Facebook Versus Tencent on Messaging: Growing Chinese Consumer Tech

WhatsApp's Chinese rival WeChat shows how China has been producing more consumer technology and developing more e-commerce technology instead of just serving as a selling ground for Western companies.

Apr 1, 2014 at 8:30PM

Messengars Monthly Users Nov
Source: Canalys

Two competitors battle to send the world's messages with applications that both show unprecedented rates of growth. Facebook (NASDAQ:FB), which recently purchased popular messaging application WhatsApp for $19 billion, may have a tough battle ahead. Chinese Internet giant Tencent (NASDAQOTH:TCEHY) and its increasingly popular WeChat (Weixin in China) have given users a means for chatting, shopping, gaming, and even banking all in one app. A WeChat user can send digital cash, buy a soda from a vending machine, book an appointment with a doctor, or hail a taxi all from within the app while still sending messages to friends.

Whatsapp Grows Faster Than Facebook

Source: The Economist.

Did Facebook make its $19 billion purchase to stay competitively cool?
The decision to pay $19 billion for a messaging app when Facebook already had its own messenger seemed like an extreme use of the company's cash. However, even Google (NASDAQ:GOOGL) CEO Eric Schmidt agrees that this price could be well worth it if Facebook can monetize WhatsApp's 460 million active users. Google itself has shown interest in the space with Schmidt saying in an interview, "Let's just say that we like WhatsApp... and we like some other things too including our own products."

Facebook CEO Mark Zuckerberg has said that WhatsApp was worth even more than that. The app reached 450 million users much faster than any other web service did. It is also addictive, with 72% of its users actively using it every day.

Since Facebook seems to have lost some of its appeal with younger users recently, perhaps the company feels it needs a new, separate messenger that will keep it competitive in the space where Facebook Messenger might not have. So which company is Facebook competing with in a market of mobile users who are using separate messaging apps?

Enter WeChat, Tencent's multi-use messenger
Social messaging apps have developed much differently over the last few years in China than they have in the Western world. The Chinese government has restricted many globally recognized social media services such as Facebook, Twitter, YouTube, and others. Therefore, an organic social platform of web services and apps has developed specifically for Chinese consumers.

Source: China Internet Watch.

Enter WeChat, which had more than 270 million monthly users by the end of 2013. While WhatsApp exceeds this base with around 450 million active monthly users, WeChat also doubled its user base in just one year. The app recently reached the 100-million download mark in just the Google Play store alone. WhatsApp is popular in the Americas and Europe, but WeChat has made strides not just in China but also in East Asia and Africa. If the app can grow into WhatsApp's territory, it may become a major threat to Facebook itself.


Source: Tencent

Tencent, WeChat's parent company and the creator of China's No. 1 online messaging system QQ, only recently became a name known in the Western world. However, the company has a market capitalization of $140 billion, trades on the Hong Kong stock exchange, and posted 92% growth over the last year alone. WeChat is not Tencent's first social-messaging success. The company's QQ instant messaging service at one time had 818 million monthly active users, which is nearly three times the size of the entire U.S. population.

Tencent is an e-commerce services company which also provides online and mobile games as well as other services such as mobile music and mobile books. Recently, the company announced that it bought almost 10% of the logistics center operator China South City Holdings Ltd. for $193 million. The move looks like an attempt to challenge existing leaders for presence in online e-commerce.

This could mean the company will not just compete in the consumer tech space, it will compete in the space with Amazon (NASDAQ:AMZN) as well. While Amazon has enjoyed the rise in consumer spending habits as consumers make more and more purchases online and receive shipments throughout the Western world, the company would be happy to have a strong hold in China as well where online retail is expected to double from 2016 to 2020, according to analysts at China Internet Watch.

China Online Retail Market
Graphic: China Internet Watch

WeChat vs. WhatsApp on monetization
WhatsApp is free for the first year, but users must pay $0.99 per year after that. For this, the company promises to provide an ad-free messaging experience. However, WeChat never charges users to download and use its app, it just charges for in-app purchases and encourages shopping through the app because Tencent gets a percentage of each in-app purchase.

This approach makes WeChat more valuable, according to an analyst with Nomura International in Hong Kong. Estimates call for WeChat to bring in $1.1 billion (6.8 billion yuan) this year and about 40% more in 2015. According to estimates by Nomura, WeChat collects revenue of about $7 per user while WhatsApp gets about $1 per user.

Investors seem to appreciate the extra cash flow: analysts at Barclays value WeChat at about $30 billion as a stand-alone business or about $95 per user, which easily exceeds the valuation of $19 billion and $45 per user that Facebook paid for WhatsApp.

Could China's big brother halt WeChat's global push?
WeChat has one big barrier blocking viral growth around the world that does not affect WhatsApp: the watching eye of the Chinese government. Just as with the micro-blogging platform Weibo that grew in China where regulations forbid Twitter, the Chinese government monitors WeChat. Most people's trivial messages to friends about their latest relationship statuses or pictures of the food they are eating don't make the list of concerns of the Chinese government. Even so, Westerners are still not likely to download an app that they know a foreign government monitors and censors. If WeChat hopes to expand beyond China, it will have to convince users not only that it's cooler and more efficient than WhatsApp, but also that it's not a surveillance tool.

Foolish conclusion: An example of Chinese consumer technology competition
Whether WeChat can actually break into the Western world and compete here for messaging app users, or whether the company will remain a dominant force that WhatsApp will have to battle for markets in Asia, will be shown by these apps' growth rates over the coming months. However, one thing is for sure: Tencent is an example of how China is increasingly producing consumer tech and developing e-commerce instead of just serving as a growth market for Western companies. Understanding this trend alone should be a key part of evaluating all businesses in these globalized consumer tech markets.

Consumer tech is growing in China, but could manufacturing be moving back to the U.S.?
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Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Facebook, Google, and Twitter. The Motley Fool owns shares of Amazon.com, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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