For those of us on the right-hand side of the Pacific Ocean, there is a tendency to think of China as the foundry for the tech industry and not a place where vast fortunes are being made on Internet services. Indeed, with the much anticipated coming IPO of Twitter, and with all eyes focused on Microsoft’s impending regime change and stock buy-back and Apple’s fortunes or misfortunes, a lot of attention has been paid lately to one of Wall Street’s favorite terms, VALUATION. 

For those unfamiliar, stock valuation is a method of trying to estimate the intrinsic value of a stock based on predictions of things like future cash flows and profitability along with views on what investors would pay for the stock regardless of “fundamentals.” Reality is that investors use valuations as a key determinant of when and if to buy stocks based on perceptions as to whether they are priced correctly, e.g., valued reasonably or are under or over-valued.  

The reason to bring this up is that China’s largest and most used Internet service portal Tencent Holdings Ltd. has reached the magical $100 billion valuation plateau this week and is poised to move up. Along with its subscriber growth the company is also expanding its services. Locked in fierce competition with China’s other big Internet services companies Alibaba (e-commerce) and Baidu (China’s SEO dominant player), Tencent is taking a significant position in China’s third largest search engine company Sogou (owned by Sohu.com). 


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Big valuation for a big market

One of the interesting things about Tencent is how far it has come in just 10 years of the company going public to reach the $100 billion valuation mark. As a frame of reference only Apple, Microsoft, IBM, Google, Oracle, Facebook, and Intel of the U.S. tech giants consistently are on the list of companies north of $100 billion valuation. This is rarified air.       

The reasons for Tencent’s rapid rise are not just the sevenfold increase since 2004 in China’s online population, but the company’s adroit exploitation of that populations’ increased use of smartphones for mobile Internet access and the Chinese preoccupation with all things relating to gaming, which is a huge (over $200 billion per year) and rapidly growing market.

How big is big? Tencent’s QQ instant messaging service has 818 million users and its WeChat service currently has had 236 million. In other words, we are talking Facebook numbers.

Girding for the battle ahead

As noted, Tencent is expanding to combat its rivals by leveraging its fast mover advantage in mobile and strategically moving into other growth areas. As in the U.S., the goal is to make sure Tencent has all of the puzzle pieces to develop an online ecosystem that gives subscribers no reason to leave its domains. The company is developing offerings for it immensely popular WeChat (known as Weixin in China), to compete with Alibaba, which itself is pondering an IPO which could actually rival Facebook’s with early valuations set near $90 billion. The investment is Sogou, a company that has about 10 percent of the SEO market in China (Baidu has roughly 63 percent and search engine company Qihoo has 18 percent according to estimates) is a critical competitive part of the intricate chess game being played.

“We are confident that Sogou, after combination with Soso, will deliver superior search experiences to users on our social, browser and content platforms, especially on the mobile front,” Ma Huateng, chief executive of Tencent, said in a press release on the deal.

Press speculation in China is that Tencent’s move to not just take a stake in Sogou but to have an option to increase it to up to 40 percent was a much defensive as offensive, i.e., it keeps a valuable asset out of the hands of competitors. It also highlights the value attached to search as a means for getting customer stickiness.

China’s Internet services market is a rough and tumble affair that can get nasty. For example, a few months ago Alibaba moved to block online retailers on its site from using WeChat because the messaging service increasingly was being used as has happened in other countries as a key part of marketing campaigns. This displeased Alibaba who has an 18 percent stake in Sina Weibo, a Chinese version of Twitter, along with an investment in online mapping company AutoNavi.

Baido, also has been shoring up its ecosystem with its $1.9 billion agreement to acquire mobile application store operator 91 Wireless.    

Finally, those of us on this side of the Pacific and across the pond in Europe need to be paying attention to what is happening in China for two big reasons. The first is that Tencent, Alibaba and Baidu all are interested in expanding outside of China, and the threat they pose should not be under-estimated. In addition, understanding the applications and services that are popular in China, particularly the popular sophisticated messaging services and online gaming ones, is important. These are value-added services with substantial growth characteristics. Given the fact that China’s users have an intense infatuation with the latest and greatest smartphones and the impact this has on all aspects of evolving ecosystems in terms of mobile access, apps, etc., there is a lot to be learned here as traditional mobile service providers ponder how to fend off threats from OTTs and the OTTs plot their next moves.

Clearly the Tencent solution is something to keep a close watch on.