Here's how China’s Tencent wants to get a piece of...

Disclosure: The author was India’s marketing & strategy lead at Tencent’s WeChat between 2012-2015. This article solely reflects the opinions of the author.

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The China-based company, despite dominating its home market through WeChat, has failed to crack Facebook’s messaging and social empire globally till now.

Rather than fight Facebook directly, its new strategy is to invest and partner with upstarts that are digging tunnels and sending trojans into Facebook’s castles.

How do you win this castle? Conquer it like Facebook, or go ‘wololo’ like Tencent?

Image credit: Age of Empires

Tencent recently announced a lead investment of $175m into Hike, an Indian messaging app. This is an addition to the series of investments that the Chinese internet behemoth has made in the messaging and social space globally?—?earlier with KakaoTalk, Kik and Snapchat, and with probably more that are unannounced.

Rather than view each of these in isolation, it is better to look at the moves as a whole, to understand what Tencent is attempting to do here, why it’s investing in these specific players, and whether it’s likely to be successful at its strategy.

The post-iPhone era

Post the emergence of iPhone in 2007, the messaging and social apps category has been on a tear, with multiple players having hundreds of millions, or even billions, of users today.

However, in terms of monetisation, only two players have been able to capture big value in this space globally?—?the first being Facebook. It has made money by showing relevant advertising to its billions of users, utilising its excellent demographic and user behavioural data, on top of the insane amounts of time spent by its users on the core Facebook app.

The other player has been China-based Tencent?—?which has made its social messaging app, WeChat, a lifestyle hub for all offline-to-online services, enabling P2P and merchant payments, and allowing micro-transaction based gaming on its platform. WeChat makes money by taking a percentage commission out of these transactions.

While both the core apps, Facebook and WeChat, have remained strong in completely distinct geographies, their parent companies have been building armies of sorts, by acquiring or taking stakes in multiple players in the category globally.

Beyond the differing approaches to monetisation, these two are now squaring off against each other, albeit with each following opposite approaches to building their messaging and social empire.

Rather than explicitly chosen decisions, the opposing strategies have likely emerged as a result of each app’s respective competitive positions and past successes. However, these strategies may come to define the future of messaging and social space globally.

The kingdom of WeChat

Without doubt, Tencent’s WeChat has been a huge success in China.

In China, WeChat is a complete ecosystem with tons of local integrations (You can order a cab from Didi Chuxing, or buy ecommerce products from JD.com?—?all within WeChat) and cultural idiosyncrasies such as the red envelope (you can send money to friends on WeChat, in the form of random lottery splits) added in.

However, this tight-knit hydra-type structure also makes it difficult to take the app global, since what works in China doesn’t scale or port that well outside.

WeChat’s tight-knit hydra-type structure makes it difficult to take the app global.

With its base of 762m monthly active users (MAUs), with most of them being in an internally intensely competitive market as China, WeChat’s core product teams have limited bandwidth available, and are only able to respond slowly, to allow for product changes for geographical markets which are very different from China.

Hence, WeChat’s forays into outside markets with a low ratio of Chinese speaking users, including USA, Europe, and non-Southeast Asian emerging markets, haven’t been very successful.

Compared to this, single-purpose apps like WhatsApp have always aimed at global markets, with focus only on messaging, and have done really well at solving that problem, even if they haven’t found significant paths to monetisation till now. Facebook Messenger has been experimenting with features inspired by WeChat, such as P2P payments and businesses-owned chat accounts, but only with limited success till now.

The rise of challengers

In meanwhile, local messaging apps have emerged in countries with large enough populations such as South Korea (Kakao), Snapchat (US), India (Hike), Canada (Kik), building their own integrated ecosystems with regional/user segment specific flavours added in.

Snapchat started with disappearing photos, Kakao started with local Stickers, Hike allowed Chats-to-SMS deliveries in an Indian market with a high percentage of non-internet connected users, and Kik did some cool stuff with GIFs that’s popular among youths.

While all the apps mentioned above have expanded today to include mass messaging features to cater to general audiences, they continue to retain their differentiated identities.

The network effect

The traditional consensus has been that categories such as messaging and social networks are governed by the network effect; ?the value of the network becomes even more valuable as more users join it.

No one wants to go to an empty party.

Hence, the largest player should end up becoming winner-takes-all. Taking a cue from real life?—?No one wants to go to an empty party, which is usually what laggard messaging and social networks suffer from, as the users fail to find their friends and an active community when they sign up, and end up leaving it soon enough.

The effect was very much pronounced on PC web, as Facebook being the dominant network there, had your entire social graph on it, which was built over time by carefully finding and adding friends, and accepting friend requests. Facebook also had a dominant presence on your PC browser, and ended up being opened on your Chrome/Firefox/IE browser at least once a day.

In case of a new (and by association, small) network like Google Plus or any other player, users signed up on the network, saw very little activity initially due to the lack of friends there, closed their browser tab and went away, pretty much permanently. Even if a friend messaged them or posted some activity on the newish network then, they would not be informed of it, since the browser tab was now closed.

However, with messaging and social coming to smartphones, a lot of this dynamic changed.

While the access to phonebook contacts allowed users to find all their friends instantly, the presence of an always-on internet connectivity on-the-go, and push notifications, meant that users instantly got to know of messages and activity from their friends, even if the network size of a new messaging app was small.

This changed dynamic on mobile, and allowed newer messaging and social apps to flourish. That is, if they managed to find vacant spaces which were big enough to attract a network of users looking for alternative flavours. Rather than being monolithic, it turned out that the network effect affected different user groups differently.

Source: Company data, Media reports; * Daily active users; ** Total registered users

Based on the evidence we’ve seen via app downloads and active numbers, the vacant spaces in messaging have come from either local language based apps (Kakao? ?supports Korean, Hike? supports multiple Indian languages, LINE? supports Japanese), or virgin (pun unintended) user segments based (Snapchat?—?teens in US, Kik?—?teens in Canada being their early primary users) spaces.

Why are these apps so successful?

In the case of countries with a large number of local language speaking populations, the global one-size-fits-all players such as WhatsApp or Facebook Messenger do not satisfy user segments accustomed to using regional languages in daily life, and hence the opportunity to serve them.

Youths and teens are looking for cool personal spaces that remain difficult for parents to access, allowing them freedom to just be themselves. While messaging apps, too, are popular (Viber?—?for voice calling, Telegram?—?for encrypted chats, Tango?—?for video calls) their defensive moats are unclear.

There is no use discussing Skype, Google Hangouts or BBM here, since they never truly arrived to the game.

Facebook’s conquest and conquer strategy, vs Tencent’s marry and build an alliance approach

In the larger scheme of things, both Facebook and Tencent have been accumulating social and messaging users, directly or indirectly.

Facebook’s approach

In 2014, Facebook hard-unbundled Facebook Messenger from its core Facebook app (you couldn’t use Facebook mobile app to send messages to friends any longer) to create a dedicated messaging offering, which today has grown to 1b MAUs.

But in truly brilliant moves, Mark Zuckerberg also picked up Instagram and WhatsApp, before they acquired their next 400m monthly active users?—?more than the population of every country in the world, except China and India (Facebook acquired Instagram when it was at 30m MAUs, and WhatsApp at roughly 450m MAUs. The apps are today at 500m+ MAUs and 1b+ MAUs respectively).

There are possible reasons why both of these apps sold themselves to Facebook.

In case of Instagram, it was acquired well before the app became the huge phenomenon it is today, or the boom in social and messaging on mobile was clearly apparent to everyone. In the case of WhatsApp, its founders didn’t want to bother with monetisation before they were satisfied with the overall product experience, and hence went ahead with the very lucratively priced acquisition.

It is increasingly difficult for Facebook to acquire the next Instagram or WhatsApp.

But money may not be the only thing every entrepreneur may be chasing today, especially after it’s clear that some of these new challenger apps have defensible user bases and active communities, and can survive any and every onslaught Facebook and its army of apps can throw at them.

KakaoTalk is the de-facto messaging app in South Korea today, while Kik and Hike have continued to grow organically despite the increasing dominance of Facebook Messenger and WhatsApp. Snapchat, as per media reports, is already bigger than Twitter in terms of daily active users.

That makes it increasingly difficult for Facebook to acquire the next Instagram or WhatsApp. We’ve already seen this with Snapchat, where Mark Zuckerberg tried to buy it completely for a $3b bid, and was rebuffed.

Tencent’s approach

Compared to this, Tencent’s approach has been more of building alliances, rather than the 100 percent acquisition approach of Facebook. By doing so, it has left money on the table for the entrepreneurs to earn.

With the exception of LINE, Tencent today has stakes in all the players with defensive moats, which I mentioned above – Kakao, Kik, Hike and Snapchat.

Some of this dynamic may be attributed to competitive positions and familiarity with the geographical markets.

In the case of Facebook, because it competes globally everywhere (except China), it feels very much threatened by the rise of any alternate social or messaging player, and hence tries to acquire it, as Benedict Evans puts it, whack-a-mole style.

For Tencent, because its core Messaging app WeChat have been successful primarily in China and selected pockets in Southeast Asia such as Malaysia and Hong Kong where a significant number of population speaks variants of Chinese language, it seems okay with relinquishing control and taking strategic bets on the messaging and social apps that are clear leaders in markets where it’s not strong.

Tencent’s approach has been more of building alliances.

It’s unlikely that Tencent would have taken a similar approach if another messaging or social app becomes even a credible competition to WeChat in China. Hence, the rise of marry (take a stake) and building alliances as an emergent rather than deliberate strategy.

Tencent also has had years of experience in building a similar gaming empire globally, where it has acquired or taken stakes in some of the largest gaming companies (Tencent owns Riot Games, has majority stake in SuperCell – the maker of Clash of the Clans. It also has stakes in Epic Games, Activision, and others).

In each of these cases, the upcoming challengers in gaming and social messaging spaces have found WeChat a worthy ally, as it has helped them implement micro-transactions, payment and ecosystem based lessons from China. These lessons also seem more attractive compared to copying Facebook’s approach of advertising as the only monetisation source, which many entrepreneurs want to avoid today, and would not fit well with messaging players anyway.

While Facebook might be the biggest giant in the social and messaging space today, changes in market dynamics and the rapid growth of new players keeps risks always lurking by (just ask Yahoo!).

In the long run, as the new niches/flavours of internet become significant, local players would continue to become bigger and bigger on mobile.

In the new emerging tech-cultures around the world, local entrepreneurs may not want to lose their identity and control of their destiny to Menlo Park.

Tencent lost the first innings of the game, but it’s come back with an army of nimble entrepreneurs. Mark Zuckerberg has beaten the Google Plus’ and WeChats of the world, but would he be able to take on the entrepreneurs? That’s the billion dollar question.