Tencent's (OTC:TCEH.Y) WeChat is the most popular mobile messaging app in China, with 1.08 billion monthly active users. It's also a platform for more than a million "mini programs," which provide services from over 200 industries to 200 million daily active users.
These programs let WeChat users order food, hail rides, buy products, make payments, and perform other tasks without ever leaving the app. That expanding portfolio of services lets Tencent own a mobile app "store" without controlling a major smartphone OS like iOS or Android.
However, Tencent recently revealed even bigger ambitions for WeChat. It's expanding the platform with Xiaowei, an Alexa-like voice assistant that links to WeChat's mini programs and Tencent's other services -- including Tencent Music, food delivery platform Meituan Dianping, ride-hailing app Didi Chuxing, and bike-sharing service Mobike.
Tencent also plans to tether Xiaowei to myriad connected devices, including cars, smart speakers, industrial machines, and other Internet of Things (IoT) gadgets. Tencent hasn't revealed a release date for Xiaowei yet, but the assistant could significantly widen its moat against tech rivals Baidu (NASDAQ:BIDU) and Alibaba (NYSE:BABA).
Why Tencent needs Xiaowei
WeChat's MAUs rose 10.5% annually to 1.08 billion last quarter, but its sequential growth of 2.3% indicates that its growth is peaking. The Chinese government also recently reported that smartphone shipments in China tumbled 15.5% in 2018.
To address this imminent slowdown in the smartphone market, Tencent needs fresh ways to squeeze more revenue from its existing users. That's why it launched its mini programs platform in early 2017. Tencent recently said that it will monetize these programs with in-app ads, which should bolster the online advertising business, which generated a fifth of its revenue last quarter.
But Tencent isn't the only tech giant with mini programs and a virtual assistant. Baidu, which controls 70% of China's online search market, launched mini programs for its Baidu app last year. It's also been expanding its virtual assistant, DuerOS, to smart speakers and other connected devices.
Baidu recently stated that its mini programs had 150 million MAUs, and that DuerOS had an installed base of over 200 million devices. Those formidable figures, along with Baidu's dominance of the driverless market with Project Apollo, could box Tencent's WeChat into a corner.
Alibaba, the biggest e-commerce player in China, also uses a virtual assistant, called AllGenie, in its Tmall Genie smart speakers. The Tmall Genie was the best-selling smart speaker in China during the third quarter of 2018, according to Canalys, with 2.2 million units sold. Xiaomi ranked second with 1.9 million units, followed by Baidu with 1 million units.
Tencent's WeChat-powered smart speaker, Tingting, trails far behind those market leaders, but injecting Xiaowei into Tingting and other connected devices could help Tencent finally catch up to Alibaba, Xiaomi, and Baidu, which are tethering other smart-home devices to their speakers. Tencent can also leverage its strong presence in China's healthcare market, where 60% of medical institutions let patients register and pay for appointments via WeChat, to integrate Xiaowei into medical devices and software services.
The expansion of WeChat's ecosystem beyond phones complements Tencent's restructuring last October, which prioritizes the growth of its WeChat, cloud, AI, and digital platform businesses over its video game unit -- which struggled with a temporary freeze on new gaming approvals in China.
Late to the party, but still a smart move
Leveraging the strength of WeChat to enter the virtual assistant market is a smart move for Tencent. But Tencent is arriving late to the party, whereas Baidu and Alibaba are already leveraging their core strengths to expand their virtual assistant ecosystems. The recent resignation of Tencent's AI chief could make it even tougher for Xiaowei to catch up to its rivals.
However, the introduction of Xiaowei is a step in the right direction, and it could widen its moat against Baidu and Alibaba in the ongoing war for user data in China.
Check out the latest Tencent Holdings earnings call transcript.