Tecent Empire #02: Attack 2005–2009

Tencent wins around all fields, but becomes Public Enemy

Since 2004, Tencent has released quarterly, semi-annual and annual financial reports on time. When I read these documents one by one, I finally came to a conclusion that is so much frustrating: you can never read from the financial statements to understand an Internet company.

Thomas Watson, who founded IBM, spoke a famous saying: “Machines should work, people should think.” This should be the most prospective thinking in the industrial civilization era, but in the era of information revolution, it is still behind. For Internet companies, there is no boundary between machines and humans. You need to redefine what machines and assets are, and need to re-plan the technology investment and its input-output cycle. Even the meaning of strategy, the determination of opponents and accounting principles, all need to be reevaluated.

The capital market has always looked at Tencent with a cold eye. From the IPO in 2004 to around 2007, Tencent experienced a “strategic adjustment period” of three years. This does not seem to be a process in which the strategy is determined, but a process in which the strategy is gradually being adjusted. In the beginning, the starting point of the strategic adjustment was to avoid a disaster: nearly 70% of Tencent’s revenue came from China Mobile’s “Monternet” business, and the latter issued a notice to clean up and rectify the day before Tencent’s listing.

In the subsequent adjustments, Tencent’s various risk-taking behaviors are full of controversy and gunpowder.

In the cold 2005, Ma Huateng proposed a new strategic proposition of “Online Life” and made major adjustments in organization and talent structure. More than 30 disrupted departments have been reorganized to clearly articulate 5 business modules: wireless value-added services, Internet value-added services, interactive entertainment services, enterprise development services and online media services. A group of senior managers, such as Liu Chiping and Xiong Minghua, who have served in transnational corporations, have entered the decision-making level. They brought a standardized operation principle and reshaped the talent structure of Tencent, which was full of grassroots startup smell. This move stirred a huge wave inside Tencent.

In the main battlefield of instant messaging, Tencent does not actively advocate “interconnection”, which is considered by some of its peers to violate the Internet spirit “make the world flat.” Tencent repelled the portal company’s siege to QQ, such as NetEase, Sina and Yahoo. Especially for Microsoft MSN, Tencent not only solved the strong attack from MSN, but even introduced the three core cadres of MSN China to the company. This iconic event shows the fighting capability of Chinese Internet companies in their local market.

Tencent’s QQ zone, launched in 2005, was initially seen as the Chinese version of My Space and later as a follower of Facebook. In fact, QQ zone has a totally different operation pattern and profit model. It further magnifies the earning power of virtual goods, and creatively stimulates the enthusiasm of Chinese netizens via the monthly subscription mode. In the following four years, QQ zone carried out the “three major battles” of 51.com, RenRen and KaiXin(Happy Net) in phases, thus becoming the biggest winner in the big wave of socialization.

Still in 2005, Tencent determined to become the overlord of online games. At that time, this seems to be the mission impossible: Beijing Lianzhong (Ourgame) occupied more than 80% of the market share in casual games like chess and cards; in the field of massive online games, Ding Lei of Guangzhou Netease and Chen Tianqiao of Shanghai Shanda, like two door gods holding the entrance, they all climbed the throne of “China’s richest man” because of the success of online games. However, in just one and a half years, Tencent has made its number of card and board players to exceed Lianzhong (Ourgame). By 2009, Tencent’s online game revenue exceeded Shanda. Before the rise of WeChat, online games became Tencent’s biggest “cash cow”, accounting for about half of all revenue. Therefore, Tencent was hailed as an online entertainment company.

What also surprises everybody is Tencent’s achievements on the portal. In the face of the traditional three major news portals — Sina, Sohu and Netease, Tencent quietly surpassed them using flanking tactics. Liu Shengyi redefines the rules of online advertisements placement, and has gained the recognition of advertisers. The QQ mini-homepage brought a huge increase on traffic, which makes all opponents helpless.

Ma Huateng is also involved in the field of e-commerce and search. He first launched the Paipai(like ebay) and online payment system — Tenpay(like paypal), and then launched Soso(search engine). In these two battlefields, he encountered fierce resistance from Ma Yun(Alibaba, Taobao) and Li Yanhong(Baidu). This foreshadows the future “new three giants”(BAT, Baidu, Alibaba, Tencent) pattern of Chinese Internet.

In the history of Chinese Internet, 2008 was an iconic year. In this year, China’s Internet population surpassed US for the first time in history. However, in the wave of Social Network Service (SNS), the three news portals tried to transform based on “blog mode” but could not find a reliable profit model. QQ zone, Baidu space, Renren, 51 and others have sprung up with the new SNS model, which indicates the news portal era has come to an end.

Tencent’s adjustments and attacks during this period were highly risky. It seemed to violate the traditional concept of specialization — even inconsistent with Ma Huateng’s early remarks. In just a few years, Tencent has become an increasingly unfamiliar “big monster”. It has risen in multiple fields at the same time. Whether in China or in the United States, there is no analogy.

When it went public in 2004, Tencent was just a fast-growing, marginalized instant messaging service provider, but in the next few years, Tencent was like an inconspicuous light cavalry unit, quietly moving from a remote corner to the central theatre, and smoothly completing the territory expansion from the client-side to the web-side .

By 2008, Tencent owned 4 billion-level entries — QQ, QQ zone, QQ games and QQ.com, which is unique among Internet companies worldwide. Energetic Ma Huateng attacked in all directions, made enemies in all fields. In almost all areas, he attack, battle and win heartily, finally gained the nickname:

Public Enemy

Even Tencent itself does not know how to define it own. For a long time, the southern company, whose employee average age is only 26, was not prepared for the victory it achieved.

Ma Huateng eluded the media all year round — before 2010, he never had a meal with the editor-in-chief of any financial media. For financial journalists in China, the two entrepreneurs most difficult to interview are both in Shenzhen, one is Huawei’s Ren Zhengfei and the other is Ma Huateng.

The low-key gesture further aggravates his mystery, which is why he is also called as the “shadow leader.” Later, Ma Huateng admitted that on a certain level of fact, he actually “does not know how to tell Tencent’s story to others.”

A creator is very unfamiliar with the history he created, and this situation is not the first time.

“Growth is always fragile”, Peter Drucker’s warning will soon be fulfilled in Tencent. It encountered unprecedented challenges and attacks after 2010, and all this seems to be the inevitable result of its fuzzy definition.

Previously on Tecent Empire

Tencent Empire #00: Who can freeze a volcano that is erupting?

Tencent Empire #01: Startup 1998–2004