INTERNET: Revenue, Profit Absent in New WeChat Data Pile

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Bottom line: Lack of revenue figures in a wealth of new data on WeChat indicates the service continues to lose big money, and could become a drag on Tencent’s profits if commercialization efforts don’t accelerate soon.

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WeChat: Where’s the revenue?

Social networking giant Tencent (HKEx: 700) has just released a wealth of information about its wildly popular WeChat, including a headline figure that the wildly popular mobile messaging service now has a whopping 570 million active users. But missing from the wealth of new information are any meaningful monetary figures, reflecting the slow progress that Tencent is making in commercializing a service whose huge popularity also means its quite costly to operate.

People love to talk about WeChat and how popular it is, but you see far less discussion about how much money Tencent is losing on the service. There’s even less discussion of when it might become profitable. But all that said, Tencent is such a cash-rich company it can easily afford to keep pouring money into WeChat for the next decade or more until the day when profits finally come. The big risks, of course, are that investors may not be that patient, and that newer and more popular services could come along.

I did some searching online, and the results seem to reinforce the reality that Tencent doesn’t like to give out information on just how much money WeChat costs to operate or how much revenue it’s bringing in. One analyst estimated the service might bring in about $1.1 billion in 2014, and the number could grow to about $1.5 billion this year. That would equate to a relatively paltry $2.60 in spending per user each year.

But the latest figures also show that users spend quite a bit of time on WeChat, and it’s far from clear if they actually spend any money for that time. I’m probably a good case in point, even though my older age of 51 hardly qualifies me as representative of the 60 percent of WeChat users who are below 30 years old.

A quick scan of the WeChat on my smartphone shows that I sent messages to 14 different friends or groups yesterday alone, and I would personally estimate I spent perhaps 3-4 minutes on average for each of those conversations. That translates to nearly an hour of WeChat usage during the day, and I’m probably a lower user than most. And how much money did I spend on WeChat during all of that time? Nothing.

Big Challenge

That lack of spending is the big challenge for WeChat, though none of that was mentioned in the wealth of data given out at the company’s latest Global Partners Meeting. (English article; Chinese article) After the headline figure of 570 million daily active users, probably the next most interesting data point was the one that said 60 percent of those were in the 15-29 age group.

Media reporters like myself know that a more commonly measured demographic is the 18-29 group, which is one of the most highly sought by advertisers due to their relatively high incomes and tendency to spend liberally. So it’s somewhat significant that Tencent lowered the bottom end of that demographic to 15. That implies that a large portion of WeChat users are in the 15-18 year old bracket, which have far less money to spend and probably take up huge amounts of air time.

Among the other figures, the most interesting for investors was probably that WeChat users consume 280 million minutes daily on audio chats, translating to about half a minute per user. That’s another huge expense, since audio technology uses far more data than that for transmitting simple text messages. In terms of revenue-generating activity, the only significant information is that 15 percent of WeChat users play games. But  even that figure could be misleading, since a big portion of those could play free games.

Tencent is certainly trying to make some money off WeChat. The biggest effort in that direction is its equity tie-up with JD.com (Nasdaq: JD), China’s second largest e-commerce company, which has its own dedicated channel on the platform and is experimenting with other marketing partnerships. WeChat also has some advertising that pops up from time to time in its popular “Moments” function, but even that is relatively limited.

At the end of the day, I should probably compliment Tencent for its go-slow approach to monetizing WeChat. The company realizes the service is hugely popular, but also that it needs to be careful not to become too aggressive with its commercialization and risk scaring people away. Investors certainly seem content to let Tencent use that approach for now, though they could change their minds in the next 2-3 years if the service keeps eating into the company’s bottom line without any signs of earning its own profits.

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