ByteDance, the Chinese tech giant that owns TikTok, recently sued its larger rival Tencent (TCEHY +2.38%) over alleged antitrust violations. ByteDance says Tencent blocked users on its WeChat and QQ apps -- which host 1.21 billion and 617 million mobile monthly active users, respectively -- from accessing content from Douyin, the Chinese version of TikTok.
ByteDance claims Tencent is blocking Douyin to promote WeChat's own short video channels, and it's asking for 90 million yuan ($14 million) in damages. Let's see how ByteDance's lawsuit could cause headaches for Tencent, which is already being scrutinized by antitrust regulators in China.
Image source: Getty Images.
Trying to spark an antitrust probe
Over the past few months, China's SAMR (State Administration for Market Regulation) tightened its grip on the country's top tech companies. It fined Tencent and Alibaba (BABA +1.41%) over unapproved acquisitions last December, and recently introduced new rules to rein in China's two largest payment platforms, Tencent's WeChat Pay and Alibaba-backed AliPay.
The SAMR launched an antitrust probe into Alibaba's e-commerce business in late December, and demanded that its marketplaces end their exclusive deals with merchants and aggressive pricing strategies. Complaints from Alibaba's rivals, including JD.com and Pinduoduo, reportedly sparked that probe.
ByteDance likely wants to spark a similar antitrust probe against Tencent. Douyin currently reaches over 400 million daily active users in China, but it's still much smaller than WeChat and QQ.
Understanding Tencent's strategies
QQ, Tencent's older messaging platform, is gradually shrinking. But WeChat -- a monolithic app that hosts millions of integrated "Mini Programs" for online shopping, payments, food deliveries, ride-hailing services, online news, games, music, and more -- is still growing.
Image source: Getty Images.
Tencent considers popular apps that pull users away from that walled garden, including ByteDance's Douyin and its news app Jinri Toutiao, to be long-term threats -- especially if it offers its own competing app or feature within WeChat.
Tencent previously barred WeChat's users from posting links to Jinri Toutiao's news stories. Tencent also didn't approve ByteDance's WeChat Mini Programs for its cloud-based office platform, Feishu. That's why it wasn't surprising when Tencent finally cut its users off from Douyin's videos.
Tencent likely cut off those apps to protect Tencent News, Tencent Cloud Office, and WeChat's short video channels from ByteDance's apps. Those moves certainly seem anti-competitive, and could cause the SAMR to closely scrutinize the relationship between WeChat, its integrated features, and Tencent's other mobile apps.
It's not about the money, it's about sending a message
ByteDance generated $37 billion in revenue last year, according to The Information, so a $14 million settlement would be a drop in the bucket. It also won't matter much to Tencent, which generated nearly $54 billion in revenue in the first nine months of 2020. Therefore, ByteDance's latest lawsuit against Tencent isn't really about the money -- it's about drawing regulators to Tencent.
ByteDance has sued Tencent before, but none of those legal challenges have been definitely resolved yet. However, its latest lawsuit represents the first time it openly accused Tencent of violating "antitrust laws" -- which could certainly get the SAMR's attention.
What's at stake for Tencent?
Analysts expect Tencent's revenue and earnings per share to rise 38% and 49%, respectively, this year. Next year, they expect its revenue and EPS to grow another 24% and 18%, respectively, as its gaming, advertising, social networking, fintech, and business services units all continue to generate double-digit percentage sales growth.
Based on those expectations, Tencent's stock still looks reasonably valued at about 40 times forward earnings -- even after it rallied nearly 90% over the past 12 months. However, analysts could quickly reduce those estimates if the SAMR drops the hammer on Tencent as it did on Alibaba.
Therefore, Tencent's investors should keep close tabs on these developments, which could spark a full-blown crisis if other companies follow ByteDance's lawsuit lead.
