In this edition of the Business Models of Technology Companies, I’m talking about Tencent’s business model using the business model canvas.
In the video, I use the Tencent business model canvas to show who it’s key customers are and the value proposition it offers them.
Introduction
Tencent is a Chinese multinational investment and holding conglomerate. The company has interests in music, gaming, cloud infrastructure, social media, mobile payments, eCommerce and digital payments.
The company holds interest in the various aforementioned industries through an array of more than 600 subsidiary companies which it wholly owns or has stakes in.
Tencent was founded in 1998 by Pony Ma, Zhang Zhidong, Xu Chenye, Chen Yidan and Zeng Liqing and was incorporated in the Cayman Islands.
Tencent’s first instant messaging service, OICQ, was released in 1999, but later had its name changed into what is now known as QQ… this happened after it faced lawsuit threats from AOL-backed ICQ.
The company remained unprofitable for its first three years of operation, a period during which it received funding from venture capitalists. One of the most notable being South African-based company, Naspers, which currently owns a 30.99% stake in Tencent, making them the largest shareholders of the the Chinese conglomerate.
In this article I will use the business model canvas to cover various aspects of Tencent’s business model.
Like most social networks Tencent’s customers are the young and digitally connected.
They are mostly Chinese, whether in China or part of the Chinese diaspora.
Unlike other social networks, Tencent hasn’t really made the jump into other geographies. Within China, it has a defensible position that provides it with a vast base of users that it can monetise.
In short, the Tencent business model offers a platform where users can do everything that they want online. As they do so it makes money from upselling microtransactions. This is quite different from western models of social networks.
Tencent gets users to pay directly in a freemium style model. Western companies like Facebook provide everything for free and then make money from advertising.
I describe how Tencent communicates with its customers and its key marketing and distribution channels. Finally, I cover how Tencent monetises its business model.
How does Tencent deliver value to customers?
I then look at the infrastructure side of the Tencent Business Model Canvas to show how it uses key resources to deliver the key activities that are required to keep users engaged on and return to its platforms and the partnerships that it needs to do this. Finally, I look at how much this all costs.
Customer segments
Tencent’s main customers can be grouped into; advertisers and consumers.
Just like Facebook, the company provides free and engaging services to its users, collects user data and then sells advertising space to businesses willing to reach its wide array of users. The company generated an excess of RMB 18 billion from advertising in Q2, 2020.
Value proposition
Tencent provides value for its customers through the following offerings:
- Provision of one-stop services such as mobile payments for its end users.
- Helping people connect with friends and loved ones through its social media platforms
- Provision of memberships on some of its platforms
- Value added services which it provides to make its games better and to enable its users access special premium features on its social, music and video platforms for a fee.
According to Tencent’s official annual report for the second half of 2020, its value added services subscriptions increased by 28% year-on-year to 203 million, primarily due to growth in video and music content subscriptions. This made the company generate an excess of RMB 65 billion from its valued added services in Q2(second quarter), 2020.
Customer relationship
Tencent bolsters customer relationships by interacting with its customers through its community and self-service platforms
Channels
Tencent has a variety of channels through which it uses to provide services, reach and keep its users engaged.
It provides its services through a wide array of apps and websites on both mobile and desktop.
Examples include its social media products QQ and QQI (desktop version) which has over 647 billion monthly active users, as well as WeChat and Weixin which are instant messaging platforms with a combined user base of over 1.2 billion monthly active users.
Some of the company’s other channels include its gaming platform, WeGame, its music streaming platform, Tencent Music Entertainment which has over 600 million users, out of which 120 million are paying subscribers. Currently, Tencent is the largest gaming company in the world.
The company’s video streaming platform, Tencent video, has over 100 million subscribers.
Revenue streams
Tencent’s innovative business model has made it earn its place as the 5th most valuable tech company in the world. With this, its humongous revenue figures shouldn’t be surprising.
The company makes money by monetizing its games and various digital content. The company also makes revenue from members who subscribe to its various services.
Tencent made over $56 billion in revenue in 2019, alone.
During the second quarter of 2020, the company posted net sales (revenue) of RMB 114.83 billion. As stated in Tencent’s 2020 official interim report, it makes revenue from its four major lines of business as enumerated below;
- Value added services – RMB 65 billion, a 35% year-on-year(YoY) increase from Q2, 2019. The increase in this sector was primarily driven by higher revenue from smartphone games in both domestic and overseas markets, as well as PC client games revenues.
- FinTech and business services – RMB 29.8 billion, a 30% year-on-year increase from Q2, 2019. The revenue from this sector was largely derived from its cloud services and public cloud infrastructure, as well as wealth management which in turn made its revenue grow as a result of increase in commercial payments due to increased average daily transactions and value per transactions.
- Online advertising – RMB 18.5 billion, a 13% year-on-year increase from Q2, 2019. The increase in this sector was driven by revenue growth from their mobile advertising networks, as a result of increased traffic and a greater variety of video advertising with higher pricing.
- Others – RMB 1.46 billion
Key resources
Some of Tencent’s key resources includes; its intellectual property (IP) upon which its various software is built, and its wide array of Research & Development (R&D) staff.
The company also holds a couple of valuable resources such as its stock, brand image, reputation, values, as well as its algorithm!
Key activities
Tencent’s key activities include development of new products and services.
The company states that part of its mission and vision is to constantly promote technology innovation, help industries digitally upgrade and collaborate for the sustainable development of society.
With this, it’s safe to say that the company will continue to provide new offerings, products and services in order to fulfil its long-term goals as well as its mission and vision.
The company is also actively involved in market segmentation and analysis.
The company serves a vast variety of users with different demographics and interests ranging from music lovers, to gamers and businesses who utilize its cloud infrastructure and advertising services.
Hence, the company needs to be actively involved in segmenting and analyzing its market so it can better provide the right services and offerings for its various customers and satisfy their needs, thus leading to customer satisfaction for the brand.
Key partners
Tencent’s key partners include the government, especially with the communist party’s new directive to place government officials in the top 100 companies in China.
Tencent is always involved with the government due to the fact that they’re constantly working with legislators and regulators in order to keep with the government’s compliance and regulations.
This can be exemplified by its filing of annual and quarterly financial reports, a regulatory requirement of any publicly traded company which it has to be in compliance with.
As of August 2019, Tencent also collaborated with the publicity department of the Chinese Communist party and the people’s Daily to create patriotic games.
Tencent’s key partners also includes shareholders such as Naspers which own the majority stake of the company, 30.99%.
Tencent’s key partners also includes game vendors which it has acquired or partnered with, such as Activision Blizzard and Epic games, in order to help develop its games as part of its interactive entertainment and gaming businesses.
Tencent also has key partners in the music industry. Its music arm, Tencent Music Entertainment and Spotify both swapped 10% of each others bussinesses in order to form a collaboration.
Tencent also owns 1.6% stake of Warner Music Group. Not to mention its numerous music licensing and distribution rights which it has made through deals with major players in the music industry.
Tencent has also partnered with other key players in eCommerce such as JD.com, the largest online retailer in China.
Cost structure
When talking about Tencent’s business model, its cost structure generally entails its expenses.
As of Q2, 2020, its cost of revenue, which is the expense associated with providing its services rose to RMB 61,673 billion which was largely attributed to higher server and bandwidth costs, as well as greater channel and distribution/traffic acquisition costs, as highlighted in the company’s interim annual report of 2020.
The company also racks up huge selling, marketing, general and administrative costs, as well as finance costs.
The company’s general and administrative expenses have mainly been driven by greater R&D (Research & Development) and staff costs.
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