WeChat is the dominant social platform in China, with over 963 million monthly active users. In addition to its large user base, WeChat has an extremely high engagement; over half of WeChat users spend more than 90 minutes per day on the super-app, and roughly one-third of users spend over four hours per day in the WeChat ecosystem.
But with all of these positive metrics, there is still a debate as to how much money parent company Tencent Holdings (OTC:TCEHY) can make from WeChat. In fact, a recent story by The Information revealed tension between upper management and WeChat creator Allen Zhang over the monetization issue. Here are the outlines of the current debate.
Tencent actually doesn't charge for a lot of WeChat's functionality in the way Western companies do. The platform has, up until now, primarily been a tool to attract users and direct them to play Tencent's mobile games through the WeChat Game Center. In fact, Tencent still makes most of its revenue from "value-added services," and much of that is its core video game segment.
Of course, WeChat has begun to make a fair amount of revenue outside gaming. The company started selling advertisements on WeChat Moments in 2015, which led to strong growth in social-media online ad revenue. Still, Tencent has been very cautious, limiting advertisements to only one per day -- in stark contrast to Facebook's one ad roughly every ten posts. This has led to only $1.1 billion in social advertising revenue last quarter for Tencent -- only about one-tenth of Facebook's quarterly ad revenue, despite WeChat having nearly half the users of Facebook.
Another way WeChat makes money is through Tenpay, its payments platform. Tencent only recently began charging merchants 0.6% fees for transactions with Tenpay (well below Paypal's 3% fee), yet that led to triple-digit payment-related services revenue growth last quarter.
While these are strong numbers, Tencent's price-to-earnings ratio of over 50 suggests investors are expecting much more in the future. That may be tricky, as one of the WeChat team's core principles is to "Monetize Subtly," and apparently WeChat creator Allen Zhang has been butting heads with Tencent executives over how best to do that without alienating users.
I was surprised to learn of other functions WeChat doesn't charge for. For instance, many independent bloggers who publish on WeChat have garnered thousands or even millions of followers, and brands pay handsomely to advertise on popular blogs. Instead of charging publishers a huge fee, WeChat allows these publishers to directly negotiate with brands and doesn't charge anything for providing the platform.
Bloggers and other content creators can also receive "tips" from followers, a commonplace custom in China. WeChat doesn't take a cut of those either. In fact, when Apple tried to take a 30% commission on tips (since WeChat is available through its App Store), Tencent suspended tipping on iPhones and only recently allowed it to resume (details of the deal with Apple weren't disclosed).
The debate likely not only focused on these current "free" services, but also on several new and important features WeChat unveiled in the past year:
- Mini Programs: This is WeChat's alternative to the App Store, and it could be hugely disruptive. The "mini-programs" here are essentially lightweight applications; they don't have to be downloaded to a phone (and therefore take up precious space), but can be accessed entirely through WeChat. In the first year, there are already 580,000 mini-programs on the WeChat store.
- WeChat search: Since WeChat is really its own ecosystem at this point, Tencent unveiled a WeChat search function last summer for relevant conversations and content entirely within the WeChat ecosystem. This is a big step, and it could potentially take share away from dominant Chinese search giant Baidu.
- Premium "Brand Zone": WeChat has introduced new types of pages that allow big-name brands (especially luxury brands) to create their own WeChat pages and gain access to WeChat users who aren't already followers. Brands can customize their virtual storefronts, give offers, run contests, sell directly through WeChat, or link to their external websites.
All of these initiatives are relatively new features for WeChat, and it is unclear if they are currently generating revenues, or how much they are making. Still, it's clear that Tencent has tons of monetization options, and management seems to be pondering how best to take advantage without alienating its valuable customer base.