Tencent Pivots From PC to iPhone for Ads

Messaging Service Weixin is Helping Company Sign up a More High-end Mobile User Base, Attract Advertisers

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Tencent Holdings is China's biggest internet company, with 430 million users. Even so, it is only No. 6 in attracting advertising, as its customers are considered students and farmers without much discretionary income.

Enter the smartphone.

China's online-ad market expanded more than 40% last year, to $4.2 billion, according to Media Partners Asia. The industry may exceed $10 billion by 2015, it said. Tencent CEO Ma Huateng is wooing that money by shifting his focus from personal computers to mobile devices.

As many as 75 million smartphones will be sold in the world's biggest internet market this year, 29% more than in 2011, according to JPMorgan Chase, and those users are often members of China's growing middle class.

"It's the right strategy," said Billy Leung, an analyst at OSK Securities in Hong Kong. "High-end users have the ability to spend more."

The market agrees: Following a 7.6% decline in 2011, Tencent shares have jumped 26% in Hong Kong this year, outperforming the gains in Baidu, China's biggest search-engine company, and NetEase.com, its No. 2 online-games operator.

Tencent's QQ.com is China's most popular website; Sina Corp. news site Sina.com ranks No. 3, according to data from China Websites Ranking. Still, Sina had $101 million of ad revenue in the third quarter, compared with Tencent, which had about $95 million, according to earnings data reported by the companies.

"Advertisers have regarded [Tencent] users as low-end," said Dick Wei, an analyst at JPMorgan. For example, its websites carry fewer ads for luxury cars and prime real-estate than Sina's, he said.

Hear from SY Lau, senior VP of Tencent, about China's burgeoning internet advertising market at the 2012 Ad Age Digital Conference. For more info, visit AdAge.com/digital2012.

To help change that , Shenzhen-based Tencent introduced its Weixin messaging service for Apple's iPhones as well as devices running Google's Android system. A 16-gigabyte iPhone 4S costs 4,988 yuan ($792) at Apple's online store in China -- more than double the country's average monthly wage.

Weixin offers better features for social-networking than Tencent's Mobile QQ wireless-chat software -- important in a country where services by Facebook and Twitter are restricted by government censorship. Weixin users can receive alerts about text, voice and video messages even if they aren't opening the application, while QQ users need to be logged on to access information.

Dundas Deng, an analyst at Guotai Junan Securities in Shenzhen, said he uses Weixin on his iPhone to locate contacts in his vicinity. The service includes a technology that displays contacts within a user-specified geographical area that are on the network, he said. QQ has a similar feature.

"All the operators are trying to enhance the social-networking features of their service because that will help make them be more sticky," said Mr. Deng.

Tencent has signed up 50 million people for Weixin since last year, a number that could more than triple by 2013, according to Mr. Wei at JPMorgan.

Demand for Weixin, a free service, will help drive a third of Tencent's internet users to access its services on their mobile devices by next year, said Mr. Wei, who has an "overweight" rating on the company's stock.

Winning users with higher incomes will help Tencent boost online advertising, said Vivek Couto, executive director at media consultants Media Partners Asia in Singapore. The per-capita income of Chinese households in cities and towns has doubled in six years.

"They are making a more concerted effort to win over the higher-end demographics," Mr. Couto said.

Tencent accounted for 4.1% of China's online advertising market in the fourth quarter, according to research company Analysys International. It ranked behind Baidu, Alibaba Group Holding, Google, Sohu.com and Sina in ad sales, according to Analysys. "With the adoption by smartphone users with 3G data plans, Weixin is helping Tencent to sign up a more high-end mobile user base," Catherine Chan, a spokeswoman for Tencent, said in an email.

Weixin is the most popular social-networking application for iPhone users in China after Tencent's Mobile QQ, according to Analysys. Tencent introduced Weixin in January 2011, 12 years after offering QQ.

"Even before Weixin, we have attracted some high-end advertisers with our young user base," Tencent's Mr. Chan said.

The surge in Weixin users will allow Tencent to boost e-commerce revenue through partnerships with retailers, said Qin Weijie, an analyst at PingAn Securities in Beijing. "The location-based technology of Weixin gives it a lot of potential in mobile commerce," he said.

Offering online games, entertainment and lifestyle services to QQ users, while keeping the basic messaging service free, has helped Tencent boost revenue. Games accounted for more than half of third-quarter revenue of 7.5 billion yuan.

Tencent may also increase sales by placing advertising in mobile-phone apps accessed by Weixin users, similar to Apple's iAd mobile-advertising system, according to JPMorgan's Mr. Wei.

Alibaba Group, China's biggest e-commerce company, introduced its AliCloud service in July to add mobile-phone users, while Baidu said in December its mobile-phone technology platform was included in a new Dell handset in China.

Spending on developing new services is putting pressure on its margins. Tencent's third-quarter profit missed analysts' estimates. And Weixin isn't expected to generate revenue for the company "anytime soon," said Jiong Shao, who rates Tencent "underperform" at Macquarie Group in Hong Kong.

Weixin leads in China's mobile instant-messaging services market, with more users than services offered by competitors WhatsApp and Xiaomi, according to JPMorgan.

"The mobile instant-messaging market is a winner-takes-all market," Mr. Deng said. "And users tend to go for the service that their friends are using."

~Bloomberg News~

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