Social Empires: Why are Tencent and Facebook Heading in Opposite Directions?

Tencent and Facebook are operate social empires in the East and the West. Their market valuations are similar, and commentators often attempt to compare these two companies and imagine a competition. The competition between Facebook and Tencent is similar to a battle between the Asian tiger and the African lion. Though the competition would be a spectacle, it is geographically impossible. Both Facebook and Tencent are shaping the social empire, but why is Tencent using games and other channels to support itself, while Facebook is surviving on advertisements?

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I. Advertising Company Facebook, Game+ Company Tencent

(1) The social empires of Facebook and Tencent

According to the latest research report, the number of netizens has reached 4.02 billion, and global population is 7.8 billion, which means that more than half people are using social media.

With a 15 percent annual user growth rate and 2.17 billion active users, Facebook ranks as the world’s largest social network platform. Its WhatsApp serves 128 countries, making it the world’s most widespread social software.

WeChat has 980 million monthly active accounts, and it ranks second among the Top 5 social media platforms in terms of popularity. The other four are Facebook products. Facebook and Tencent are the undisputed lords of the English and Chinese mobile Internet worlds.

Facebook’s social empire is led by Facebook, its flagship product. Facebook focuses on chain of information flow. It is a mainstream social platform displaying friends’ moments and media reports. The number of monthly active users exceeds 2 billion. WhatsApp and Messenger are mobile communication tools. WhatsApp is a pure communication tool, only offering chat, which has more than 1.3 billion live users monthly. Inspired by WhatsApp, Messenger added voice messages, voice calls and basic functions. It has gradually become a platform similar to WeChat. Instagram is a social App for photos and videos, with more than 800 million users monthly.

Tencent built the QQ+ WeChat dual social platforms after years of effort. In the subdivision of social products, Tencent‘s WeChat and QQ belong to instant messaging, and WeChat Moments is an additional information stream product. By leveraging China’s large population, Tencent turned WeChat into a super app. If Facebook’s products are specialized to serve different interest in social networking, WeChat is a basic platform carrying all the functions at once.

(2) Facebook Advertising Business & Tencent‘s Game+ Profitability

Facebook has very simple business model, which is advertising. More than 90 percent of Facebook’s revenue comes from advertising and the proportion is growing over the years. In the latest quarterly earnings, Facebook’s revenue was $12.9 billion, and its advertising revenue accounted for 98.5 percent. According to Zethi, Facebook is the No. 2 company worldwide in terms of advertising revenue: Google is No. 1.

Facebook invented News Feed Ads to generate cash. It integrates advertisements into the home page, and uses a unified style to make the whole experience seamless. Advertisements usually have interesting titles and contents.

Facebook is a company that can target products. Facebook can score users according to 11 dimensions, such as region, interests, relationship chain and education, and this score is used to target advertisements accurately. This precise technology is a prerequisite for Facebook’s advertising. Compared with the extensive reach of China’s Weibo, Facebook has much better advertising effects, though at a higher cost. Advertising alone can support its huge market value.

Facebook controls a huge flow of traffic, and it sells advertising through that traffic flow. While Tencent has adopted a variety of patterns, games have always been its main source of revenue. In the latest quarter, games accounted for 41 percent of Tencent‘s revenue – advertising accounted for only 17 percent.

In China, Tencent occupies almost traffic flow through its products WeChat, QQ, games, music, video and payment. Tencent seems to be omnipresent. But as Tencent has only explored the Chinese market, its range and the user scale are far less than Facebook. Nevertheless, Tencent and Facebook are very close to each other in product field, market value and revenue.

II. Why Tencent and Facebook Choose Different Models

(1) The genes are different: Facebook depends on products and technology, and Tencent relies on its business model.

In May 2007, Facebook, which had 132 million active users, opened the Facebook Platform to third-party software developers. These new Apps integrated into the core functions of Facebook and met users’ interests. Facebook quickly completed its transformation from a website into the platform.

This move enabled Facebook to have a more comprehensive grasp of user data, and thus Facebook accumulated data and laid a foundation for its industrial chain. Open source contributed a lot to the data volume and accurate user analysis technology Facebook has today. In China, Amap has travel data, Meituan accumulates food data and WeChat has relationship chain data. All data is separate from each other, so the ads sent on WeChat Moments are not targeted. This is why they are cheaper than Facebook ads.

Tencent‘s drawback lies in technology. Without a technical advantages, it is difficult for Tencent to counterbalance Baidu in the way Facebook competes with Google. So in advertising (search), which is the most efficient way for Tencent to find cash, Tencent was defeated and turned to games.

After their battle with 360, Tencent executives realized QQ (including WeChat) was a social network built on underlying contacts. It would never be a source of money, but it could incubate future profitable products. Tencent tried many ways to enhance user retention. so WeChat’s global expansion isn’t too important for Tencent.

The congenital gene of the product determines what direction the company is heading, and there is a certain reason for it.

(2) Different Market Features

Why can the Tencent, with 980 million users, create similar value to Facebook with 2 billion users? It has a lot to do with the market.

Yin Sheng, former deputy editor in chief of Forbes, said user scale and value chain decide why Tencent and Facebook head in different directions.

Facebook relies on English language and mainstream American culture to spread across the world. However, due to different national conditions and cultural differences, Facebook has wide range of radiation and low user concentration. Facebook can only make universal products, such as WhatsApp, to meet the needs of all people. WeChat relies on the single Chinese market. As users’ habits, infrastructure and cultural background are highly consistent, WeChat has high user concentration.

III Facebook and Tencent Head in Different Directions

(1) Growth potential of the Tencent: China’s Internet dividend

Today, Tencent has become a connection platform and entrance of traffic. Any App that wants to attract users cannot avoid Tencent. Tencent is not only service provider, but also a link between businesses and consumers. Tencent can pick out excellent startups and foster these companies as its ‘descendants’.

Tencent is a similar to Berkshire Hathaway. It relies on the existing business and hires reputed and experienced Internet and mobile Internet persons as managing partners of its Internet investment funds. The listings of China Literature Limited and Zhongan Limited started the harvest of Tencent investment, and there are more to come.

(2) Facebook casts a net, draw it in, cashes the flow

Based on its existing core business, Tencent is more profitable than Facebook, but the ceiling of Facebook is higher than Tencent.

At this stage, the cash flow of the Tencent depends mainly on games and social network service revenue. The proportion of advertising, payments and cloud services are relatively small. The time that users stay on its products, and the ceiling of money invested, determine the ceiling of the Tencent‘s performance.

Facebook’s ceilings depend not only on the number of users and the time they stay on products, but also on the economic situation of the countries it serves. Although Facebook has a single business, it has 2 billion users. Facebook covers many countries, and its customers are wealthy enterprises.

The competition between Facebook and Tencent is similar to a battle between the Asian tiger and the African lion. Though the competition would be a spectacle, it is geographically impossible. They are more likely to learn from (or copy) each other. Tencent‘s rival will remain Alibaba, and Facebook’s is Google.