Tencent’s Plays Games With WeChat

WeChat commercialization marches on

The headlines have been buzzing these last few days with news on Internet giant Tencent (HKEx: 700) and its WeChat mobile messaging service, which has become the company’s hottest new product but is still looking for ways to make money. The most interesting rumor, which appears to be false, had Tencent in talks to purchase a controlling stake of leading online travel agent Ctrip (Nasdaq: CTRP). Meantime, other media are reporting that WeChat’s international expansion is accelerating, and that Tencent is quietly testing out a new mobile gaming platform for the service.

All this is part of the anxious scramble by Tencent to quickly find ways to earn money from WeChat, which has rapidly grown to boast more than 400 million users just over 2 years after its launch. The drive to monetize the service parallels similar efforts at other Chinese social networking services (SNS), which have discovered it’s much easier to sign up millions of users than to earn any money from them. Sina’s (Nasdaq: SINA) Weibo microblogging service and Renren (NYSE: RENN), which is more similar to Facebook (Nasdaq: FB), are also busy looking for profits in their own ways.

All that said, let’s have a look at the latest headlines starting with the report that Tencent was in talks to buy a controlling stake of Ctrip (Nasdaq: CTRP). (Chinese article) The reports said that Tencent wanted to buy more than 51 percent of Ctrip, in a deal that would have valued the company at around $6 billion. Ctrip shares shot up 6.5 percent after the report came out, prompting the company to put out a statement denying the report. (company announcement)

Frankly speaking, I believe Ctrip’s denial in this case, since I don’t really see any major synergies between WeChat and Ctrip’s core online travel services. Ctrip did once sell a strategic stake in itself to Japanese e-commerce firm Rakuten. But Rukuten later sold the stake after it failed to get any synergies from the tie-up. That case showed that Ctrip’s owners preferred to stay independent and didn’t really want a strategic partner, and I expect they would take a similar view about a tie-up with Tencent.

While the Ctrip rumors look suspicious, another report that Tencent is quietly testing a new gaming platform for WeChat looks a bit more credible. (Chinese article) That report says Tencent was showing off the new platform at a recent conference for developers, who gave a positive reception to a demonstration of the first game on the platform, called Tiantian Lianmeng. The company also reportedly has a strong pipeline of other new games that it plans to roll out on the platform after its official launch.

This strategy looks consistent with what Tencent has said in the past, namely that games will be one of the big money earners on WeChat. Tencent successfully used a similar strategy with its popular desktop messaging product QQ to become China’s biggest online game company. This new WeChat strategy looks similar, and seems like a better way to commercialize the service because it will appeal to WeChat’s core demographic of users in their teens and 20s.

Finally there’s news from the international front, with media reporting that WeChat now has some 70 million registered users outside China, nearly double the total from just 3 months ago. (English article) I suspect many of those users are in Hong Kong and Taiwan, which also use Chinese and where WeChat has quickly gained a major following.

Tencent recently opened a US office as part of its global WeChat expansion (previous post), and the latest reports indicate it is eying other markets like Brazil, India and Mexico for future growth. Tencent will have a bit more competition in this global drive, as it faces strong competitors like US-based WhatsApp and Japan’s Line. But WeChat’s solid product design, combined with Tencent’s own deep resources, could give this global campaign a strong chance of success.

Bottom line: A rumored WeChat tie-up with Ctrip looks false, while a new online game platform could help WeChat to quickly turn profitable.

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