What do you think of the business philosophy of Tencent? How does Tencent’s role as both an Internet value-added service (VAS) provider and a venture capital with large investments in global tech startups facilitate its growth?
Financialization and trans-nationalization are two important trends in global digital industries that are also true to Tencent’s business development, and Tencent’s role as online value-added service (VAS) provider and venture capital (VC) investor speaks to those emerging trends.
Some of the key strategies for Tencent’s business development are horizontal integration, vertical integration and product diversification, and they all had a profound impact on Tencent’s success. However, Tencent is not unique in adopting these strategies. We see these in traditional media companies like Disney, NewsCorp and even non-media companies, so these are intrinsic trends for companies to grow in a capitalist market economy. The essential goal for a tech company is to grow itself big and fast and reproduce as much capital as possible. Diversification is a newer trend for Tencent, and this move suggests that the scale of the company has reached a certain level and has amassed enough capital to dab into other businesses. It is signaling that the company is doing well in its own business and thus it seeks diversification.
At the initial phase of Tencent’s development, there was relatively less domestic investors who were interested in Tencent. Its largest stakeholder, even until today, is a South Africa-based media conglomerate Naspers (). This phenomenon can be explained by both the Chinese and the global political economy context. Tencent was established in 1998, that was only two decades since China started the opening-up and market economy reform. Specifically, the financial market in China was still at a premature stage as the Shenzhen and Shanghai Stock Exchange were established in the early 1990s (. Thus, there was a growing number of domestic investors, but the Chinese financial sector was still small and not as active as that of the leading countries in the global financial system. Furthermore, these Chinese tech companies started at a time when the financial market just began to open up for more inflow of foreign capital. Globally speaking, the venture capital investment has been ongoing for about three decades. With further deregulation of the financial sector and an overzealous attitude toward Internet companies in the U.S., there were much more active and powerful US and other foreign venture capitalists who would invest in tech startups like Tencent. But now, we also see this close interaction of financial sector and Internet sector in China.
Diversification is one of Tencent’s major expansion strategies; business and product diversification saved Tencent from the bitter blow of the 2008 global financial crisis. How else has diversification helped Tencent grow? Does stretching too broad also create vulnerabilities for the company?
We should place Tencent’s diversification process in the broader Chinese national political economic context, where the Chinese government started trying to use digital economy as a vehicle to structure some domestic rebalancing process. Internet Plus, for instance, was one of these strategies promoted by the national government starting 2015, which aims to restructure the national economy and social life surrounding the Internet industry through wide application of Internet and information technologies in many conventional industries.
As for the second part of this question, the Tencent leadership is very smart in navigating the complex situation. In addition, I don’t think it’s necessarily a bad thing to explore and expose your vulnerability. The company will only understand itself and the market better by knowing where exactly its vulnerability is. Especially for burgeoning companies like Tencent, diversification is a trial-and-error process for them to learn what works best for them.
I don’t think Tencent has lost its focus during the diversification process. The instant messaging (IM) apps, along with the gaming sector, have always been Tencent’s flagship products, and Tencent only started to explore and diversify its business when its core business is already quite successful and solid.
Tencent’s game sector had given it an entry into the global market. How would you explain the nature of Tencent games’ higher global popularity (compared with the other star products of Tencent)?
It is surprising to many that Tencent is so successful in the global gaming industry because it has been keeping a really low profile and expanding quietly. Many people play games produced by Tencent without knowing that Tencent is the owner.
Tencent managed to vertically integrate itself into the gaming industry through doing game development, distribution and operation. At its earlier stage, Tencent was able to collaborate with and become the Chinese distributor for some high-profile foreign game studios such as Activation Blizzard.
There are different ways of collaboration with the higher-profile game companies: one way is to have some ownership of the companies through buying stocks, and the other is to be their foreign distributor. Tencent started as a distributor to get a foothold in the global game industry. It had collaborated with a few South Korean-based and U.S.-based game studios. There are various regulations by different governments regarding cultural product (like video games), . In China, there are certain rules about who can release a game. So, for some games that are produced by South Korean or the U.S. companies, they need to find a local partner to help them distribute their products into the Chinese market. This is very similar to the import and export of foreign-produced films. Tencent naturally became a good candidate for local distributor because in early 2000s, Tencent had already acquired a large user base through the popularity of QQ. Such a large user base is ideal for any game company that is trying to extend its market into China.
I am intrigued by the argument that the success of Tencent can be attributed to Chinese government’s policies, which liberalized the market for private and foreign capital to flow into Internet companies. Given the deteriorating relations between China and the West, in particular the U.S., how can Tencent sustain its success with diminished access to foreign talent and capital?
This is a great but complex question, and we will need to wait and see how the situation unfolds. The first issue here is whether there will be diminished access to foreign capital. It is true that we are living in this critical moment, but the world is rapidly changing. Whether the world is going to be more globalized or less is still unknown. However, there has always been inter-capital rivalries and fights over markets and national interests. We may find the current moment challenging, but there is nothing new about the tension between the large world economies.
I think the real question here is whether Tencent is able to adapt and evolve under different circumstances. To that end, it depends on Tencent’s leadership and business decisions. By looking at the political economy of media companies in the past, my guess is that as long as we are operating under the capitalist system, capital would always find a way to expand and reproduce.
Compared to Alibaba or Huawei, Tencent is keeping a relatively low-profile, and there seems to be less negative rhetoric targeting at Tencent. This actually allows some sectors of Tencent’s business (i.e. the game sector) to continue expanding quietly.
Some Chinese media giants have been criticized for failing to take their social responsibility. In other words, they failed to seek the balance between “meeting the government’s standard” and keeping its integrity as a social media platform. Does the same criticism apply to Tencent?
The question you are posting presumes that regulation is a bad thing, which I don’t necessarily agree with. Proper government regulations are critical for a society to function properly; regulation is an important part in the political economy of our system. So a better way to look at the question is to examine what types and purposes of regulations are acceptable. Secondly, this question also assumes that those regulations are on the opposite side of the people, but I think we need to move beyond this dichotomous framework when looking at the relationship between a government and its people. This is particularly true when it comes to the discussions on China, which brings to my third point. China has been brought up so much and put under the spotlight when people talk about the collaboration between the social media platforms and the government on censorship. But such phenomenon is by no means unique to China. We learned about NSA’s surveillance programs through U.S.-based telecom and digital giants revealed by Edward Snowden. So when we are making evaluations or critiques on the type of questions you are asking, we need to be careful and specific with the context and the contextualized issues.
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