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.
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.
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. 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.
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.
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.
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.
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 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.
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.
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.
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.
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.
"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.
"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 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 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.
"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.
"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 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.
"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.
"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.
"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.
"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.
"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.
"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.
"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 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 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.
"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.
"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 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 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.
"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.
"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 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.
"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.
"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.
"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.