IT’s
hot and crowded in the Shatang Internet Café in China’s southern
coastal city of Shenzhen, where some 300 young factory workers sit amid
flickering lights and discarded cigarette packs. At one computer, Zhou
Qingqing chats with her boyfriend about 600 miles away in Zhejiang
province using QQ, the popular instant-messaging software.She interrupts the conversation to play an online game called QQ Dancer, maneuvering a fashionably dressed avatar to the beat of a catchy Chinese pop song. “This is the only game I know how to play,” she says. “It’s easy.”
Across the smoky room, not far from one of the No Smoking signs, Yan Huan also has QQ open on two screens, mainly to accrue the loyalty points that come from spending time on the service, Bloomberg Businessweek reported in its August 8 issue. The more points, the higher the level. The higher the level, the better the icons on your home screen. Huan has attained two smiley faces.
“It
means nothing,” he says, then brags that his level is several times
higher than his girlfriend’s. His favorite game is QQ Speed, in which he
races a go-cart through an urban landscape, zipping past characters
controlled by players around the country.
Zhou
and Yan are both in their own digital worlds, yet like almost everyone
else in the café, they’re mostly engaged with the products of a single
company: Tencent Holdings Ltd.
Guo
Zhenquan, deputy manager of China Internet Café Holdings, which has 55
outlets in Shenzhen, walks from row to row, pointing out all the
customers using Tencent’s QQ service. They’re chatting, gaming, watching
films, and topping up prepaid mobile phones. “Every computer has
somebody on QQ,” he says.
Tencent
is the Internet Goliath most people have never heard of. Yet
674 million Chinese actively use its QQ service, and hundreds of
millions more are familiar with its cute cartoon mascot, a winking,
scarf-wearing penguin that has helped make Tencent one of the most
recognized brands in the country.
With
11,400 employees and more than $3 billion in revenue in 2010, it’s
become the largest—and, by its competitors, most criticized—Internet
company in China. Now Tencent’s ambitions are expanding into the US and
elsewhere. Flush with cash, it’s making investments, acquiring
start-ups, and forcing Western companies to consider whether it’s friend
or foe.
“If you
are a Silicon Valley guy and you don’t have Tencent on your radar, you
have to be deaf, dumb and blind,” says Michael J. Moritz, the venture
capitalist who backed Google Inc. and PayPal Inc. “I am full of
admiration for the characters at the helm of that company. They are
extraordinarily thirsty and aggressive.”
Tencent
was founded in 1998 by four geeky college classmates and a friend from
Shenzhen who devised a Chinese version of the pioneering instant
messaging service ICQ. Led by the zoomorphically nicknamed “Pony” Ma
Huateng (ma is Mandarin for “horse”), the founders adapted their chat
software for mobile phones and watched as it became the primary
communication tool for a generation of young Chinese.
Along
with chat and games, the company’s stable of products now includes a
virtual currency called Q Coins, a search engine, an e-commerce
marketplace and two social networks, pengyou.com and the youth-oriented
Qzone, which collectively have more than 500 million members.
Tencent
also recently hatched a Twitter Inc.-like service known as Tencent
Weibo (pronounced way-baw), which is used by some 200 million people in
China and is keeping pace with a competing service from rival portal
Sina.com. The publicly traded company has a $48-billion market value.
Last
year it had $1.2 billion in profit, the bulk of that from selling
free-to-make bits and bytes like virtual clothes and racing car decals
that allow its young users to represent themselves online.
Some
US companies are choosing to join forces with Tencent. In February,
Groupon Inc. announced it would counter the proliferating number of
Chinese daily deal sites by co-investing in a Beijing start-up along
with Tencent and others. On July 26 game maker Zynga Inc. said it would
bring its online game CityVille to China via Tencent’s QQ network.
Tencent
has an indirect relationship with both of those companies. Last year it
invested $300 million in Digital Sky Technologies, the Russian
venture-capital firm that has backed Zynga, Groupon, Facebook Inc. and
Twitter. Tencent looms especially large for Facebook.
Mark
Zuckerberg is looking for a way to enter the world’s largest Internet
market, according to two people familiar with Facebook’s plans. Chinese
Internet users, particularly young ones, may not want to shift their
allegiance away from Pony Ma.
“If
Facebook goes into China,” says Hugo Shong, of the venture firm IDG
Capital Partners, who backed Tencent in its early years, “it will have
to think about how to compete against Tencent.”
Tencent’s
rise has not been frictionless. Among the dozens of rivals, partners,
and analysts interviewed for this article, a common concern about
Tencent is its dominance of the Chinese Internet. Its products may
resemble elements of AOL Inc., Yahoo! Inc., Facebook and Twitter, but in
reputation, at least, the company evokes the specter of the Bill
Gates-led Microsoft Corp. of the 1990s.
“Tencent
is a copycat,” Charles Zhang, chief executive of Sohu.com Inc., which
operates a rival Web portal and video-game service, said in an interview
last year. “It’s a company that doesn’t create anything.”
Stephen
Bell, a Shanghai-based partner at Trinity Ventures Ltd., a
venture-capital firm, says he hears this all the time: “In the US,
students think, ‘If I build something good, Google will buy me.’ In
China they think, ‘If I build something good, Tencent will copy me.’”
A
story last year in the technology magazine China ComputerWorld captured
that sentiment. The article charged that Tencent was never the first to
“eat crab”—a localism that means “try new things”—but “looks for a
space in a mature market to shove its way in.”
The
magazine cover featured the Tencent penguin, stabbed and bleeding,
along with a headline that included a profanity that translates roughly
as “Tencent has sexual relations with dogs.” Tencent complained and
threatened legal action over the depiction of its trademark; the
magazine apologized.
Tencent
has been intensely private, even mysterious to many followers of the
Chinese Internet industry. The company’s executives grant few
interviews.
Amid
the criticism and an increased level of competition from new Chinese
social networks and microblogging sites, Tencent has signaled that it
wants to be more open and accessible to third-party developers and
journalists. After months of requests from Bloomberg Businessweek, the
company agreed to host a reporter in Shenzhen, a coastal city of
10 million people across the bay from Hong Kong.
The
headquarters is nestled amid the skyscrapers of Shenzhen. The tall,
tapered building so resembles an electric razor that some employees
jokingly call it Gillette Tower.
Tencent
takes the Chinese tradition of a post-lunch naptime seriously: Office
lights are dimmed between noon and two, and most of its twentysomething
employees put their heads on their desks or lie down on foldout cots. If
anyone’s too noisy, security asks them to keep it down.
Like
Pony Ma, employees give themselves English nicknames—Thunder, Fruity,
Neo—and use those handles on the company’s internal instant messaging
system.
In a
top-floor conference room with views of the city, Ma addresses the most
persistent question around Tencent: Why doesn’t it innovate?
“I
think that’s unfair,” he says. Most Internet inventions, he notes,
spring from Silicon Valley, with its high concentration of experienced
entrepreneurs and engineers. The focus of Tencent, like most other tech
companies in Asia and Europe, is on what he calls
“micro-innovation”—adding small details that localize a service and make
it relevant. He also rejects the idea that Tencent directly copies the
work of other companies.
“Just
because we enter a space, that’s not to say we plagiarize your features
and code,” he says. “Look at Microsoft, Google and Facebook. They have
all entered many sectors, and actually in many of those sectors, they
weren’t as early as Tencent.”
Ma
is the ninth-richest man in China, according to Forbes, with a fortune
estimated at $4.4 billion. He wears glasses and an open-collar dress
shirt and combs his hair somewhat messily across his broad forehead. He
speaks quietly and with gathering confidence, but he’s famous for being
shy. His public profile in China is much lower than that of Robin Li,
the handsome co- founder of Baidu Inc., and Jack Ma (no relation),
Alibaba Group’s pugnacious CEO who has gone multiple rounds in a
high-profile fight with Yahoo, one of his largest shareholders.
Within
his company, though, Pony Ma is hardly demure. Former colleagues say
he’s a micromanager who will send e-mails to product heads about the
location of a single button on a new service. When it comes to the media
spotlight, he typically begs off, saying public speaking isn’t his
style.
Keeping a
low profile “is a personality issue. It’s not a choice, I don’t have
those abilities,” he says, speaking in Mandarin but punctuating his
phrases with occasional English. The reticence, he says, is a trait
common to people from China’s Guangdong province: “In the south, you do
your own thing. You talk through your product.”
Ma
was born in October 1971 and grew up in modest circumstances. He spent
his childhood on Hainan, an island off the south coast, and as a
teenager moved with his parents and sister to Shenzhen, where his father
got a job as a port manager and his mother worked in a local company’s
accounting office.
Ma
graduated from Shenzhen University in 1993 with a bachelor’s degree in
computer science, then worked on a paging network for China Motion. He
caught only glimpses of the Internet via slow, expensive dial-up
connections to local bulletin boards.
In
1996 the company sent him to the US for training at Harris Corp., a
telecom equipment company in Melbourne, Florida. It was there that Ma
got his first unfettered look at the Web, which was exploding with new
technologies—including a chat service called ICQ.
ICQ
was created in Israel by four recent college graduates who wanted to
replicate the Unix-based chat tools of the early Internet on personal
computers. Introduced in 1996, it was free to download and spread
rapidly. It had 3 million users by the end of 1997, mostly in the US and
Europe.
AOL
bought ICQ in 1998 for more than $287 million, an astonishing figure at
the time. For Pony Ma, the deal suggested there was tremendous
opportunity on the Internet. With financial support from his mother and
help from four friends, Ma quit his job and set out to devise an instant
messenger tailored for the Chinese market. He barely disguised his
intentions to appropriate the Israeli company’s idea, naming his startup
OICQ.
The plan
was to create an Internet service whose messages were accessible via
pagers, and then to sell the software to a larger company for a quick
payday.
Four
companies sniffed at the prototype, including Ma’s old employer China
Motion and Tom Group, a company controlled by Hong Kong billionaire Li
Ka-shing. They either didn’t believe in the service or were unwilling to
pay enough to acquire it, so Ma and his friends were stuck developing
OICQ themselves. “It just ended up in our hands,” he says.
People
who visited the start-up back then remember a group of young engineers
working in cramped offices—not in Shenzhen’s booming downtown district
but in a mixed-use residential and commercial neighborhood. Only a
freight elevator stopped on every floor, so employees and visitors
usually took the stairs. Ma’s English was terrible, so everything had to
be translated for American visitors.
“They
were not so internationalized at that time,” says Anthony Zhao, a
partner at Zhong Lun Law Firm in Shanghai, who worked with the company
as it was getting started. “They didn’t have overseas exposure,
education, or working experience.”
Ma
and his friends had one advantage: “They had a manic focus,” recalls
Paul Hsiao, a partner at Silicon Valley VC firm New Enterprise
Associates. “They would lock themselves in a room and work around the
clock to tackle problems. They had a fear that someone else could do it
faster than they could.”
The
founders crammed group messaging, online dating and other features into
their chat software and outmaneuvered Chinese rivals with similarly
uninventive names such as PICQ and CICQ.
By
late 1999, Ma had 100,000 users and the attention of AOL, which
demanded that the start-up change its name. His father helped him
register the name Tengxun, which translates into “galloping message.”
For foreigners, Ma went with the easier-to-pronounce Tencent, and the
messaging service itself was ultimately renamed QQ.
Investors
were not easy to come by initially. Shenzhen was known for
manufacturing, not software. Desperate for cash, Ma raised $2.2 million
in seed capital from PCCW Ltd., an investment firm run by one of Li
Ka-shing’s sons, and IDG, one of the first Western venture-capital firms
in China.
By 2001
Ma’s cash situation was dire again. Ultimately, both firms agreed to
sell their stake to South African media group Naspers Ltd. The terms
were $32 million for a 47-percent share in Tencent. Cape Town-based
Naspers’s investment is now worth more than $16 billion, making it one
of the most profitable private equity investments of all time.
Shong
of IDG, who can console himself with a blockbuster return on his stake
in Baidu, says that selling his piece of Tencent was the biggest mistake
of his career.
With
Naspers onboard, Ma was free to address another looming threat:
Microsoft. QQ’s entertainment-oriented messaging service appealed to
young people. Microsoft, which introduced a Mandarin version of its MSN
Messenger service in the late 1990s, had locked up a more professional
user base.
“The pressure on us from MSN was really great,” Ma says. “People were saying sooner or later we were going to die.”
The
Chinese company set out to build services that Microsoft, without a
significant force of local engineers, probably wouldn’t or couldn’t
match.
Tencent
again borrowed ideas from other companies. It took a virtual goods model
from early Korean social networks such as Cyworld, which allowed users
to express themselves by dressing up their avatars, and copied Chinese
Web pioneers such as Sina.com and Sohu.com with a Web portal, QQ.com,
that was densely populated with links to news, music and video.
Microsoft
executives who worked in China at the time charge that Tencent also
freely copied features from MSN Messenger, right down to the light blue
background of the chat software. They also acknowledge that they
underestimated the size of the market and the willingness of young
Chinese Internet users to spend money accessorizing their avatars.
“I
don’t think anyone [at Microsoft] really took the time to understand
what the culture was and what would be big there,” says Friedbert Wall, a
general manager for Microsoft in China from 2005 to 2009. “We were
really US-centric and thought, we’ll just do it and everyone will accept
it. But it doesn’t actually work that way.”
Tencent
went public in 2004 on the Hong Kong Stock Exchange, raising
$200 million. Pony Ma and his four co-founders became millionaires. Ma
says he doesn’t recall celebrating.
He
may have been preoccupied with other matters. Around the time of the
IPO, the young tycoon began chatting over QQ with a woman in Beijing;
she didn’t know who he was, since Ma didn’t use his real name. The two
eventually married. A Tencent spokesman won’t comment on Ma’s wife or
the couple’s children.
Since
the IPO, Tencent’s stock has jumped more than 5,000 percent. Games are a
big reason. They also offer a good example of why many competitors,
analysts and Internet observers continue to argue about whether Tencent
is a company uniquely tuned in to the needs of Chinese Internet users—or
a ruthless force that steals and profits from the creativity of its
competitors.
Tencent
first added casual games such as chess to QQ.com in 2004, then watched
as upstarts Shanda Interactive Entertainment Ltd. and NetEase.com Inc.
imported more immersive games from developers in South Korea and the US.
The Chinese market, those companies proved, was uniquely receptive to
free games that offered players the option of paying small amounts of
money for virtual goods, since years of rampant piracy had undermined
the retail trade in shrink-wrapped games.
The
company decided to enter the game market seriously in 2007, led in part
by Martin Lau, a former Goldman Sachs Group Inc. banker who joined
Tencent in 2005 and is now its president. Tencent scoured South Korea
for new game properties, licensed and adapted them for Chinese users,
and linked them to its massively popular QQ service.
By
2008 users of QQ chat software could, with a few clicks, call up a
shoot-’em-up called “Cross Fire” or a fantasy role-playing game called
“Dungeon & Fighter,” both developed by South Korean companies.
Tencent
licenses those games and splits the virtual goods revenue with their
creators. A farm-simulation game called “QQ Farm,” like Zynga’s
FarmVille in the US, is a version of a game called “Happy Farm” by the
Chinese game maker Five Minutes. Some of Tencent’s other popular games
were built in-house, and they aren’t exactly unique. The racing game “QQ
Speed” closely resembles “KartRacer,” created by South Korea’s Nexon
Corp.
Adapting
free online games for the Chinese market and linking them to ubiquitous
QQ chat software proved to be a killer formula. The company’s gaming
revenue vaulted past that of NetEase and Shanda, and Tencent now has
four of the five most popular games in Chinese Internet cafés, according
to Goyoo, which provides an Internet portal service to more than 30,000
cafés around the country.
QQ’s
users, accustomed to paying for virtual goods, have made the games
massively profitable. Players can use their virtual Q Coins to buy
everything from body armor in “Cross Fire” to healing potions in
“Dungeon & Fighter.”
Steve
Gray, a veteran of Electronic Arts Inc. who moved to Shanghai in 2009
to run Tencent’s game production division, acknowledges that inventing
from scratch is not the company’s strength.
“Tencent
is not really a first mover,” he says. “You can say that we sort of
follow a lot of stuff. We’re cautious.” He believes Tencent innovates in
another way: publicizing its games to a mass audience, bringing out
incremental features customers want—and supporting millions of gamers at
the same time.
A
year ago, “QQ Speed” had 700,000 players concurrently at peak times.
Gray says the company fiercely marketed the game with giveaways like
(real) automobiles, and managed to triple the number of players in a
year. Now 2.3 million Chinese play “QQ Speed” during peak hours.
“I’d
say the secret sauce of Tencent is in its customer service and
operations,” he says. “You can have millions of people playing the same
game, and it works.”
Benjamin
Joffe, a consultant who studies the Asian technology market, has a name
for this kind of commercial mimicry: innovation arbitrage. He says
Tencent, like many other tech companies, finds things that work abroad,
strips them of their native cultural components, and adapts them to the
local market.
Like Zynga in the US, Tencent is a “fast follower, because there is little upside in taking big risks to innovate dramatically.”
Tencent
understands that it needs a reputation makeover. In the last year it
has reached out to game makers, promising to be more open and work with
them to bring their games to QQ’s network. The exact meaning of such
“openness” is hotly debated in Chinese Internet circles.
In
the US, for example, anyone can create a program for Apple Inc.’s App
store, as long as they follow Apple’s published guidelines. Tencent has
guarded its network much more closely than that, carefully selecting and
vetting which applications it will feature—and which it will simply
copy in-house.
Executives
tend to cite security reasons and the need to protect their users’
financial information from hackers and malware. Julian Ma, a general
manager of Tencent’s strategy development department (and no relation to
Pony), promises the company will be a friendlier, more inclusive
partner.
“We will
be quite cautious about competing with third-party developers,” he says.
“If there is a conflict of short-term interest, we will put the
partners first.”
Recent
events may have forced Tencent to play nicer. Last autumn the company,
which bundles antivirus software into QQ, was drawn into a public spat
with Beijing security software maker Qihoo 360 Technology Co., with both
sides accusing the other of anticompetitive behavior and spying on
users.
The Chinese
government rebuked Tencent and Qihoo—the Minister of Information
Technology called both “immoral” and “irresponsible”—but not before
users were spooked and both companies were widely criticized in the
local media.
One
former Tencent employee, who does not want to be named because he plans
to do business with Tencent, says the intensity of the criticism was a
wake-up call that forced Pony Ma and his colleagues to recognize they
needed to do a better job courting favor with other Chinese high-tech
companies.
Tencent
also faces a new wave of more open social networks that may lure users
away from QQ. Renren Inc.’s Facebook-like service has tens of millions
of active members and is flush with cash after raising $743 million in
an IPO this year. Another threat is Sina Corp.’s microblogging service,
Sina Weibo. Sina’s offering launched in 2009 and now has 140 million
members.
In terms
of features, Sina’s Weibo has surpassed Twitter, the company it
imitated. Users can comment directly on each other’s posts and more
easily integrate photographs and video.
Tencent
has lined up celebrities to join and use its service, including Chicago
Bulls superstar point guard Derrick Rose. Tencent’s Weibo now has more
members, though Sina’s regularly gets more posts.
The
Chinese Internet market is growing so quickly that Tencent doesn’t
necessarily need to expand abroad. Still, Pony Ma continues to attempt
to become one of the first Chinese Internet CEOs to make it big outside
his native country.
In
2006 the company experimented with localized versions of QQ in Japan
and the US, and packaged its games into the instant messaging software
of its old rival, AOL. “The products weren’t competitive and those
markets were already dominated by big US companies,” Ma says.
Tencent
decided to concentrate its global ambitions in online games. It has a
small development team in a high-priced office building in downtown Palo
Alto, California. The second-floor office is marked by a small,
photocopied picture of its penguin mascot taped to a window.
Employees
there develop social games for Facebook, published under the name Ice
Break Games. In February Tencent also paid $400 million to acquire a
majority share of Los Angeles-based gaming studio Riot Games Inc., and
is adapting its online fantasy game “League of Legends” for the Chinese
market.
Brandon
Beck, Riot’s 29-year-old CEO, says that since the acquisition, Tencent
has basically left the company alone because it understands the
importance of preserving entrepreneurial energy in a start-up.
Tencent
and its executives may finally be learning from their past. At the
company’s holiday party last December, Pony Ma performed magic tricks
and grabbed the microphone to sing “Silent Night” and “Jingle Bells” in
English. It was another sign that he’s trying to open up to people, both
inside and outside the company.
In
early July at a Tencent conference in Beijing for software developers,
Martin Lau, Tencent’s president, declared that the “theme of the day is
openness.” Later, Pony Ma took the stage to do the thing he hates:
public speaking.
Cooperating
with other companies, he explained, is now part of Tencent’s core
strategy. Even a dominating force such as Tencent has to rely on
partners to create content in the era of iPhone apps and Facebook games.
“We have to do this,” Ma says back at headquarters in Shenzhen. “We can’t develop all that content, all those applications.”
As
for the criticism, he says he’s not letting it get to him. He doesn’t
have any hobbies, though every couple of days he gets a little time to
play games like “Cross Fire,” Tencent’s popular first-person shooter.
“The
important thing isn’t to look at the level,” he says. Shooting things
up online “is a way to reduce stress.” And although he’d never say so,
apparently he’s quite good at it.
In Photo:
Ma ‘’Pony’’ Huateng, chairman and CEO of Tencent Holdings Ltd., speaks
during a news conference to announce the company’s annual results in
Hong Kong on March 16, 2011. (Jerome Favre/Bloomberg News)
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