Tencent (QQ) keeps on growing

Last night Chinese instant messaging/gaming/social networking giant Tencent released it Q1’09 figures and they were once again impressive. I have been following Tencent for years and the company keeps amazing me with its figures. Also tech blogs outside China finally start to understand that what Tencent is doing in China is a lot more impressive than Facebook’s and MySpace’s figures, and that these two companies can learn a thing or two from China.

The Q1 revenue for Tencent was USD 366 million, 20% over Q4’08 and 75% over Q1’08. That’s already a major achievement in a global recession, but even more remarkable is where the revenues come from. Most non-Chinese social networks still rely for the majority of their revenues on advertising. Tencent, however, only had USD 21 million in advertising revenue, which is a decrease of 30% compared to Q4’08. USD 342 million came out of virtual items and microtransactions, and out of this amount and amazing 64 million USD was mobile value added services!

Tencent seems to be pretty much recession proof because of its micro-transactions, people keep on spending money on this even when the economy is not doing very well. The main reason is that people always want entertainment, even (or maybe especially) when the economy is getting hit by a global crisis. However, Tencent remains a bit cautious for the future: “The Company’s Internet and wireless value-added services, which are characterized by user-paid small ticket consumption items, have so far been rather resilient in the downturn, although the Company is uncertain of its performance should the economy continue to weaken for a prolonged period. “.

Their advertising income is not very important to the companies bottom line anymore, only about 6% of total revenue is advertising. So the fact that the ad income nosedived by 30% since the last quarter is not good, but the company does not really feel it. The company remarked: “The decline reflected lower advertising spending by customers as they imposed more cautious cost control measures, which include delaying the budget approval process and signing of framework contracts, under the uncertain economic environment.” They also note that for the rest of the year there is not a lot of visibility yet.

For Spil Games Asia I am seeing similar things. Meeting advertising income targets is a challenge, but income from virtual items and micro-transactions is growing very fast (we just started doing this and are now seeing growth rates of 20-30% per week). Mobile games are also doing well, but our main target for now is to grow our mobile audience and not yet to earn a lot of money from it. Our focus will be on monetization of games through micro-transactions, that’s where the real money is. But we won’t neglect advertising of course, both revenue streams will be important for us, especially for casual flash games.

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  1. It indeed took a long time for Western media to pick up on Tencent.
    Tencent’s stock has really exploded over the last month or so. It went from ~40 to about 80 today, many colleagues were very happy about that 🙂
    It seems everything comes together at the right moment. We just had the 10-year aniversery and in a few months we move to our new headquarters in Shenzhen.

    I often get asked by friends if I notice the economic slowdown and I always have to answer: the opposite; I’m very busy! I guess that’s a good thing 🙂

  2. Tell me Marc, what do you think Myspace and Facebook can learn from China? The importance of microtransactions? And what if western audiences didn’t give a crap about that, plain and simple? What else would there be to learn? That you need a large population to reach such a large scale?

    I’m being sarcastic, but I am very curious. Because you always say others should learn from China, but you never really go much deeper than that. Do you really think chinese market strategies can be exported directly to the west? Why would that be true if the opposite isn’t?

  3. @Thijs It must be a great experience to work at Tencent right now. I hope for you that you have a lot of stock options 🙂

    @Yannick I am getting used to your sarcasm and as usual I see things a lot more optimistic. As I said before, guess that’s why I am an entrepreneur?

    You ask “what if western audiences didn’t give a crap about micro-transactions?”. It’s not about ‘if’ because it already starts to happen in (mainly) games and it is spreading. It’s now about when it will become mainstream and when the big SNS sites start embracing it. 3rd party apps will make over USD 500 million this year on Facebook, these are mainly micro-transactions (see:

    I believe Chinese games and game strategies can be exported, because Chinese companies need to be a lot more innovative to grow and survive because of the different market circumstances here. US companies are not forced to innovate. Just relying on advertising is a lot more difficult here than in the US.

    Of course you need some localization, you cannot copy it one to one. The reason that foreign concepts don’t work here is exactly because of the fact that foreign sites do not localize enough and try to rely on advertising or subscription models for revenue. Why do Facebook copies like xiaonei and kaixin001 do so well? Because they understand which things to adjust to be successful here, things like making the game more addictive (will work in US as well I think) and more viral (might work to a certain extent). The other way around that will work as well. I will put my money where my mouth is, as you will see in a couple of months.

  4. What I want to know is this: what’s the RETURN rate on people who buy from microtransactions. I want to see if it’s durable, or just a novel fad.

    And yes, it exists in games, it exists on Facebook in the form of $1 gifts, it has existed on MSN for almost 10 years in the form of customizable avatars. Yet, it has never picked up as much as here. There can be many reasons for that, but I can’t help but think that a big chunk of it is that people perceive it as a poor value (even though it’s cheap).

    As for my sarcasm vs your optimism… i’ll brush that off politely by simply saying that we are just not optimistic about the same things. 🙂 I have my own stakes as well, just not in the same places. 🙂 So far I’ve been proven pretty right as well… so, it’s not exclusive. (mind you, i sometimes agree with you, but I like to comment when I don’t… what’s the fun of commenting if it’s always one-sided? 😉 )

  5. Hi Marc, thanks for this very interesting article.
    I’ve created a location-based mobile social network and my next challenge is to generate revenues from users payments so QQ seems the perfect example to follow. It confirms Flirtomatic’s figures showing that the money from users is 3 times bigger than the money from advertisers and less sensitive to the crisis. So we know more or less what to do… we ‘just’ need to do it 🙂
    We have a global approach and India is currently our biggest market, but we have no members in China, any idea why? Translating the service into Chinese and advertising seems quite easy… but visitors are not registering 🙁
    A bit of local magic seems required…