BREAKINGVIEWS-Tencent’s troubles reflect monopolistic shift

Wed Apr 3, 2013 2:03pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By John Foley

BEIJING, April 3 (Reuters Breakingviews) - WeChat could be China’s killer app - if disgruntled rivals don’t kill it off. The smartphone messaging service, which has amassed 300 million users in just over two years, has attracted the ire of mobile network operators worried about their margins. It sounds like vested interests squashing innovation. More likely, it’s old monopolists fighting to keep out a new one.

WeChat lets users message and chat online via their smartphones, with some extra features like hooking up with users based on location. Moreover, it is free - something telecoms companies, and the Ministry of Industry and Information Technology, may like to change. The head of the MIIT has floated the idea of letting telcos charge WeChat’s owner, Tencent (0700.HK), per user.

It’s easy to see why the telecoms are displeased. China Mobile (0941.HK), China Unicom (0762.HK) and China Telecom (0728.HK) have a stranglehold on the mobile market, and margins on voice and text messaging vastly outstrip those on data. While WeChat users pay for the data they use – and data revenue rose 46 percent in the second half of 2012, year on year – its success erodes the telcos’ economic rents.

Yet Tencent and its older rivals aren’t so different. While telecoms firms have long enjoyed a collective monopoly because of their control of the physical network, online services seek to edge out competition with control of the "social graph". For that kind of network too, scale creates effective barriers to new entrants - and the winner is likely to take all.

That explains why Tencent is prepared to keep investing in a product that is not yet making money. It also explains the importance of Weibo, the microblogging service owned by Chinese dot-conglomerate Sina (SINA.O). Investors are supportive, because the rewards from investing today are economic rents from cornering the market tomorrow.

For now, the old monopolists are beating the new, because their hold over the market translates into real profit. Users of WeChat, by contrast, don’t pay. That leaves the likes of Tencent and Sina reliant on the distant promise of fickle advertising revenue. Down the line, the best hope for Tencent is that WeChat’s monopoly delivers defensive value - maybe by scaring one of China’s telecoms into buying it up.

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CONTEXT NEWS

- Users of China’s popular online messaging service WeChat may have to pay fees to appease the country’s top telecoms companies, a government official was quoted as saying by a Chinese magazine on March 31.

- Miao Wei, head of the Ministry of Industry and Information Technology, said that the ministry was studying WeChat’s impact on the telecoms market, and would consider allowing operators to charge Tencent, the online gaming and networking group that owns WeChat, though the amount would not be high.

- WeChat, known in Chinese as Weixin, allows users to send texts and voicemails over the Internet from smartphones. Since launching in 2011 it has amassed 300 million users. Tencent said on March 20 it would invest heavily in the product and integrate games and content apps, as well as stepping up marketing outside China.

- The number of point-to-point text messages sent in China fell 11 percent in the first two months of 2012 from a year earlier, Caixin reported the MIIT as saying.

- Reuters: China's Tencent messaging app may no longer be free: government official [ID:nL3N0CN01T]

RELATED COLUMN

Downwardly mobile margins [ID:nL4N0B11RV] - For previous columns by the author, Reuters customers can click on [FOLEY/]

(Editing by David Evans and Sarah Bailey)

((john.foley@thomsonreuters.com))

((Reuters messaging: john.foley.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS CHINA/TENCENT

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