Ep. 5: Has Tencent Lost Its Mojo?

This week on TechBuzz China by Pandaily, our hosts Ying-Ying Lu and Rui Ma talk in-depth about a story that sparked great controversy across China’s technosphere – the debate on whether Tencent has still got its mojo.

TechBuzz China by Pandaily is a weekly technology podcast that is all about China’s innovations. It is co-hosted by Ying-Ying Lu and Rui Ma who are both seasoned China watchers with years of experience working in the technology space in China. They share and discuss the most important tech news from China every week with commentaries from investors, industry experts and entrepreneurs.

The subject of today’s story is Tencent, the T ot the Chinese technology trio “BAT,” and whether or not Tencent has a dream. Why? Well, when a veteran tech journalist writes a 13,000 word piece titled “Tencent Has No Dream,” leading to thousands of responses and a #fakenews scandal involving Tencent CEO Pony Ma, the topic is definitely worthy of discussion.

Rui and Ying-Ying take you back to 2011 when Tencent had a market cap of less than one tenth of they’re worth today to see what they’ve done, how they’ve evolved, and what their future holds. Also in the show, Hans Tung, Managing Director at GGV and an early investor in Xiaomi as well as the co-host of SupChina Network’s 996 Podcast with GGV Capital, shares his own insights and thoughts on the internet giant’s future.

As always, let us know what you think of the show, and you can find these and other stories at pandaily.com. Don’t forget to follow us on twitter at @thepandaily and like our Facebook page!


Please be advised that parts of the transcript has been edited for enhanced readability.

(R:Rui Ma; Y:Ying-Ying Lu)

h[0:00] Y: Last week, a blogger named Pan Luan 潘乱 wrote a sweeping 13,000 word article, this small novella, really, called 腾讯没有梦想, or Tencent Has No Dream and it went crazy viral.

R: That’s the literal translation. But come on, a far more appropriate translation would be, Tencent Has Lost Its Mojo.

Y: That does capture the sentiment much better. Because what this veteran tech journalist was really claiming is that Tencent doesn’t have its act together.

R: Well its news team certainly doesn’t. It was spreading fake news about its own CEO. But yeah, that’s today’s story. We’ll give you the facts, and we want you to decide for yourself. Does Tencent, in fact, have its act together? Or, has it lost its mojo.

R: Hi everyone. We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network! We are a new weekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. TechBuzz China is a part of https://pandaily.com/, a new English language site that tells you “everything about China’s innovation.” I’m one of your two co-hosts Rui Ma and I live in San Fransisco.

Y: And I’m your other co-host Ying-Ying Lu. Alright, let’s dive right in. This week we are talking in-depth about Tencent this week because the article was just so scathing and the reaction was so revealing.

[1:46] R: In order to understand most of his points in this article, we have to backup a few years. To 2011.

Y: 7 years ago in the spring of 2011, the world was a different place. Tencent had a market cap of less than one tenth what it’s worth today, about $45Bn. But it was still the biggest internet company in China. But on March 23, 2011, Pony Ma, the CEO’s worst nightmare came true.

R: Yup. Baidu exceeded Tencent’s market cap for the first time. They were neck and neck for a while, but when Tencent got beat, Pony apparently went into a panic.

Y: Poor Pony. He’d been fighting wars left and right, and was freshly licking his wounds against another giant internet company in China at the time, called Qihoo360. Chinese people refer to it fondly as the 3Q war (三Q大战).

R: By fondly, you mean that it was traumatic.

Y: Well, I don’t know too much about it, because it happened before I was working in tech. So what happened?

R: So at the time, everyone in China who owned a PC installed two pieces of software. 360 antivirus, and Tencent QQ, the original Tencent messenger. Both had hundreds of millions of users. And then Tencent, one day, being the powerful copycat that it was, decided to launch its own antivirus software.

Y: Why? Just because someone else was doing it successfully?

R: I don’t know. I think so. It used to be a copycat, remember. A bloody battle ensued. The main gist of it was, it got so bad, both companies claimed the other one’s product was malware, and forced you to uninstall.

Y: Like, if you wanted to use QQ, you had to uninstall 360?

R: Yup. Pretty much. I mean, can you imagine if Apple forced you to uninstall Chrome? Or, if you were on Google you could never use Facebook? I can’t even make up examples because it’s just so ridiculous.

R: It got so crazy the Ministry of Information had to step in. And except for censorship issues, the Chinese government actually rarely steps into business scuffles. That’s how crazy it got.

Y: Back to The point is, though, that Tencent had a tarnished image after this,

[4:03] R: So now imagine it’s March 2011, and you’re Pony, and your company has this battered public reputation, of being this lowly, unoriginal, even unscrupulous copycat, and you had lost your perch as the big kahuna in Chinese tech. I mean, Alibaba was probably bigger, but it was a few years away from going public, so out of the public CEOs, you were numero uno. But you just lost that distinction.

Y: Yeah, lost it. So what do you do?

R: You call a management meeting of course.

Y: Of course. According to this article, Pony had his top sixteen lieutenants gather in a room and each write down what they thought the company’s core competitive advantages were. Two answers emerged. Capital, and traffic.

[4:48] R: Capital, as in we have lots of money, and we should buy or invest instead of building ourselves. And traffic, or 流量, as in we have a lot of that across our properties, which we can divert to other companies as incentive for working together. Seems obvious. But actually no, it was apparently very controversial internally. Especially “capital,” which supposedly came from President Martin Lau.

Y: Martin was educated in the U.S., went to Michigan, then Stanford, Northwestern, and Goldman Sachs. Before Tencent, he was an investment banker, and he saw things the Wall Street way.

R: To fix the perception of Tencent as a copycat, Martin advocated for Tencent to open up and use capital and traffic to lure in partners. But a lot of old-timers felt that Tencent should exclusively focus on organic growth and be heads down on creating new product.

Y: Martin won though, and one of the first things he did was to bring in James Mitchell as Chief Strategy Officer. James was his old colleague at Goldman, who was definitely not Chinese, but was a well-known tech equity research analyst and definitely understood internet businesses.

[5:58] R: Pretty crazy if you stop and think about it. James was effectively brought in to be the Number 3 guy at Tencent. Before joining, he had never lived in China, and was just this dude who went to Oxford and was working in New York.

Y: And it was after the hiring of James that Tencent really became the active investor that it is today, totally wiping out the copycat reputation it once had, and becoming the biggest, most friendly, most active source of strategic capital in tech.

R: Yeah.That’s literally how they describe themselves. They’re active in China, but also in India, southeast Asia, and even in the US, where they have a pretty active office down in Palo Alto. But this is also the chief complaint against Tencent. That it has become more of an investment firm than a great product company.

[6:45] Y: Doesn’t Tencent have great products though? Like Wechat / Wepay? All the games… League of Legends? Honor of Kings … and … maybe still QQ?

R: What else though? Granted, those are all excellent, excellent, highly profitable, category-defining products. But besides gaming and messaging, which Tencent already excelled at back in the early 2000s, it’s not had much success elsewhere.

Y: That’s a good point. It’s made a bunch of attempts at other categories such as….. ecommerce, marketplaces, longform and shortform video, weibo … but none of these new directions have been particularly successful.

[7:25] R: Yeah. Well the guy who wrote this article, and who claims to have interviewed dozens of Tencent insiders, says that it’s not just that these projects haven’t succeeded, but that they were doomed to fail. Because of the way Tencent is set up and its corporate philosophy.

Y: Yeah, he writes that the internal elimination system Tencent has, in which multiple teams, maybe as many as ten, work on the exact same project and compete with each other, is a really poor use of resources. Although of note, a lot of Chinese companies have this, and some investors think that’s what makes them successful. Kind of like an internal Battle Royale.

R: Yeah. May the odds always be in your favor! But maybe because of this, the company business units don’t work together very effectively. There’s a lot of bureaucracy, and collaborating cross departments is about as easy as if you were an external partner. That is to say, really hard. At least, that’s what people say.

Y: Yeah. That doesn’t sound too different from any large company to me. But I think that the main point really is that with this quote new investment-driven, traffic-sharing mentality, Tencent has not been as eager to take on capital intensive, risky projects.

R: Right. While its archnemesis Alibaba, on the other hand, has gone on to sink billions into cloud computing and logistics, and buying out businesses, such as Lazada in southeast Asia. Companies that take a lot of capital and time to grow, but have a lot of stickiness.

[8:58] Y: And stickiness, argues this writer, is what Tencent doesn’t have, aside from its Wechat family of products. Games are hugely profitable, but their revenue streams just don’t last very long.

R: League of Legends has been popular forever though, so I guess it depends on what you mean by “long.” But it is true that Tencent hasn’t really sunk in the billions needed to really make some of their newer projects succeed. For example, in social media, video and ecommerce, Tencent attempted multiple starts and sank in capital, but was also to quick to pull the plug.

Y: In social media, the Tencent brand 腾讯微博 was always number two to Sina Weibo, what we generically know as “weibo” these days, but the Tencent product still had a good 80M plus users. And yet HQ decided to close it. Why?

R: Exactly. Why? Because it doesn’t make *enough* money. So, going by the quote unquote Wall Street mentality of Tencent management, even though it might be a super important product in the long run, if it doesn’t succeed quickly, axe it, because we don’t want that dragging down our profits.

[10:08] Y: Yes, axe it internally, but because it’s risky, expensive… but also important– invest in the vertical instead. Like they did with e-commerce, which they have to-date mostly exited and just now rely on their investment in JD.com.

R: Which, Pan Luan argues, isn’t what really truly great companies like Amazon does. Amazon invests for the long haul. At the expense of profitability. And look where it got Bezos.

Y: World’s richest man.

R: And while Tencent does have a significant stake in JD, about 18%. But it doesn’t own the company. And is it really wise to rely on a strategic minority investment to fight against Alibaba? Ecommerce is no joke. There are many people who believe Tencent should have been more patient in growing their own ecommerce products.

[10:59] Y: And now we are back to the beginning of the story. Tencent had to make an announcement about making no announcement.

R: Yup, because you see, this article went so crazy viral that pretty soon, Tencent executives were commenting on it in their Wechat Moments, and even Pony Ma wrote a Wechat response kinda acknowledging that the company has lost its way. Then someone took a screenshot of, and that too, went immediately viral.

Y: Except, it wasn’t actually by Pony. Get this– A growth hacker named Zen Photoshopped his reply to quote unquote see what would happen.

R: Well what happened was I guess the response was so convincing that no one, not even Tencent Tech News itself, bothered to verify that it was real, and it was published everywhere. And when this dude Zen posted that he had in fact doctored it, people didn’t believe him, they thought it was a tactic to get PR.

Y: And this is why the real Tencent corporate PR had to step in and make an announcement that indeed, the response — which their colleagues reported on — had been fake.

R: I know, right? Crazy. Hashtag Fakenews. But again, the original article was so well-written and researched that everyone started talking about it. Had Tencent in fact lost its mojo?

[12:23] Y: Had it? We asked Hans Tung, managing director at GGV, a $4 Bn cross-border US-China venture capital firm and co-host of another Sinica podcast, the excellent 996, what he thought. Hans was an early investor in Xiaomi and has been named to the Mi IIIII das list of top VCs multiple times.

H: I think the blog post may be onto something but may have misspoke on the causality. It’s not that Tencent is too strong in investments, and therefore become weaker in product innovation outside of Wechat. One could argue that despite lack of innovation on products beyond Wechat, the investment has come up to be a very good Plan B. What’s funny is that Allen Zhang wasn’t homegrown either, he came via acquisition by Tencent of a company called Foxmail, which was Allen Zhang’s first product. So, I think Tencent should continue to be aggressive if needed at acquiring talent, acquiring the next Allen Zhang, figure out a way to find the next Zhang Yiming, through M&A. Doesn’t matter if the talent is homegrown or acquired, as long as it produces for Tencent, that’s what matters most.

[13:43] R: Wow. Those are such good points. Zhang Yiming, by the way, is the CEO of Bytedance AKA Toutiao, which owns a suite of huge news and entertainment apps that we talked about back in Episode 1, and which some people think is Tencent’s biggest current threat.

Y: And what do you think, Rui? I remember you interviewed with Tencent investments just as they were starting out.

R: Yes, also ages ago! In late 2011. When Wechat only had about 20mm users— now they’re at 1B. The main interview question was, how would I value Wechat and what did I think its strategy would be? I was actually surprised because they didn’t care what I thought about any other part of the business.

Y: What was your answer?

R: Well cIearly I got it super wrong, that’s why I’m hosting a podcast. I thought it was gonna be a weibo competitor, and Weibo was just a few Bs at the time, so I did some math, and arrived at a ballpark of $3Bn.

Y: $3Bn! People thought it was worth $100Bn back in 2015, it’s probably way higher now. You were off by almost two orders of magnitude!

R: I know! But honestly, that was my best guess at the time. I’m glad they didn’t laugh me out of the room, but they sure as heck challenged my answer a lot. And they were totally right.

Y: What do you think that says about Tencent?

R: It says a lot! Maybe other people knew Wechat was going to be a Big Deal, but I certainly didn’t. But Tencent internal did. And they’ve really executed on it. Maybe Wechat is just one win, but it’s a heck of a win. Aside from AWS, how many other $100Bn+ businesses have been incubated internally that is completely distinct from a company’s original product offering?.

Y: Well I think we could go on this topic forever, it’s so interesting. So let us know. Do you agree with the original post, which claimed that Tencent has lost its mojo? Has Tencent stopped making innovative new products? Has it become too reliant on investing and playing nice with the rest of the ecosystem?

R: Yeah, or do you think that it makes sense to start by investing in the areas you’re not so strong in… and just really lean into your winners, either homegrown or acquired? Either way, I’m sure Tencent management is discussing this internally. Judging by their track record, even if they’ve lost it, I’m sure they will get their mojo back.

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