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Case Study: Tencent

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Case Study: Tencent

Summary
Tencent is China’s leading social networking and online gaming company. Its annual

record for 2016, showed an increase in sales and operating profits. It is the most valuable

company in Asia ahead of China Mobile and Alibaba. Tencent, founded in 1998 by Ma and his

colleagues, as a simple messaging service, has since transformed to the largest online games

provider in China with diverse games, China’s largest social networking service provider with

various applications in the world, and China’s favorite internet portal. It faces competition from

Baidu and Alibaba in addition to thousands of start-ups looking to venture into the same business

(Wells and Ellsworth, 2017).

PC-based Instant Messaging (IM) service was Tencent’s first product. It was modeled on

ICQ, an open source and freely downloadable program developed by Israel firm, Mirabilis. The

modeling was meant to fit the Chinese market, and it was named OICQ and was later changed to

QQ. QQ became very popular with the young Chinese citizens anxious to communicate with

each other. In 2000, Tencent launched Mobile QQ offering a wide range of value-added services

like personal dial tones and later introduced premium subscription fees. Simple SMS messaging

and value-added applications were very popular, enabling the company to achieve profitability

by 2001. In 2003, Tencent introduced QQ.com as an internet portal offering a wide range of

entertainment and services. The company’s popular applications were QQ Dating, QQ E-Card,

QQ Alumni, and QQ Show avatars. Its main portal competitors in China were Sina.com and

Netease.com among others, and in the US, there were AOL, Yahoo, Microsoft, and independent

players such as Match.com for dating and Friends United for alumni social networking (Wells

and Ellsworth, 2017).

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Tencent worked with China Unicom and China Mobile to pre-load mobile QQ SMS onto

mobile phone’s SIM cards, and also with handset makers to include the software in their

products. It offered various value-added mobile subscriptions such as mobile chat, interactive

voice response (IVR), ringback tones, mobile news and information, and mobile games among

others. Still, in 2003, the company focused on its PC-based internet value-added services and

advertising (Wells and Ellsworth, 2017).

Between 2004 and 2009, Tencent focused on new directions to ensure that they become the

leading internet and telecommunication value-added service provider in China. During this

period, it experienced a strained relationship with telephone companies and also the government.

Tencent fought back by offering a wide range of simple casual games both developed in-house

and licensed from third parties. It also started offering a massive multiple player online game

known as Sephiroth. It launched casual games from 2005, such as QQ Tang, QQ Speed, and

Cross Fire among others. Tencent also participated in social network gaming by launching its

version of virtual farming, QQ Farm in 2009. Its game strategy like participating at all levels in

the industry with a wide range of games for all users, was effective in attracting new gamers,

retaining existing and encouraged players to recommend the games to their friends. This strategy

also diversified risk in a hit-driven industry (Wells and Ellsworth, 2017).

From 2010 to 2016, Tencent focused on remobilization and change. It started opening up

its platform to create an ecosystem for innovation. Its core gaming and social networking

businesses went from strength to strength, and it also started driving into international markets

which proved more successful in gaming than social networking (Wells and Ellsworth, 2017). In

2017, Tencent focused on moving forward by exploring ways possible to neutralize their

competitors and maximize its profits.

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Question 1: How was Tencent able to transform itself from a simple messaging service to
China's biggest Social and Gaming platform?
In 2004, Tencent had a primary goal of becoming the leading internet and

telecommunications value-added service provider in China. They prioritized significant ways to

achieve this goal and enabled them to achieve this goal, and transform from a simple messaging

service to the biggest social and gaming platform in China. Some of this ways include;

continuing to expand the user base of their products; delivering new services and products to

enrich the QQ community experience; continue strengthening strategic relationships with third

parties like telecommunications operators; content providers and device manufacturers; and

lastly developing real-time communications solutions for enterprises in China.

Question 2: What competition did Tencent face, and how was it able to stay ahead of the
competition?
Tencent faced various competitions from other companies such as Baidu and Alibaba as

well as many start-ups interested in venturing into the same sector. However, it faced major

competition from telephone companies and the government between 2004 and 2009. During this

period, phone companies welcomed value-added service providers because they were

competitors for the companies´ value-added products. Also in 2005, state-owned China Mobile

terminated its chat fee-sharing contracts and altered its multimedia service billing policies. As a

result, Tencent’s revenues from mobile and telecommunications services reduced, and the

number of paying subscribers dropped. In 2009, the Chinese government also stopped allowing

consumers to buy online content and charge to their mobile phone bills, and this was also a major

blow to Tencent.

To overcome such competition, Tencent decided to attack the online gaming on multiple

fronts by introducing simple casual games, massive multiple player online game and advanced
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casual games for gamers who wanted something more challenging than the simple casual games.

The company also became aggressive in social network gaming as it launched its version of

virtual farming called QQ Farm in 2009. As a result, Tencent had become the largest online

game operator in China by the end of 2009. Therefore, by being active in all levels in the gaming

industry with various games for all users, Tencent successfully attracted new gamers and

retained existing ones.

Question 3: CEO Ma Huateng states that "ideas are not important, execution is'. Do you
agree with this statement?
I entirely agree with CEO Ma Huateng because, in China, there are always thousands of

start-ups looking to enter the market, and so immediately they have an idea, they rush to execute

it, as compared to like the United States, where execution of an idea takes several months before

competition pops up.

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References
Wells, J. R., and Ellsworth G. (2017). Tencent. Harvard Business School. p.1-39.