Season 3, Episode 10 Tencent

In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal, along with guest Martin Lau, delve into the story of Tencent, a Chinese conglomerate that has grown from a modest messaging service to a multifaceted powerhouse with significant stakes in gaming, social media, and music. Starting as a clone of ICQ with their product OICQ, Tencent rebranded to QQ after a legal scuffle with AOL, eventually discovering a lucrative business model through virtual goods and microtransactions. They then expanded into the gaming sector, becoming the world's largest gaming company and acquiring stakes in major players like Riot Games and Epic Games. Tencent also revolutionized social media and communication in China with WeChat, which boasts nearly a billion users and integrates messaging, social networking, and commerce, solidifying Tencent's dominance. The episode also touches on Tencent's strategic investments, including a significant share in Tesla and the recent IPO of Tencent Music. Despite challenges such as regulatory hurdles in China and the rise of ByteDance, Tencent's journey from a pager software company to a global tech titan is a testament to its adaptability and strategic vision.

• Tencent invested in Tesla and had significant ownership in Snap.
• Tencent is known for its widespread investment portfolio, which includes major tech companies.

Also, I did have Tesla that they invested in Tesla. And I have one other that is kind of surprising that they own a good bit of, or owned a good bit of excellent. Do you know that one? Snap.

The quote highlights Tencent's investment in Tesla and ownership in Snap, revealing the company's diverse and surprising investment choices.

• Tencent is a Chinese multinational conglomerate known for its investments and technological ventures.
• The company is described as a significant player in gaming, social media, and music services.
• Tencent's market cap reached half a trillion US dollars at one point, and it ranked as the fifth largest brand globally.

Welcome to season three, episode ten of acquired, the show about technology acquisitions and ipos. I'm Ben Gilbert. I'm David Rosenthal and we are your hosts. Today we are covering a company that Wikipedia describes as a chinese multinational investment holding conglomerate founded in 1998. Of course, this is ten cent.

Ben Gilbert introduces the episode, focusing on Tencent, a major conglomerate with a broad impact on technology and investment sectors.

• Tencent is the world's largest gaming company and a significant social networking company by market cap.
• The company owns the world's largest music service, which recently IPO'd with a market cap of $21 billion.
• Tencent's brand is highly valued, surpassing even Facebook in WPP brand rankings.

Tencent is the world's largest gaming company. They are a game publisher, and they take most of their money from games. It's where they make most money as a company.

Ben Gilbert emphasizes Tencent's dominance in the gaming industry and its significant source of revenue.

• Tencent acknowledges its weak PR and is not widely recognized as a world-leading company outside gaming or social media.
• Despite its low public profile, Tencent rivals Facebook in social networking and has a substantial impact on the global market.

Well, first off, they're notoriously bad at PR, and they actually talk about this as a company. You probably don't have them in your mind as one of the world's most important companies, unless you're in gaming or maybe social media.

Ben Gilbert discusses Tencent's self-awareness regarding its PR shortcomings and its relatively obscure public profile despite its significant market presence.

• Tencent and Alibaba are two major players in China's tech industry, with different founders and company cultures.
• The episode will explore the contrasts between Tencent's Ponyma and Alibaba's Jack Ma, as well as their respective companies.

There's going to be so much back and forth through this episode between Alibaba and its founder, Jack Ma. And here now, Tencent and its founder, Ponyma. They're very different, as are their companies.

David Rosenthal sets up a comparison between Tencent and Alibaba, indicating the unique characteristics of each company and their founders.

• The hosts discuss a bonus episode for limited partners about the art of pitching a company for investment.
• The episode provides insights into crafting a compelling narrative for potential investors.

So last week on the lp show, the topic was the art of pitching your company for investment and how to craft the narrative.

Ben Gilbert mentions the limited partner bonus show's topic, which delves into the strategies for successfully pitching a company to investors.

• The Acquired podcast has expanded its offerings and compares its growth to Tencent's media empire.
• The hosts joke about needing sub-brands and a mascot, much like Tencent's WeChat and QQ.

Along with our slack, we're turning into Tencent. We are a media empire of properties here.

David Rosenthal humorously compares the podcast's expansion to Tencent's vast media empire, suggesting they are developing a range of properties and brands.

• Pilot is a company that provides accounting, tax, and bookkeeping services for startups and growth companies.
• The hosts discuss Pilot's success and its focus on allowing companies to concentrate on their core products while outsourcing financial operations.

Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US.

Ben Gilbert introduces Pilot as a sponsor, highlighting its services and importance to startups and growing businesses.

• The hosts address a missed topic from their Netflix series regarding spinouts like Red Box and Roku.
• They discuss MoviePass as a "quasi spin-out" from Netflix, founded by Mitch Lowe, a former Netflix executive.

And several listeners wrote us after they listened to part two and said, guys, I was waiting for the third spin out, quote unquote quasi spin out. And it never came.

David Rosenthal acknowledges listener feedback about an omission in their Netflix series, specifically the lack of discussion about MoviePass and its connection to Netflix.

• Shenzhen is the "Silicon Valley of China" and played a critical role in Tencent's inception.
• The city's transformation from a fishing village to a tech hub is part of China's economic reforms and introduction of capitalism.

So before we get to Tencent and its founder, Ponyma, I think it helps a little bit like Netflix to talk about the geographical place where Tencent is located. And that is the city of Shenzhen, which is probably familiar to, I would assume, all listeners of the show at this point, the quote unquote Silicon Valley of China.

David Rosenthal explains the significance of Shenzhen as a technological and economic center in China, setting the stage for Tencent's story.

• Ponyma, also known as Pony Ma, had a strong educational background in computer science and was an early entrepreneur.
• Tencent, originally named Tenshin, was founded with the intent to develop Internet services for pagers before pivoting to instant messaging.

In 1971, a boy named Ma Huaten is born in a small city in the province of Hainan, which is an island south of Shenzhen in Hong Kong. It is the southernmost chinese province. He eventually adopts the english name Pony, which is a reference to his last name, ma, which means horse. So he is pony horse.

Ben Gilbert provides a brief biography of Pony Ma, Tencent's founder, highlighting his early interest in technology and the beginnings of Tencent.

• Tencent's messaging service, OICQ, gained rapid popularity but faced a legal challenge from AOL over the use of "ICQ" in its name.
• The company considered selling or raising venture capital to address financial pressures and legal issues.

So they're kind of up a creek without a paddle. They have no business model. They're giving away all this for free.

David Rosenthal discusses the challenges Tencent faced with its initial product and the strategic decisions the company had to make in response to AOL's lawsuit.

• IDG Venture Capital and a company owned by Lee Ka Shing showed interest in investing in Tencent in 2000.
• They invested $2.2 million USD for a 40% stake, valuing Tencent at $5.5 million post-money.
• Tencent had a million users at that time, making the terms of the deal seem harsh due to the large equity given up.

"So IDG wants to invest in this."

This quote indicates IDG Venture Capital's interest in investing in Tencent, highlighting the early recognition of Tencent's potential by venture capitalists.

"They take the money, they sell the 40% of the company."

This quote summarizes the decision by Tencent to accept the investment terms, which involved giving up a significant portion of the company for capital.

• Tencent faced a legal issue with AOL over the use of the "OICQ" name and was ordered to stop using it.
• An employee overheard users referring to the service as QQ and suggested it as the new name.
• Tencent embraced the "QQ" name and adopted a penguin mascot, moving away from potential trademark issues with ICQ and Disney characters.

"Immediately afterwards, they lose the judgment in the matter with AOL."

This quote explains the legal challenge Tencent faced, which led to the need for rebranding.

"Supposedly a Tencent employee is on the bus one day in Shenzhen and he hears a couple of users who use the service just talking about it on the bus, and they're referring to it as QQ."

This quote describes the serendipitous moment that led to the rebranding of Tencent's messaging service to QQ, which became a key part of the company's identity.

• IDG had been a longstanding publishing group since 1964, known for running expos and magazines like Macworld.
• Tencent continued to grow rapidly despite harsh investment terms, reaching over 100 million users.
• The .com crash cooled the venture financing market, but Tencent still aimed to find a buyer due to its rapid user growth and the need for liquidity.

"IDG doesn't have any ability to do follow on capital because they're in that kind of very small fund."

This quote highlights IDG's limitations in providing additional capital to Tencent, which influenced their investment decisions.

"The company is still growing like a weed. They're adding 500,000 users a day."

This quote emphasizes Tencent's explosive growth, even in the face of a cooling investment market.

• Naspers, a South African media conglomerate, invested in Tencent, buying out existing investors at a $60 million valuation.
• Lee Ka Shing sold his entire stake, while IDG sold part of theirs, leaving them with a 7.2% ownership.
• Naspers acquired a 32.8% stake in Tencent for $20 million, which would later prove to be an incredibly prescient investment.

"Naspers acquires 32.8% of Tencent in total, just under a third for $20 million."

This quote details the significant investment made by Naspers in Tencent, marking a pivotal moment in Tencent's financial history.

• Tencent had no solid business model initially, giving away their software for free and making some revenue from telecom carriers.
• They adopted a business model involving "digital goods" for avatar customization, which became a massive success.
• By 2002, Tencent had a 300 million RMB annual run rate from digital goods alone, showcasing the potential of microtransactions.

"Within six months, they have over 5 million users on the QQ platform that are paying an average of five RMB a month."

This quote illustrates the rapid adoption and financial success of Tencent's digital goods and microtransactions business model.

• Tencent expanded into online gaming by adding games to the QQ platform, which contributed significantly to their revenue.
• They began acquiring game studios and developing in-house games, further diversifying their business model.
• Tencent acquired a majority stake in Riot Games in 2011, which owned the popular game League of Legends, a strategic move that capitalized on the gaming market.

"Within the year, it adds another $50 million of revenue to the company."

This quote demonstrates the immediate financial impact of Tencent's venture into the online gaming sector.

• Martin Lau, a former Goldman Sachs banker, joined Tencent as Chief Strategy Officer after their IPO and later became President.
• Lau's expertise in business development and capital allocation helped shape Tencent's growth strategy.
• Tencent's management recognized the importance of mobile and held a "Conference of the Gods" to strategize their approach to the mobile market.

"Martin is super interesting, just like Josie in Alibaba. He's a TMT banker at Goldman in Hong Kong."

This quote introduces Martin Lau, comparing his potential impact on Tencent to that of Joe Tsai's on Alibaba.

• Tencent saw the rise of mobile as a critical shift and aimed to create a mobile messaging app to rival others like Kick.
• Alan Zhang, who created Foxmail which was acquired by Tencent, proposed the development of a new mobile messaging app.
• Tencent's move to mobile led to the creation of WeChat, which would become a dominant platform in China's mobile ecosystem.

"Alan is still working at Tencent and he emails pony and he's like, let me..."

This quote sets the stage for Alan Zhang's pivotal role in Tencent's transition to mobile and the inception of WeChat.

• Tencent had internal competition regarding mobile messaging development.
• A task force was working on mobile messaging post a major company conference.
• Alan emailed Pony Ma directly asking for resources and power to develop a mobile messaging app.
• Pony Ma responded positively to Alan's request, allowing him to assemble a team.

"Alan is he just emails pony one night and he's like, let me do this. Give me the resources. Give me. Yes. Give me the power."

This quote shows Alan's initiative and Pony Ma's quick and supportive response, which led to the creation of WeChat.

• Alan's team worked in isolation for two months to develop a new app.
• The app was named "Weixin" in Chinese, which translates to WeChat in English.
• WeChat faced competition from other messaging apps like Xiaomi's Metalk and Talkbox from Hong Kong.

"Supposedly, Alan takes a small team. They go lock themselves away in. I think pony refers to it as, like, a black room. It's like a room with blackboards and no light."

This quote describes the intense and secretive development process that Alan's team underwent to create WeChat.

• WeChat imported the social graph from QQ, giving it a significant advantage.
• The team identified the walkie-talkie feature from competitors as a key functionality to implement.
• The complexity of Chinese characters made voice messaging a more practical option for users.

"They realize that there's one thing that Talkbox is doing and that I think Metalk has copied at this point, too. That's pretty important."

This quote highlights the strategic decision to incorporate a walkie-talkie feature, which was a game-changer for WeChat's usability and popularity.

• Messaging platforms had to work seamlessly between iOS and Android to succeed.
• WeChat's cross-platform functionality helped it catch up with competitors.
• The "Friends Nearby" feature was introduced, which functioned similarly to a dating app and contributed to WeChat's growth.

"One of the really key things about a messaging platform that people start to realize is you have to be able to work seamlessly between iOS and Android."

This quote emphasizes the importance of cross-platform compatibility in the success of messaging apps.

• WeChat became the primary communication platform in China, replacing email and other messaging services.
• Official accounts allowed businesses to interact with users, leading to commerce and service offerings within WeChat.
• The Moments newsfeed became a major content ecosystem, facilitating transactions and interactions.

"What WeChat has become, it's the communication platform for imagine your iMessage or whatever your messaging app is, WhatsApp, whatever you use, that plus your email, plus your slack for work."

This quote explains how WeChat consolidated various forms of communication and commerce into a single platform.

• WeChat Pay evolved from QQPay, which was initially shut down by the Chinese government.
• The "Lucky Money" feature helped bootstrap WeChat Pay by seeding users' accounts with small amounts of money.
• WeChat Pay's low transaction fees meant it was not as profitable as expected but served as a platform for further growth.

"So it's interesting that when the time was finally right for WeChat pay, I mean, I'm sure they had sort of worked it out with the government where it made a lot of sense for them to do that and wouldn't get shut down like the previous time."

This quote reflects on the strategic timing and government relations involved in the successful launch of WeChat Pay.

• Tencent sought to invest in Snapchat and WhatsApp but was outmaneuvered by Facebook in both cases.
• Tencent owns a significant stake in various companies that leverage the WeChat platform, such as Dee Dee and Meituan.
• Tencent's investment in these companies aligns with their strategy to build an ecosystem around WeChat.

"Tencent has started buying up shares on the open market. So they now own 12% of Snap."

This quote indicates Tencent's ongoing interest in investing in social and messaging platforms, even after initial acquisition attempts failed.

• Tencent's acquisition of Riot Games led to internal development of the mobile game "Honor of Kings" after Riot refused to create a mobile version of League of Legends.
• Tencent also acquired Supercell, expanding its gaming portfolio.
• Tencent secured rights to publish PUBG in China and developed its own battle royale game.

"Tencent decides that we will do this in one of our internal studios, and they agree on some kind of revenue share with League of Legends."

This quote shows Tencent's willingness to innovate and create new gaming experiences, capitalizing on existing intellectual property and market trends.

• Epic Games, based in North Carolina, is the creator of Fortnite.
• At the time when PUBG was popular, Fortnite did not have the battle royale mode and was a regular first-person shooter.
• Epic Games had the battle royale mode in development and did not create it as a direct response to PUBG's success.

"They did have all of the battle royale stuff in development, so it's not like they just saw PUBG and were like, build that."

This quote explains that Epic Games already had plans for a battle royale mode in Fortnite before the rise of PUBG, indicating that the addition was not merely a reactionary move.

• Tencent, a major company in the gaming industry, controls the largest mobile games in various continents.
• Tencent's pivot with Fortnite to focus on battle royale significantly increased the game's popularity.
• Tencent's influence extends beyond gaming, with investments in companies like Tesla and involvement in the electric vehicle market.

"Fortnite pivots and becomes all about battle royale and is now, I believe, by far the largest game and mobile game in North America."

The quote highlights the strategic pivot of Fortnite towards the battle royale genre, which led to its massive success, especially in North America.

• Tencent acquired a 5% stake in Tesla in 2017, becoming one of its largest shareholders.
• Shenzhen, where Tencent is located, has become a hub for tech and electric vehicle companies.
• Speculations suggest Tencent may enter the electric vehicle market themselves.

"Tencent is, I believe, now the third or fourth largest shareholder in Tesla."

This quote signifies Tencent's substantial investment in Tesla, positioning it as a major stakeholder and suggesting potential strategic moves in the electric vehicle industry.

• Tencent Music went public with a $21 billion market cap, with Tencent retaining significant ownership.
• Some refer to Tencent and its management team as the "Berkshire Hathaway of tech" due to their prescient investment strategies.

"Tencent Music publicly has a $21 billion market cap. I believe Tencent still owns, like, 95% of the company."

The quote provides details on the market capitalization of Tencent Music at the time of its IPO and Tencent's continued majority ownership, illustrating the company's successful investment strategy.

• Tencent's stock saw a massive increase in 2017, from $25 USD to $60 USD, significantly growing its market cap.
• However, in 2018, Tencent experienced a decline, wiping out the gains from 2017.
• Concerns about gaming regulations in China and their impact on Tencent's ability to release and monetize games contributed to the stock's slide.

"Their stock started the year at $25 USD and ended the year at $60 USD."

This quote emphasizes the dramatic increase in Tencent's stock value over the course of 2017, reflecting the company's financial success during that period.

• China's gaming regulations, including approval processes and monetization restrictions, have raised concerns about Tencent's business.
• These regulations may solidify Tencent's moat by protecting incumbents and hindering new startups.
• Tencent's position allows it to bring non-Chinese developed games to China, a unique advantage in the global gaming market.

"Tencent may in fact get to have their games out there, but they won't be able to monetize them."

The quote addresses the challenges Tencent faces due to regulatory changes in China, which could affect the company's ability to monetize games, a key revenue source.

• Bytedance is considered a major threat to Tencent's dominance in China.
• Bytedance's products, like TikTok, are gaining popularity and could erode the time users spend on Tencent properties.
• The company's rapid growth and high valuation position it as a formidable rival.

"Bytedance is the biggest threat to Tencent out there right now, and it is a very, very real threat."

This quote identifies Bytedance as a significant competitor to Tencent, challenging its market position and user engagement.

• Tencent's core products are successful in China, but they have not replicated that success globally.
• The company's international presence is mainly through investments rather than direct product expansion.
• There is debate over whether Tencent is an innovative company or primarily an investment and copying entity.

"Are they an innovative company or are they sort of a very good, sort of ruthless, cutthroat investment and copying company?"

This quote questions Tencent's nature as an innovator versus its success through strategic investments and adapting existing ideas for the Chinese market.

• Certain products and services can achieve local monopolies but may not translate globally due to market-specific dynamics.
• Tencent's global strategy may be more about leveraging investments rather than exporting its core products.
• The discussion includes the challenges and potential of localized services versus global platforms.

"You need to adapt it in the right way for the right local market."

The quote underscores the importance of adapting products to fit local market conditions, a strategy that has been crucial for Tencent's success in China but may limit its global expansion.

• Tencent's investment in companies like Epic Games has allowed it to influence markets outside of China.
• The company's ability to leverage its user base to promote new products or services has been a powerful tool.
• Regulatory changes at the platform level could impact the effectiveness of such strategies in the future.

"You really can sort of promote something to the point of being successful if you're able to successfully move users over."

This quote speaks to Tencent's capacity to use its existing platforms and user base to drive the success of new ventures or investments, highlighting a key element of its market influence.