: Survival

First imitate successful product, then make subtle adjustments to improve user experience. This is Tencent's enterprise philosophy concluding from its own dark days at the very beginning. For many years, Tencent had high user increasing rate but without proper business model. It taught Tencent to be patient entering new market, with no rush to build business model at the early stage.

Pony Ma imitated ICQ and created Chinese version OICQ in 1998, made small changes catering to the habits of Chinese users. OICQ registered users reached 200,000 within two months of launch in February 1999.

Later in November, the users broke 1 million. The explosive growth caused fast increasing of cost, yet Tencent did not now how to charge users then. In 2001, Tencent renamed OICQ to QQ due to intellectual property litigation with ICQ, QQ already achieved 50 million users but was still looking for business model.

The survival struggle in the early stage forged the source of Tencent's unceasing search of business model.

First Pot of Gold

Tencent began to try its three main business models, SP,Virtual Goods and Freemium dependent on its large user base and high user interactive. In 2004, Tencent's net profit reached 450 million yuan (USD 73.71 million) and it was listed on Hong Kong stock market successfully. Its high profitability in primary business enhanced Tencent's confidence in focusing on user growth and experience.

SP Model

In December 2000, China Mobile first embraced mobile value-added service and cooperated with Service Providers. China telecom enterprises were in charge of channels reaching out to mobile users, SP could provide contents and services to users. SP model saved lots of Chinese internet companies which had no clue how to charge users then.

Tencent followed the trend and developed mobile QQ, China Mobile would charge mobile QQ user 5 yuan (USD 0.82) per month. Tencent gained 20% of the charge. In 2004, Tencent's mobile QQ value-added service brought 600 million yuan (USD 98.28 million) revenue, with over 60% gross profit rate.

SP market shrank for China Mobile strengthened its control over mobile value-added service, still, Tencent's SP kept improving and its revenue in 2012 reached 3.7 billion yuan (USD 606 million). SP model was the first pot of gold for Tencent, but it's highly dependent on third party. Therefore, Tencent explored other business models.

Virtual Goods