China: Tencent Holdings
In China, cyberspace is populated largely by teenagers and twentysomethings, and cuteness is king. And it's hard to out-cute Tencent Holdings, a Shenzhen company that's one of the most successful dot-coms in the country.
Tencent dominates China's instant-messaging market with a 60%-plus share, and that success is largely due to its cuteness quotient. It derives a big part of its revenue from sales of "avatars," cartoon characters that Tencent users pay to adopt as their online personalities. Tencent's official mascot is a chubby penguin named QQ, a cuddly character that Tencent has transformed into a heavyweight branding tool that's recognized by students nationwide. Even Tencent's 34-year-old founder has a funny name. In Mandarin, Chairman and CEO Ma Huateng's family name means "horse," so of course he likes to use his English name, Pony Ma. Cute.
Still, there's nothing childlike about Tencent's success in selling cuteness online. Few Chinese companies have grown faster. Sales in 2004 were $138 million, up 55% over the previous year, and analysts expect revenues to reach $173 million this year. Tencent is also highly profitable, with 2004 earnings of $53 million, up 37% from 2003. Analysts predict profits of $63 million this year. The stock price has climbed 93% since Tencent's June, 2004, initial public offering. "This is just the beginning," says Ma.
Ma was born on the southern island of Hainan and moved to booming Shenzhen as a teen. After graduating from Shenzhen University, he found work with a paging company. In 1998, he launched Tencent and won the support of International Data Group Inc., a Boston venture-capital firm. At first, Ma focused on text messaging, but soon he transformed Tencent into a Chinese answer to America Online's AIM, giving users the ability to contact one another instantly while online. With QQ at the fore, Ma made sure Tencent appealed to his target audience. "The most important users are the young people," he says.
What impresses investors is Tencent's ability to build on instant messaging. The company has increased ad rates by 50% this year, and Morgan Stanley estimates that its advertising revenue in the third quarter was $3.6 million, up 16% from the second quarter. Tencent also charges for online games, dating clubs, and services such as data storage. "If you look at instant messaging and the ability to enhance services and generate revenue from them, Tencent is probably the leader in the world," says Morgan Stanley analyst Mary Meeker.
That success isn't scaring away potential rivals. Microsoft's MSN earlier this year formed a joint venture with a Shanghai company. In August, Yahoo! Inc. paid $1 billion for control of online retailer Alibaba.com Corp. And local companies are moving into instant messaging, too.
Ma says he's ready for the challenge. In February he formed an alliance with Google, with the U.S. company providing search services that Tencent now integrates into its portal. Tencent is also diversifying into games, and Ma is hoping to win older users with an instant-messaging service that lacks cutesy touches. To keep the growth going, Pony Ma's company might have to grow up a bit.
By Bruce Einhorn in Shenzhen