Tencent Empire #01: Startup 1998–2004

Tencent a fast-growing child, curiously asking: Who am I?

“How can Ma Huateng, who is shy and quiet, become an entrepreneur?” All the students and teachers of Ma Huateng interviewed by me, couldn’t help sighing with such emotions. Even Ma Huateng himself did not expect that he would create a “big business.” He and his founding partner Zhang Zhidong once planned that by the third year, the number of employees would reach 18. When OICQ, which is QQ in future, goes online, they set the user’s limit to 100 thousand. Ma Huateng also tried to sell the company several times, but no one was willing to take over.

Nevertheless, Ma Huateng is most fortunate that he is in a “big industry” and “big era.” In describing the commercial significance of railways and telegraphs, Richard Tedrow, a professor at Harvard Business School, said:

Any new development that breaks the time and space constraints on people, products and information, will have a huge impact on how business works.

In the history of mankind, the Internet economy that emerged in the 1990s is clearly a commercial invention that is as significant as railroads and telegraphs. It reshapes the way of information dissemination. China, after 20 years of reform and opening up, took the first train of the Internet economy. If the United States is the head of the train, then China is the second carriage that hangs behind. We can even say that China benefits the most from the Internet movement among all countries.

Ma Huateng is the third generation entrepreneurs after the reform and opening up. Unlike previous farmer-run enterprises, “urban fringe” business and officials going to business, Ma Huateng founded Tencent, with the bigger driving force of interest, and the innate passion for information technology. Shenzhen is the third city in China which provides Internet access services. Ma Huateng is one of the earliest hundreds of Internet users in the country and has managed a site that has a little reputation. Ma Huateng and four other startup partners were born in urban middle-class families, four of whom were middle school and college students. They all had a religious fanaticism about the Internet — not money itself.

In the history of the early American industrial and commercial enterprises, Chandler, Alfred D. Jr. proposed the famous “four stages of growth” theory, that is, the accumulation of resources, the rational use of resources, sustainable growth, and rational use of resources during expansion. Looking back on Tencent’s early growth history, we clearly saw the evolution of this trajectory: achieving the accumulation of user resources via QQ, achieving profits of user resources with innovative profit model. However, this is not an destined process.

From the mid-1990s to the mid-2000s, the Internet bubble burst, and all Chinese Internet companies were American-style imitations, news portals, mailboxes, search engine, including instant messaging tools, without exception. Tencent has not been favored by the industry for a long time.

One big reason is that its imitation target, ICQ developed by Israelis and later acquired by AOL, has never been profitable. Even until I write this book, there was no other instant messaging product that found a good way to make money. Therefore, Ma Huateng must do something which Americans haven’t done before.

The first thing done right: Tencent’s imitation of ICQ is based on micro-innovation. It transferred the information from the client-side to the server-side, thus adapting to the Internet environment in China at that time, and also invented novel functions such as breakpoint resume transmission, group chat, and screen capture. It can be seen from the Tencent’s case that the ability and speed of Chinese Internet practitioners in applied innovation is not inferior to any international counterparts. This is completely different from what happens in the fields of electronics, automobiles, medicine, and mechanical equipment.

The second thing done right: In addition to the micro-innovation of technology, the commercial application of the Internet is also affected by the objective conditions of a regional network environment, user habits, payment systems, and national policies. Therefore, local companies often have greater advantages. Tencent has long proposed the concept of “user experience”. It has creatively launched service innovations such as “member(VIP) service”, selling virtual items, and Q coins (1Q coin=1CNY). All of these gradually transformed QQ from an instant messaging tool with no warmth, into an online social platform for “accompanied people”. In this sense, Tencent is one of the earliest social network testers in the world.

The third thing done right: Ma Huateng began to seek support from the capital market shortly after starting a business. Fortunately, venture capital has entered China when he is looking for money around the world. IDG, Yingke, and MIH have played an important role in capital transfusion in the early development of Tencent. Tencent is also the second Chinese Internet company listed on the Hong Kong Stock Exchange.

Another phenomenon that has never been valued is that China’s value-added services in the field of mobile communications started much earlier than in US. As early as the end of 2000, the newly established China Mobile Company launched the “Mobile Monternet” service, which provides various types of information value-added services for mobile phone users through SMS push, which caused a unique SMS outbreak phenomenon. All the value-added service providers (SP) in this project have achieved startling profits. Tencent was once the biggest partner of “Monternet” and therefore the biggest beneficiary. In June 2001, Tencent became the first Internet company to achieve profitability in an unexpected way.

From the end of 1998 to the IPO in June 2004, Tencent completed the whole process of product imitation, application innovation and profit model exploration during this tortuous period of entrepreneurship. This is also a microcosm of Chinese Internet companies. After the global Internet bubble burst in 2000, Chinese Internet companies have taken a different path from their American counterparts in terms of profit model and user value mining. In 2003, there was a historic big diversion between China and the US Internet companies. In the following two years, local companies have “winned” all international companies in almost all areas such as news portals, search engine, e-commerce, e-mail services, online games and instant messaging. A very different, Chinese-style Internet world is gradually showing his own outline.

Ma Huateng did not show all his qualities as an entrepreneur during the start-up period. He seized the opportunity that others saw as an obstacle, but the ability he formed seemed to be a fatal flaw in the “armor”: the over-reliance on “Monternet” and the profit model was questioned. At the same time, almost all Internet companies have launched their own instant messaging tools. The challenge is like a dangerous and towering railing, in front of Pony. If Tencent helps those young people find their “identity” in a virtual world, it is dramatic that, for quite a long time, Tencent itself is like a fast-growing child, curiously asking:

Who am I?

Previously on Tecent Empire

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