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Tencent's WeChat Takes a Page From Facebook

By Andrew Tonner – Mar 25, 2016 at 9:09AM

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As Facebook and Tencent monetize their popular messaging services, Tencent's strategy to profit from WeChat both mimics and differs from Facebook's own playbook.

Source: Tencent WeChat

Messaging apps are the new social networks, and this trends carries sweeping implications for tech investors everywhere.

Already, a number of firms including Facebook (META 1.98%) and China's Tencent (TCTZ.F 0.14%) have established strong leadership positions in mobile messaging. Facebook Messenger, its WhatsApp subsidiary, and Tencent's WeChat constitute the three most popular messaging apps in the world, serving a combined 2.35 billion users based on early 2016 data.

However, despite acquiring users like wildfire, layering profitable business models atop these popular services has proven a learning process for all parties involved, as Tencent's recent earnings report helps partially demonstrate.

Tencent earnings impress
Though many fear business conditions in China may be slowing, Tencent's recently reported fourth quarter and full-year 2015 earnings showed a company with the wind largely at its back. For its fiscal 2015, Tencent saw total sales increase 30% to a total of $15.8 billion, while Q4 sales grew 45% to nearly $4.7 billion. Full-year profits rose 22% to $4.4 billion, while Q4 net income increased 21% to $1.1 billion.

The bulk of the company's sales stem from what Tencent dubs "Value Added Services," like its highly popular online gaming platform, which alone accounted for roughly half of Tencent's quarterly sales in 2015. As smartphones become increasingly popular in China, Tencent's dominant messaging platform is reportedly viewed within the company as an additional growth engine to help justify the company's admittedly lofty valuation. As such, the company is reportedly experimenting with new methods to monetize WeChat. This highlights an interesting evolutionary twist in the rise of the megamessaging platform in which both Tencent and Facebook borrow pieces of the other's strategy.

Mutual admiration society
Recent reporting from The Wall Street Journal indicates that Tencent has begun emulating Facebook's monetization strategy by bringing advertisements to its WeChat platform. The interesting twist is that Tencent is borrowing from the advertising playbook Facebook has so successfully implemented in its core social media business, not Facebook's strategy for Messenger or WhatsApp.

Though Tencent began including advertisements in WeChat in 2014, the company started placing advertisements in WeChat's Moments, which in many ways mirrors Facebook's Timeline feature, just last year. The company has also reportedly opened advertising on Moments to include smaller companies that were previously excluded from promoting their businesses using the service.

Source: Facebook

The firm hopes that further scaling its ad business will convert WeChat into a profit center for the company, an opportunity third-party research certainly supports. According to research firm QuestMobile, Chinese smartphone owners spent over an hour daily using WeChat. Though slightly dated, 2014 data indicated Facebook users on average spent about 40 minutes daily on the service. What I find particularly interesting here is that Tencent has chosen to pursue the strategy that Facebook uses to monetize its core social media platform, which is funded almost exclusively by advertising, instead of the business model continuing to take root at its messaging subsidiaries.

Rather than rely on subscription or advertising revenue, both Facebook Messenger and WhatsApp have opted to pursue monetization strategies predicated on charging third-party companies to access the messaging platform. Though the rates it charges aren't public, the company has integrated apps from companies like ride hailing app Uber, customer service chat with brands like Zulily, and more into Messenger and WhatsApp. Of course, Facebook might have selected this strategy over an ad-based business model because the profits of the parent company can cover the messaging platform's costs.

Either way, in the growing market for mobile messaging platforms, Tencent's increased emphasis on advertising on WeChat is noteworthy for which aspect of Facebook's business it emulates.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. 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.

Stocks Mentioned

Meta Platforms Stock Quote
Meta Platforms
$120.44 (1.98%) $2.34
Tencent Stock Quote
$37.89 (0.27%) $0.10
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
$37.86 (0.14%) $0.05

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