Chinese regulators recently blocked Facebook's (NASDAQ:FB) WhatsApp amid a sweeping crackdown on social media and mobile messaging platforms. The Chinese government started censoring WhatsApp's photo, video, and voice note sharing capabilities back in July, but it has now expanded that effort to block all text messages.
Speaking to The Verge, Symbolic Software applied cryptographer Nadim Kobeissi stated that the Chinese government likely upgraded its firewall to detect and block the NoiseSocket protocol that WhatsApp uses to send texts.
China also recently fined its domestic tech giants Baidu (NASDAQ:BIDU), Tencent (OTC:TCEHY), and Weibo (NASDAQ:WB) over lax censorship issues, but it stopped short of banning their social platforms. This represents a big setback for Facebook's plans to return to China, where its platform has been banned since 2009, but it represents a key win for Tencent's WeChat, the biggest mobile messaging app in the country.
What's at stake for Facebook?
At first glance, WhatsApp's presence in China doesn't mean much to Facebook. There are only two million WhatsApp users in China, compared to the platform's 1.3 billion monthly active users (MAUs) worldwide. Tencent's WeChat already dominates the space with 963 million MAUs worldwide, making WhatsApp seem irrelevant to the average Chinese user.
However, Facebook had likely hoped to retain WhatsApp as a foothold in the Chinese market since its flagship app remains banned. Another photo-sharing app it recently launched in China, Colorful Balloons, hasn't attracted much attention.
Facebook clearly wants to return to China -- CEO Mark Zuckerberg charmed audiences in Mandarin in Beijing, advised his employees to read President Xi Jinping's book, and even tested a censorship tool for Chinese users. Chinese regulators have said that Facebook is welcome to return if it plays by its rules, but the country hasn't offered a timeline for that approval.
Facebook's total MAUs rose 17% annually to 2.01 billion last quarter. That figure is impressive, but the social network will eventually run out of room to grow as China's population of 1.38 billion remains off limits. The longer Facebook stays outside of China, the stronger Tencent will become -- making it tough to gain any meaningful market share if it finally returns.
Why this is good for Tencent
To understand why Facebook's pain is Tencent's gain, just look at the relationship between Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google and Baidu (NASDAQ:BIDU). Google was once a meaningful competitor to Baidu in China, but its exit from the market in 2010 enabled Baidu to become the dominant search engine in the country with an 80% market share.
WeChat is Tencent's biggest social platform, but it reaches an additional 662 million MAUs with its older messaging app QQ, as well as 606 million MAUs on its Qzone social network. The combination of WeChat, QQ, and Qzone make Tencent the undisputed 800-pound gorilla in China's social media market.
The government likely prefers Tencent to control this market, since its Chinese users must register their real identities and phone numbers -- a controversial requirement that could cause conflicts with foreign companies like Facebook. The Chinese government can also keep Tencent on a shorter leash and expect it to pay fines, monitor users, or change its platform as needed.
But the ban could be temporary
On the bright side, previous bans of WhatsApp haven't stuck. The UAE lifted a ban on WhatsApp in June, and repeated attempts to block the app in Brazil have failed. It's unclear if Chinese regulators will also soften their stance, but they could merely be rattling their sabers to force Facebook to implement tougher registration and censorship measures for the app.
If that's the case, the whole ordeal might prove that Facebook is capable of playing by the Chinese government's rules -- which could open the doors again for its flagship app.
But that's all speculation for now, and investors should realize that the only real winner now is Tencent -- which will likely absorb those two million WhatsApp users and reinforce its reputation as the top messaging platform in the country.