Tencent Insists WeChat To Stay Free

Tencent WeChat debate moves to Boao

The non-stop debate over Internet giant Tencent’s (HKEx: 700) popular WeChat mobile instant messaging service has moved south to Hainan island, where executives on both sides of the issue are speaking out at a major annual forum in the city of Boao. On one side of the issue, former China Mobile (HKEx: 941; NYSE: CHL) Chairman Wang Jianzhou is saying that WeChat and other popular mobile apps are a huge burden for the nation’s telcos, which must invest big bucks in infrastructure that these Internet-based programs require to operate. On the other side of the issue, Tencent President Martin Lau is saying that WeChat will remain free, contradicting recent signals from the telecoms regulator that Tencent will soon start to charge for the service.The current controversy more broadly involves the issue of Over The Top (OTT) services, which are apps created by third-party developers to take advantage of mobile Internet access. Since its introduction 2 years ago, WeChat has exploded in popularity and now boasts more than 300 million users, including 40 million outside China.

China Mobile has been quite blunt in criticizing WeChat, complaining that the popular app accounts for a large proportion of its customers’ mobile Internet usage. Accordingly, China Mobile says Tencent should share some of the benefits it gets from WeChat through a revenue sharing agreement. The only problem is that WeChat is currently free to most users, and doesn’t generate too much revenue. China Mobile wants to change that by forcing Tencent to charge fees for WeChat users, and then to share some of that revenue with the telcos.

As China’s dominant mobile carrier, China Mobile used its clout to get the industry regulator to intervene and host negotiations over the issue between Tencent and the nation’s 3 telcos, China Mobile, China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA). Observers like myself noted that China Mobile and the other 2 carriers already benefit directly from popular programs like WeChat, since such apps encourage users to spend more time on the mobile Internet and thereby generate more data service revenues for the telcos.

The latest wrinkle to this story is coming in remarks by China Mobile’s former Chairman Wang Jianzhou, who dominated the company for years and probably still wields big influence there despite his official retirement last year. Wang says that costs incurred by China Mobile to build its Internet infrastructure far exceed the revenue it is getting from data service subscribers. (Chinese article)

Longtime readers will know that I’m not a very big fan of Wang, whose conservatism has caused China Mobile to become an industry laggard instead of innovator despite its huge size and resources. This kind of comment makes me believe he may still be lingering behind the scenes, even after his high-profile retirement, and convincing China Mobile’s new management that the company needs to wrangle some money out of Tencent. In response to Wang’s latest remarks, I would simply say: If China Mobile isn’t getting enough money from subscribers to offset its infrastructure investments, then it should simply raise its data subscription prices.

From Wang, let’s look quickly at the latest remarks from Tencent’s number 2 man, Martin Lau, who insisted at the same Boao forum that WeChat would remain free for the foreseeable future. (English article) Lau’s latest remarks certainly won’t be welcome by the telecoms regulator, the Ministry of Industry and Information Technology, which said just last week that Tencent will definitely start charging fees soon for WeChat. (Chinese article)

While the MIIT is certainly an important voice in this issue, I would be more inclined to believe Tencent in this case and say it’s unlikely the company will start charging fees for WeChat anytime soon. Instead, I expect Tencent will continue to look for other ways to earn money from WeChat, such as through advertising and value-added services like online games. It will probably give some of that money to the telcos to stop China Mobile’s complaining, allowing everyone to finally move ahead with the more important business of developing the mobile Internet.

Bottom line: Tencent is likely to resist industry pressure to charge fees for WeChat, and will appease China Mobile through an alternate revenue sharing deal.

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