Known

as a leading giant in China’s technology industry, Tencent has successfully

leveraged the platform-level competition opportunity extending its ecosystem around

the communication platforms. However, looking into the future, there are still some

problems concerning “How could Tencent further monetize its platforms?” Among all

of them, two main issues are clearly presented in front of us. The first one is the

question that whether Tencent would eventually run out of room to grow as user

numbers levelled off in the country? The second one is the rapidly increasing cost to

conduct its business.

In terms of the first problem, there are two options. Tencent could either continue

focusing on domestic market or enter the international market. In my view, if Tencent

still focuses on the domestic market, the way to avoid the “running out of room”

situation is to make revenue through other channels. As is put in Pipeline Platform and

New Rules of Strategy, successful platform businesses tend to move aggressively into

new terrain and into what were once considered separate industries. Google has

moved from web search into mapping, mobile operating systems, driverless cars, and

voice recognition. Tencent can follow this path as well, and they are actually planning

to do so. For example, as is shown in Tencent’s annual report of 2017, one of the new

battlefield they will go for is intellectual medical service. This is definitely a great field

to enter in China because the government releases policies restricting foreign

companies selling advanced medical instruments. A new market like this has great

demand and barely no competitors, which means it will provide enough space for
Tencent to grow. Plus, the benefit of this method is Tencent can collect more data

about existing customers so that they can better analyze the preference of these

customers and provide more customized service.

The opposite choice is to promote Tencent’s existing products like WeChat globally.

This strategy also makes sense because there are already a large number of overseas

Chinese using WeChat. Moreover, as China is playing a more and more important role

on the global stage, there are more foreigners coming to China and they are using

WeChat as well. With these people influencing around, the path of internationalizing

WeChat is much easier. The benefit of this strategy is that Tencent will have a rapid

growth of user numbers and avoid running out of room in the country.

Nevertheless, even these two strategies all seem promising, they are also risky. If

Tencent chooses to develop within domestic market and invade new fields, chances

are that they will be faced with the uncertainty in cost. If we still take the intellectual

medical instrument market as an example, it’s not hard for us to predict that this

brand-new medical area will be a challenge for technology giant Tencent. Tencent is

used to acquire companies which means they don’t have to do too much R&D by

themselves. However, China’s intellectual medical area is not well developed yet [1],

so most likely Tencent have to do a lot R&D if they want to grow. If so, the cost will be

very high and the investment return period will be hard to estimate. When it comes to

the second choice, the main problem lies in the uncertainty of how many users
Tencent can win over other existing platforms. Facebook has been widely used all over

the world and almost every other application we use is connected to it. To say clearer,

Facebook has built an ecosystem around itself which is unbreakable. Under this

circumstance, it’s hard for Tencent to change people’s preference to use WeChat,

which barely has connection with other applications they use.

In comparison, focusing on the domestic market is still a better option. For one reason,

Tencent has enough funds to support the expensive R&D, plus they can get

government investment in terms of medical treatment because it’s an almost

uncharted territory which matters much in people’s life. Another reason will be it's too

time-consuming to build a global ecosystem around Tencent’s applications that can

compete with Facebook’s. Nonetheless, Tencent should level the chance of Chinese

government’s “One Belt One Road” strategy and enter other countries to further

develop. The success of the game of Arena of Valor launched in southeast Asia firmly

proved this. In all, I would suggest Tencent still take domestic market as the major

market. For international market, instead of launching their core service of WeChat

first and build an ecosystem around it, they should provide peripheral service first, like

mobile games, and then after their applications become adhesive enough for

customers, they can build the ecosystem around it.

The second issue Tencent has is the quickly increasing cost of conducting its business.

In 2015, the gross cost was ¥41,631m, and it grew into ¥120,835m in 2017. There are
two solutions to this problem. One is to raise the fee they charge customers, while the

other is to burden the cost and find a more profitable way of using the data they collect

by providing cheap service. The first one will work well in the short run because

customers won’t have other choices. Accordingly, we would see an ascending figure of

profit at a great rate. However, the downside of this method is that in the long run,

Tencent may lose its customers. There are many companies who just focus on one of

the market segments that Tencent has, and thus they can devote themselves

wholeheartedly to developing one specific product. For example, in the mobile game

market, one game company can fully utilize its resources just to make the game

cheaper with the same game quality. In this case, if Tencent is charging higher,

customers will turn their back on Tencent and choose other game providers.

The alternative solution is to better use the data they collected from cheap service.

One way to do so is to develop Tencent’s business more intellectually. For instance,

Smart Retailing. Smart retailing is to use Internet technologies to perceive

consumption habits, forecast consumption trends, guide manufacture, and provide

consumers with diversified and customized services. If Tencent can offer its customers

what they want accurately, customers will rely more on Tencent’s products and

purchase more. The negative side of this solution is that Tencent can’t prevent the

incrementally increasing cost.

By comparison with the first solution, I would say the second one is more favorable.
First, the profit is still great even the cost is high. According to the statistic of 2015,

2016 and 2017, although the cost is rising, the profit is rising as well. From ¥61,232m

in 2015 to ¥84,499m in 2016, to ¥116,925m in 2017 [2], we could see a stable growth

in Tencent’s gross profit. If we compare Tencent’s profit with Facebook’s, as is shown

in Appendix 1, we’ll see Tencent is earning a lot concerning the fact that it’s just

developing within one country. Under this situation, chasing for a quick high profit is

an unfavorable choice. On the opposite, keeping the capacity of making profit is more

crucial. In conclusion, my suggestion will be Tencent should not charge customers

more but analyze and use customers’ data to better provide service and interact with

other companies in its ecosystem.

Besides going for domestic market and develop intellectual business, there are some

other specific actions that I think Tencent should take to further monetize its platforms.

The first one is to keep developing WeChat Mini Programs. Until Jan. 2018, Tencent

has launched 580,000 mini programs on WeChat and the number of active daily user

is over 17,000,000 [3]. The advantage of mini programs—they could be accessed in the

cloud without having to download them, is critical in building a larger ecosystem

around WeChat. If Uber becomes a mini program that doesn’t require space, for sure

we won’t download the application anymore, and this is exactly a chance for Tencent

to expand its territory.

The second action which Tencent should do is to improve the brand reputation. When
we talk about Tencent, we will frame it as a huge company. However, when it comes

to Apple or Google, we will say they are great companies. The different terms we use

to describe these companies reflect to what extent we admire and appreciate them.

Tencent has been perceived as “Copycat” for a long time, and even within China, the

young generation are always satirizing Tencent for its unethical conducts. The bad

effect of this is customers won’t have the sense of identity towards Tencent, which

means they won't be behaviorally loyal. As long as there’s an option to Tencent’s

products, customers are likely to leave. If Tencent can build a good reputation among

customers, customers will be more willing to use its products and as a result, the

platforms it offers will be more interactive.

 Appendix 1

Facebook Tencent
Revenue 40,653 36,578
Gross Profit (Before tax) 20,203 13,572
Net Income (After tax) 15,934 11,149

1. All figure are in USD’ Million, the exchange rate between USD and RMB is 1:6.5

2. Extracted from Tencent 2017 Financial Report and Facebook 2017 Financial Report.

1) Tencent:https://www.tencent.com/zh-cn/articles/8003481521633431.pdf

2) Facebook:https://s21.q4cdn.com/399680738/files/doc_news/Facebook-Reports-Fourth-

Quarter-and-Full-Year-2017-Results.pdf

 Reference:

[1] China’s Medical Instrument Report

http://www.chyxx.com/industry/201708/548584.html

[2] Extracted from Tencent 2017 Financial Report

https://www.tencent.com/zh-cn/articles/8003481521633431.pdf

[3] Extracted from the news of 2018 WeChat Mini Program Development

http://www.sohu.com/a/217158784_499119