Tencent (the most powerful company in China) Part two.

The success story of Tencent the biggest company in China.

 

But what’s perhaps most fascinating about Tencent's story is that you can look at it in two ways: On one hand, Tencent is one of the greatest business success stories ever - at one point the company had only $1000 in its bank account, and so the journey of how a group of friends turned their struggling start-up into one of the world’s largest companies is remarkable and filled with useful lessons and genius business strategies.

 

What they have achieved is ridiculously impressive, and there is definitely an argument that Tencent has been unfairly caught in the middle of a political storm that they didn’t want any part of. But on the other hand, Tencent is often surrounded by controversy; this includes their brutal monopolistic practices to crush any competition, their blatant plagiarism of just ripping off other companies and apps, their extreme censorship and violations of privacy and freedom of speech, accusations of poor working conditions, and the fact multiple countries now see it as a national security risk because of its close ties to the China government.

 

But I do want to be clear: to just dismiss Tencent as a puppet of the CCP is unfair - in fact right now, the China government is actively hurting Tencent's business, and is responsible for wiping hundreds of billions of dollars off Tencent's valuation. Which of course just raises even more questions: why would the CCP be damaging one of its most useful assets?

 

Tencent founder and CEO (Pony Ma)

 

As you can see, the Tencent story has a lot of different pieces to it. There are both good and bad. And several plot twists along the way. Do not waste time and start a journey through Tencent's insane history to find out the truth behind this gigantic business empire. A company that influences so much, and yet is so rarely discussed. How did they get here? What are they planning next? And what does it mean for all of us? So buckle up, because I assure you: the story of Tencent is going to be a wild ride.

 

If you walked past Elon Musk, Jeff Bezos, or Mark Zuckerberg, I’m pretty sure you’d notice. But when it comes to Tencent's founder and CEO, despite running such a gigantic influential corporation, it’s quite likely you’ve never even seen him before. He goes by the name of Pony Ma in English. But since in English his surname translates to the horse, he goes by the name Pony as a bit of a joke. The fact we don’t usually hear much about Pony Ma, or know much of his story, is mostly by design. Tencent tries to walk the tightrope of keeping both China and the rest of the world happy - and since that’s very difficult to balance, he opts to not speak out publicly much at all. It’s better to just say nothing rather than cause controversy and headlines.

 

The other reason we know so little about Pony is that unlike his arch-nemesis Jack Ma - the founder of China’s other dominant company, Alibaba - Pony is introverted and simply doesn’t like being in the spotlight. And this has always been the case - growing up, Pony Ma was a quiet kid who mostly went unnoticed throughout his school years. The only time he did get much attention was when he hacked into his university’s computers and got a reputation as a great coder. In fact, for his university thesis, he created a software program that could help forecast stock price movements - and this software was so useful that at age 22 he sold the program to the company he was interning at, for a price of about three times his annual salary.

 

By the time Pony graduated from college, the internet was in its very early stages - and whilst of course, it was very primitive back then, Pony was excited by its potential, and began thinking of business ideas to try and capitalize on this exciting new internet technology. However, although Pony was undeniably a very talented and hard-working programmer, the beginning of his future business empire did not come from some revolutionary idea that Pony himself created. You see it’s time for the first uncomfortable truth about Tencent: the business was started by just ripping off someone else’s idea. And as we’ll soon see, that has remained a fundamental part of Tencent's business strategy ever since.

 

But it all began when one-day Pony was browsing online, and stumbled across something called ICQ, an internet chat platform that at the time was pretty groundbreaking. It was basically the first mass-adopted instant messaging system on the internet, letting any two people online have a private conversation.

 

So in 1998 Pony and his Tencent co-founders, which was 3 of his friends from school, launched their own duplicate chat service that was more catered to the China market. Now admittedly it was a common practice in China to just clone popular Western services - for example, Baidu copied  Google, Alibaba copied eBay, Weibo copied Twitter, and so Tencent copied ICQ. But just to demonstrate how much of a rip-off Tencent chat product was of ICQ, they literally called their service OICQ. So they just added the letter O to the name. Initially, though, Tencent's future looked bleak.

 

They got the cheapest office they could, in a chaotic and loud neighborhood full of street vendors peddling knockoff electronics. They were crammed into a tiny room, which bizarrely had a disco ball hanging from the ceiling. To be fair though, once Tencent had set up their internet chat service, OICQ, they did a great job of tailoring it more towards the China market. One simple example of this is that because download speeds in China were so slow in the 90s, it would take ages for people to download most chat programs,

 

whereas Tencent made sure their chat software had a much smaller file size so downloaded much faster. Also unlike other chat software where you could only message people you already knew, Pony made it so that on OICQ strangers could connect if they wanted to as well, thus laying the early foundations of it becoming a social network. At first, though, the problem was that very few people even knew OICQ existed. Pony himself later admitted: ‘When users first came, nobody was in the chat room. I had to keep them company and talk with them. Sometimes I had to change my profile picture and pretend to be a girl.’ So you had the CEO talking to random people in the chat, hoping they’d like the service enough to keep using it.

 

Now to be fair, this was actually more of a side project for Tencent in the early days - Pony initially spent more of his time trying to work on software that connected pagers, or beepers as they were also known, to the internet. Unfortunately, that idea was going nowhere, and so Pony was relieved when one evening he logged onto their chat app and saw a spike in users. 2 months in they’d hit 500 users, and from that point, the user number began to rise faster and faster each month as people in China shared OICQ with their friends and family.

 

Before long, the chat app was growing so fast that it became Tencent's only focus. They ditched the pager idea completely and went all in on OCIQ. Thousands of users were now joining every day, so you’d think Pony would’ve been thrilled. But in reality, he was more stressed than ever. That’s because there were 3 major issues:

 

·        Servers in China were expensive at the time, and they kept having to buy more. This was particularly problematic because of Issue 2^nd issue

 

·        Tencent wasn’t making any money. OICQ was taking off like a rocket but it wasn’t monetized - and so they were actually just losing money the more people used it. But then worst of all is issue number 3

 

·        one day in 1999, about 9 months after starting OICQ, Pony received a thick envelope in the mail from America. It was a letter from the lawyers of AOL, a big American company that owned the original ICQ chat software that Tencent had copied. It said that they were suing Tencent for violating intellectual property laws, and demanded Tencent stop using the name OICQ immediately.

 

By this point, OICQ had hit 1 million users and was growing rapidly, but Tencent didn’t have the money for a lawsuit. They barely had any money at all. In fact, most of the small Tencent team were doing freelance work on the side to try and raise enough money to pay the rising server costs. They were all working crazy hours and getting very stressed out, so eventually, Pony decided to try and sell the company.

 

Unsurprisingly though, given the lack of revenue and legal issues, nobody wanted to buy it. People just kept saying they didn’t see how it would make enough money to be sustainable. But then Pony learned about the concept of venture capital; investors who were looking for companies that weren’t necessarily profitable yet, but had huge future potential. As soon as Pony learned about this concept, he immediately began contacting VC firms and managed to get a meeting with China’s most well-known venture capital fund, called IDG Capital. In the pitch, Pony used an unusual tactic; brutal honesty. He told IDG “if you don’t fund us right now, Tencent will probably die. And even if you do give us the money, the future is still uncertain”.

 

Pony also admitted they weren’t fully sure how they would even monetize their chat software, but what he did know is that millions of China people liked using it, and that there could be real value there. Now you’d think this would be pretty underwhelming to investors, but surprisingly IDG capital agreed to invest in Tencent. Years later, one of IDG’s decision makers said that Pony’s total honesty, rather than the typical overconfidence and false promises that founders often make, is actually what made him think Pony was a really down-to-earth guy who could be trusted, which encouraged them to invest. So IDG Capital, along with another VC firm, together invested $2.2 million dollars for 40% of Tencent's business. It’s not an exaggeration to say that if the deal had not gone through right then, Tencent probably wouldn’t exist today. Not only were they nearly out of money, but the dot com bubble burst in 2000, and investment in cash-burning internet businesses all but dried up. 

 

Luckily for Tencent though, they’d got the money just in time, and so could continue operating. There was still the lawsuit threat from AOL to deal with though, and so Pony was forced to shut down the OICQ domain names and rebrand their chat app as something else. Eventually, Pony decided to rename it simply QQ. So, their legal trouble was sorted, they had enough investment to carry on running, and their user number continued to grow at an insane rate.

 

After hitting a million users in year 1, they reached 50 million in year 2, as more and more people in China shared the software with other people so they could chat. Tencent had perfectly adapted the original ICQ chat to fit China, consumers, better. Now just one issue remained: making money. Whilst you’d think having lots of users would make monetization easy, back in the early 2000s on the internet in China, it actually wasn’t. Pony tried multiple monetization strategies - including placing banner ads on QQ, selling QQ’s chat software to companies, and charging a small membership fee to use the software. All of these failed, and in fact, the membership fee, in particular, backfired horribly; people in China hated the idea of paying a fee to use any internet service, and so this allowed some competitors to gain market share from Tencent.

 

On QQ’s third birthday in 2003, Pony scrapped the subscription fee and made QQ completely free again. But of course, they had to make money somehow. Luckily, it was around this time that some Tencent employees discovered a Korean website called SayClub.com, which allowed people to create personalized avatars with customizable appearances and clothing. It seemed really popular in Korea, so Tencent decided to once again copy a popular feature from elsewhere, and launch their own avatar feature inside QQ called QQ Show, thus giving China citizens a way to express themselves by having their own unique character to represent their profile. For a very small fee, you could buy designer clothes, accessories, and styles for your character. Whilst buying things for your avatar was cheap, equivalent to just a few cents, it cost Tencent nothing, and those micro-transactions added up fast. This feature quickly became very popular, especially amongst younger users. Your avatar became a signal of your status. And the feature worked particularly well because many people had started using QQ as a dating app, adding strangers randomly and chatting with them - and so the avatar function was a way to express some personality, and in some cases establish themselves as being rich by purchasing the most expensive avatar items.

 

Finally, Pony could relax a little. Tencent chat software QQ was now making money by selling these virtual items, and they soon crossed 100 million users in China. Pony even met his future wife through QQ - for three months he was chatting with a girl on there before they met in person. Funnily enough, when they first started chatting on QQ she had no idea she was speaking to the founder of the service. She reportedly messaged him asking ‘who are you?’ and he wrote back ‘I’m penguin dad’ - a reference to the fact that Tencent's mascot was a penguin. But she replied ‘Then I’m penguin mom’ Their relationship began from there, and 6 months after meeting in person they were married. 

Click here to read Part 3