How Tencent could help Snapchat

How Tencent Could Help Snapchat

By Hans Tung and Zara Zhang

Last week, Chinese Internet giant Tencent acquired a 12% stake in Snap, one day after Snap posted weak quarterly results that sent its shares plunging.

Tencent, one of the world’s top ten publicly traded companies with a market cap of $510 billion, first invested in Snap in 2013 when the latter was still a private company.

Many on Wall Street might still be trying to decipher what Tencent wants to achieve with this move, given that it is unlikely to buy Snapchat. Since the announcement of the investment, Snap’s stock price has declined slightly further from $12.91 to $12.40.

Over the past few years, Tencent has made numerous investments in companies outside of China in a variety of sectors, including gaming, transportation, e-commerce, and social networks (see chart below). Tencent is known for trying to add value by sharing resources, expertise, and in some cases, access to the Chinese market with these companies.

Tencent's major investments outside of China GGV Capital

Map of Tencent's major investments outside of China by GGV Capital

As the operator of two of the world’s largest social networks (WeChat and QQ), Tencent is well-equipped to share its learnings with Snapchat to help with product refinement and increase engagement.

In fact, this investment raises an interesting possibility that Tencent might help with a redesign of the Snapchat app. In his prepared remarks for Snap’s Q3 earnings call, Evan Spiegel admitted that Snapchat is “hard to use” and needs to be redesigned. And Tencent said it wants to work with Snap on developing mobile games and “newsfeed” ads.

In China, Tencent is known for its expertise in product design and inventing nontraditional methods of monetization. Nearly a third of all mobile time in China is spent on WeChat; a comparable amount is spent on QQ and other Tencent apps.

Mobile time in China spent on WeChat and other Tencent apps

Here are four ways in which we think Tencent might be able to help Snapchat:

1. Tencent, a gaming king, could help to gamify Snapchat

Tencent has extensive expertise in gaming, and owns some of the world’s most popular games. It created Honour of Kings (also translated as Arena of Valor), the world’s highest-grossing mobile game, and acquired Supercell (developer of Clash of Clans) in 2016 and Riot Games (developer of League of Legends) in 2011. Both of these, as well as other Western games, are doing well in China.

Gaming is a great way to monetize. Games represent Tencent’s largest revenue source, accounting for 41% of total revenue in the third quarter of 2017, while advertising only represented 17%. As Snapchat seeks to diversify its revenue sources beyond advertising, it might be able to use a lesson from Tencent on how to seamlessly integrate games into social networks.

Breakdown Tencent revenue for Q3 2017

Integrating gaming into Snapchat might be a good idea – not just because it creates more ways to generate revenue, but also because it can enhance user engagement. Globally, more people watch gaming videos and streams than HBO, Netflix, ESPN, and Hulu combined. As Snapchat strives to add users globally, it would be smart to tap into the millions of gamers worldwide who are already spending hours each day playing games, many of which Tencent has invested in.

2. Tencent could help Snapchat develop newsfeed and related ads

It is significant that Tencent said it may help Snapchat with “newsfeed ads.” Newsfeed and related ads are central to both Facebook and WeChat, the world’s two largest social networks.

On WeChat, Tencent has created a content ecosystem of its own. WeChat’s “official account” function empowers individual organizations and users to create their own platform to broadcast text, pictures, audio, and videos to millions of WeChat users. Many Chinese reporters have left their jobs at traditional media publications to become independent freelancers by publishing through their individual official accounts. They make money through advertising and sponsored content. Tencent also had a feature that allowed users to tip bloggers directly using cash stored inside WeChat’s virtual wallet before it was forced to take it down by Apple. In the future, WeChat might try subscription fees, which we are monitoring closely.

Chinese Internet companies are good at creating not just platforms, but also ecosystems, complete with content creators, consumers, and innovative monetization methods. For example, the live streaming economy, driven by virtual gifts, is an ecosystem popularized by Chinese and other East Asian companies. We are also seeing emerging trends around learning-based subscription models.

The success of Toutiao – China’s largest AI-powered content platform reportedly worth over $22 billion – is another indication that newsfeed and craving for information from trusted sources are crucial to user engagement in emerging markets, and can be made even more powerful by algorithms that can recommend content based on users’ interests.

3. Tencent could help make content on Snapchat more shareable and discoverable

More and more people around the world now get their news from social media timelines populated by content shared by friends, instead of proactively visiting news sites. On Tencent’s WeChat, it is easy to discover new content by seeing what your friends are reading. On WeChat Moments, which is similar to Facebook’s Newsfeed, users can click on a story shared by their friend, and follow the official account that published that story with a single click. Upon following, users will start to receive future content and messages from this official account.

Discovering content on Tencent's WeChat official account

On Snapchat, users can view what their friends are up to in “Stories,” a mostly passive way to engage with the content. You can share a story by clicking and holding, but this feature seems to be purposely hidden, and requires the creator and the viewer to be friends. Snapchat also doesn’t provide an easy way to discover influencers or business accounts via social sharing – something that’s easy to do on WeChat.

4. Tencent could potentially help integrate O2O services into Snapchat

WeChat pioneered the integration O2O (online to offline) services (such as ride-hailing, food delivery, travel booking) into a social networking app, and Facebook is catching up. This is another area that might be worth exploring for Snap.

Not everyone will be happy with a redesigned Snapchat. But even Evan Spiegel has realized that change is necessary for the company to continue its growth. “There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term,” he said on the earnings call. “We’re willing to take that risk for what we believe are substantial long-term benefits to our business.”

Sign up for 996, a weekly email newsletter on China’s tech trends curated by Hans and Zara, at 996.ggvc.com.

Hans Tung is a Managing Partner at GGV Capital. A five-time Forbes Midas Lister, he has been a US/China investor for more than a decade. He was among the first Silicon Valley VCs to move to China full time, betting on the rise of the Chinese consumer internet market with companies like Xiaomi where he was an early investor and board member. His portfolio includes 3 of the top 5 shopping apps in the App Store – Wish, Poshmark and OfferUp – with Ibotta growing fast at #12. Other companies in his geographically diverse portfolio include: Airbnb, Bowery Farming, Bustle, Dirty Lemon, Function of Beauty, Giphy, LimeBike, Lively, musical.ly, Peloton, Slack, Smartmi, Xiaohongshu (aka Red), Yamibuy, and more. Read his blog at hans.vc.

Zara Zhang is an analyst at GGV Capital. She has written for The Information, The Harvard Crimson, Harvard Magazine, among other publications. Read her blog at zarazhang.com.

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