Company

A brief history of Tencent, the Eastern BIG TECH

One of China's largest Internet companies, Tencent, with a market capitalization of about RMB 4.53 trillion (about USD 0.71 trillion), is the closest Chinese company to a trillion-dollar market capitalization. In this article, we will review the important points in Tencent's growth process. It will help you understand how it has grown step by step into the business empire it is today.

As one of the largest Internet enterprises in China, Tencent has been on the Fortune 500 list for several years and is ranked 132 in 2021. It has a market capitalization of about RMB 4.53 trillion (about USD 0.71 trillion) today, making it the closest Chinese company to a trillion-dollar market capitalization.

It is also one of the three highest market capitalization gaming companies in the world, behind only Microsoft and Sony. Tencent has become the largest gaming company in the mainland Chinese market with its Honor of Kings, which is called Arena of Valor in its overseas version. But overseas, more players are familiar with it because of its acquisitions of Riot Games, Supercell, Sumo Group, Grinding Gear, Sharkmob and other game studios, and its investments in Epic Games, Activision Blizzard, Glu Mobile, Ubisoft, Funcom and other famous game companies.

Instant messaging and mobile payment apps like QQ and WeChat have been integrated into every aspect of Chinese people’s lives, becoming an important part of the daily lives of contemporary Chinese people.

Perhaps at the beginning of Tencent, even its founder, Ma Huateng (Pony), did not expect it to become such a phenomenal Internet company today. In this article, we will review the important points in Tencent’s growth process to help you understand how it has grown step by step into the business empire it is today.

The birth of QQ

Tencent was founded in November 1998 and developed its own instant messaging software, QQ, in February 1999, which was the cornerstone of all its subsequent success.

In 1996, four young Israelis, Vigiser, Vardi, Amir and Goldfinger, got together and decided to develop a software that would take advantage of the timely communication features of the Internet to enable fast and direct human-to-human communication on the Internet. They named the software ICQ, which stands for “I seek You”.

In 1997, Ma Huateng came across ICQ and became its user. He felt the charm of ICQ, but also found its limitations: ICQ used an English interface, which had a high threshold of use and was relatively cumbersome to operate. This made it unpopular in China, although some people were using it.

At that time, Ma Huateng was working for Runxun, the largest paging company in Shenzhen. He initially wanted to build a network paging system that would send information to pagers through the Internet. So he quit his job and, together with his college friend Zhang Zhidong, registered Shenzhen Tencent Computer System Co., Ltd.

Coincidentally, at that time, Guangdong Telecom put out a tender of more than 900,000 RMB to make an instant messaging system. Ma Huateng and his partners initially aimed to develop a Chinese ICQ software and sell it. After all, the newly established Tencent did not have the strength to operate a software that required a large investment and did not make money. So Tencent wrote the project construction book and started to develop OICQ, the predecessor of QQ.

However, OICQ, which was bid at that time for just over 300,000 RMB, did not win the bid, so Tencent decided to make it go on by itself. Without the bidding at that time, Tencent might not have developed OICQ. If Tencent had won the bid, there would no longer be Tencent’s OICQ and QQ, and there would probably no longer be Tencent today. To some extent, Tencent’s success relies on its strength, but it is not without the addition of luck.

In February 1999, Tencent released the first version of OICQ. In the same year, Chinese Internet companies such as Netease and Sohu also launched their own instant messaging software. At that time, the download speed of most Chinese Internet users was just over 30kb, and it was billed by the hour. Many competing products were 1~2Mb in size, and it would take more than an hour just to download, so users would have a big psychological threshold. Tencent’s OICQ, on the other hand, is only 200kb in size, which makes it more accessible to users.

Tencent also provides many cartoon avatars for users. In the age of no digital photos, it’s always a nice memory point to have an avatar. What is more important is Tencent’s technical strength. In the early days when Internet technology was immature, competitors’ software operations were generally unstable and often lost connection. Tencent emerged as the final winner with its more stable service, smaller size and faster transfer speed.

By 2000, OICQ had captured over 90% of the Chinese online instant messaging market and officially changed its name to QQ2000 in its version 0325.

Tencent that was almost sold

Despite capturing the vast majority of China’s online instant messaging market, Tencent has run into new trouble. At the beginning of the 21st century, although the Internet attracted many users, the business model was very immature. Advertisers do not recognize the Internet model, and without today’s means of online payment, Internet companies are unable to commercialize and are under great pressure to survive.

QQ already had tens of millions of users in 2000, but Tencent could not afford even one more server for it. The team visited all the listed portals in China at that time, but they were all rejected, and Tencent even intended to sell the company to China Telecom at one point.

In January 2001, David Wallerstein, then Vice President of MIH Group China in South Africa, came to Tencent and expressed his intention to acquire the company. MIH is the largest pay-TV operator in South Africa and an internationally renowned media investment group, which was already listed on NASDAQ in the US and Amsterdam in the Netherlands. David said MIH happens to have a company in China that is going to IPO, and if Tencent causes to be acquired, it can be fitted in to go public together.

Tencent’s founders politely declined and did not want to be acquired. In the subsequent meal, the two sides, however, were extraordinarily cordial and expressed their willingness to talk again the next day.

After a few more rounds of communication, the two sides finally agreed, and MIH gave Tencent a valuation of $60 million, which was 11 times Tencent’s valuation a year ago. More importantly, it acquiesced to Ma’s team’s insistence on control. in June 2001, MIH bought a then 46.5% stake in Tencent and paid $32 million for it.

Tencent finally escaped the danger of being sold and became the first Chinese Internet company to achieve profitability in the same year, taking a solid step towards becoming an industry giant.

Value-added & Gaming Business

Internet companies around the world faced a huge problem at the beginning of the 21st century: they weren’t making money.

While hundreds of millions of people around the world are starting to use a variety of Internet applications for the first time, they hardly ever pay for anyone other than their ISP. This is a disaster for Internet companies because it means that the more users a company has, the more they lose money. (Need to pay for server costs)

Tencent faced this problem during its initial period, which is why Ma Huateng once wanted to sell it.

In late 2000, Tencent made its first money with its wireless value-added business.

Through a partnership with China Mobile, the largest operator in China, a monthly membership service of RMB 5 was launched. People can send text messages from QQ to their cell phones in unlimited numbers. However, this did not solve Tencent’s financial crisis at the time, and the risk was also very high as the revenue came from another company (China Mobile) entirely. Tencent decided to look for new opportunities and find revenue sources that it could control on its own.

In 2003, Tencent tried to launch its own value-added services – QQ membership and QQ Show. QQ membership allows users to level up their accounts faster so that their names can be placed in front of other friends, which will make them very respectable. At that time, users were basically chatting without knowing what each other looked like, and QQ Show allowed users to have a virtual image, buy clothes, accessories and even backgrounds to dress themselves up, quite like the meta-universe of today. QQ Show was a huge success as soon as it was launched, becoming Tencent’s most profitable business and laying a very important foundation for the online game phase that followed.

In 2003, Tencent finally started to contact the online game business, but there were differences within the company’s founders: Ma Huateng decided that online games were an opportunity that could not be missed, while some executives said that “Tencent did not have the sense to do games yet”.

Tencent started by developing board games and also acting as an agent for games. Most of these agent games are from Korea. For example, the first 3D game “Sephiroth” entered China. But because of the lack of experience, the server was very unstable after the launch, players often dropped, Tencent also took a lot of detours in this. In contrast, board games developed by Tencent was quite successful, becoming the number one in China after only two years.

In 2007, Tencent acted as the agent for DNF(Dungeon & Fighter) developed by Neople of South Korea. This game officially landed in the mainland Chinese market in 2008. This agency can be considered a milestone success for Tencent in the game business and strengthens its determination to continue the game business. Also in this year, Tencent learned that Riot Games intended to develop a DotA-like game, and actively participated in the financing. In 2011, Tencent acquired most of the company’s rights for $1.679 billion, and even more so got the world’s hottest game, League of Legends, into its hands.

In 2012, Tencent acquired a 48.4% stake in Epic Games for $330 million, and in 2016 it acquired SuperCell for $8.6 billion.

In terms of self-developed games, Tencent has gradually found its sense and developed such popular games as “Arena of Valor” and “PUBG Mobile”.

The gaming business has been one of the most important components of Tencent’s revenue since 2004. Through the first half of 2021, the gaming business still accounted for 31.1% of Tencent Group’s total revenue.

The great war between QQ and 360

While the game business was growing, QQ encountered a new crisis.

In 2010, Tencent QQ and Qihoo 360 were the two largest client software companies in China, the latter of which was sold as protecting computer security, and it was founded by Zhou Hongyi, another godfather of entrepreneurship in China’s Internet industry. In earlier years, 360 has almost expelled other antivirus software from the Chinese market through its completely free strategy.

This year, Tencent launched QQ Doctor 1.0 Beta version, which is very similar to 360, as a gadget to check and kill Trojan horses. With the subsequent version update, QQ Doctor merged with QQ Software Management and changed its name to QQ Computer Manager, and added features such as cloud trojan checking and plug-in cleaning. This makes the 360 company’s sense of crisis multiplied, the two sides of the war also kicked off.

Because the initials of the two software in the Chinese pronunciation is very similar to the English spoken “Thank You”, the netizens called the war between the two companies “The War of 3Q”.

In September 2010, 360 released a “privacy protector” that directly targeted QQ, claiming to be able to monitor the behavior of QQ in real-time. It also suggested that “a chat software” was spying on users’ privacy files and data without their permission, which raised concerns about the QQ client.

On October 14, Tencent officially announced that it was suing 360 for unfair competition, demanding Qihoo and its affiliates to stop infringement, make a public apology and pay compensation.

On October 27, Tencent even joined hands with Baidu, Kingsoft and other famous Chinese Internet companies to jointly issue a statement requesting the competent agencies to resolutely resist 360’s improper commercial competition.

On October 29th, 2010, 360 launched a security tool called “360 QoQo Bodyguard”. The company said the tool is a comprehensive protection for QQ users, including blocking QQ from viewing users’ private files, preventing Trojan horses from stealing QQ and giving QQ acceleration, filtering ads and other features. The number of downloads exceeded 20 million within 72 hours and continues to grow rapidly. Tencent made a strong statement about this, saying that 360 QoQo bodyguard is “Plug-in” behavior.

The war reached a white-hot stage at 6 p.m. on Nov. 3. Tencent’s open letter declared that it would stop running QQ software on computers with 360 software and advocated uninstalling 360 software before logging into QQ. 360 company CEO Zhou Hongyi said that the uninstallation of 360 software users amounted to 60 million.

At around 9:00 pm on November 3, 360 took down the QoQo Bodyguard software. The next day the company published an open letter saying that it was willing to put aside the controversy and let the network restore calm, 360 QoQo bodyguard officially offline, after this QQ and 360 resume compatibility.

From 2010 to 2014, Tencent and Qihoo 360 have engaged in three lawsuits against each other, all of which ended in Tencent’s favor. Tencent achieved the ultimate victory in this five-year war.

But Tencent changed its business strategy in this regard, according to the description of “Tencent Biography”. After that, Tencent rarely used copycat strategy when it saw new Internet products emerge.

In contrast, Tencent has since made more investments and strengthened benefit sharing with other companies in the industry by opening up its own user and data resources. This is known as the “open ecology strategy” on the Chinese Internet.

WeChat and WeChat Pay

The storm of “The War of 3Q” has not yet dissipated, and Tencent is facing a new challenge in 2011. With the increase in smartphone penetration in China, the mobile instant messaging market has become an area where major companies are competing. Xiaomi, which will later become China’s largest smartphone company, has launched its chat tool called “MiChat”.

If you can’t understand how the introduction of a new chat tool for smartphones threatened QQ as it already had 100 million daily active users, think about how many chat tools Apple’s iMessage killed.

There was also a lot of controversy within Tencent, with one part supporting the launch of the new product and the other proposing to use QQ to compete. After determining to develop a new product, there were three teams within the company working on it at the same time, and whoever won would be able to launch the product.

Among them was the team led by Zhang Xiaolong.

This department originally worked on QQ Mail, but considering that mailbox was not the first concern for users, the team started to develop the product “WeChat” under the leadership of Zhang Xiaolong.

In the end, Zhang’s team won the internal competition and overtook MiChat in 3 months with Tencent’s advantages accumulated in the field of instant messaging. The innovative features introduced on WeChat, such as voice intercom and WeChat groups, have also enabled its user base to grow explosively, ultimately establishing it as the number one player in China’s mobile Internet instant messaging space.

To this day, QQ and WeChat are still the two instant messaging apps with the largest number of users in China.

Since then WeChat has continued to iterate on itself, including features such as the WeChat Moments and small programs. Of course, the most significant one is the WeChat Pay feature that we mentioned in a previous article.

The launch of this feature allowed Tencent to seize the lead in China’s mobile payment space and eventually became the two most dominant mobile payment apps in China with Alibaba’s Alipay.WeChat has also become an indispensable part of the lives of the vast majority of Chinese people.

In Ma Huateng’s self-described history of Tencent’s development, he said the release of WeChat was one of the most important nodes in Tencent’s development history: “WeChat came out, Tencent got a ticket to the mobile Internet, first class.”

The post-WeChat era

Tencent, which has achieved great success in the fields of instant messaging and games, has still not stopped moving forward and is still making challenges and launching new products – such as Tencent Cloud and WeCom, the company version of WeChat.

However, in these areas, Tencent has not been able to replicate the success of the past: Ali cloud layout earlier than Tencent cloud, more easily accepted by users. WeCom is a big problem in terms of convenience, whether it is adding friends or managing, it requires a very tedious operation, so more users choose other similar apps.

Tencent’s managers also began to see the problem and began to “divest” and consolidate its businesses as it gradually transformed into an investment company. Instead of trying to be hands-on in all areas, Tencent is doing what it does best – connecting and maximizing the connection between users and services.

By investing in companies in various fields such as content, search and e-commerce, Tencent is trying to build out an open ecosystem that combines the Internet and tradition.

In 2011, Tencent made a total of 22 investment events. In 2020, Tencent invested in 175 projects. By 2021, the growth rate is 53%, and it has 268 investment events, more than 12 times as many as 10 years ago. This also makes it the most active investor in the entire primary market.

In the mind of founder and CEO Ma Huateng, the sense of crisis is ever-present. He believes that “the real crisis never comes from outside, but only when we ignore the user experience will we encounter the real crisis. Only when Tencent loses its culture of serving users diligently and conscientiously one day will this be a real disaster.”

Perhaps it is because he has always held this idea that Tencent has been able to build such a huge business empire from an instant messaging software of only 200kb.

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