Tencent Trumps Apple in Tech-Growth Ranking

Subscriber numbers and profits are soaring at China's instant messaging giant. As Chinese consumers flock to e-commerce, will Beijing grow alarmed at the power of Web companies?

Tencent Holdings (700:HK) Chief Executive Officer Ma Huateng upstaged Apple (AAPL) CEO Steve Jobs in Bloomberg Businessweek.com's ranking of the best-performing technology companies—no mean feat in the year of the iPad.

Apple began selling its iPad tablet in April, building a market for a device that has quickly eroded demand for netbooks and laptops. The company nevertheless finished No. 2—behind Tencent, China's dominant instant messaging service, in the list, which considers a combination of share performance, sales and profit growth, return on equity, and workforce increases.

Outpacing Apple and Jobs is just Ma's latest accomplishment. Ordinarily, Tencent's founder gets less media attention than such rival Chinese executives as Robin Li, co-founder and CEO of search engine Baidu (BIDU), No. 3 on the Bloomberg Businessweek.com list published today, or Alibaba Group Holding Chairman Jack Ma.

Tencent's Ma has made his company into China's largest Internet business by market value, boosting net income 52 percent to 2.15 billion yuan ($325 million) in the most recent quarter and luring more than 636 million active users to QQ, its instant messaging service. That's 18 times the number of subscribers that Microsoft's (MSFT) MSN was serving in China at the end of 2009. "Tencent worries everybody," says Victor Koo, CEO of video-sharing site Youku.com (YOKU). "It's huge."

Tencent Profit Almost Doubled in 2009

Hong Kong-listed shares of Tencent have jumped more than twentyfold in the past five years to bring the company a market capitalization of $42.4 billion. (Apple, based in Cupertino, Calif., is valued at $295 billion.) Tencent's profit almost doubled, to $754.7 million last year, on sales of $1.82 billion, and its growth is expected to continue this year. Analysts on average predict a profit of $1.23 billion on sales of $2.91 billion, according to data compiled by Bloomberg. That means Tencent can increase its domination in China, which has more people online than any other country.

The Chinese government is trying to lessen the country's reliance on exports and broaden the consumer's role in the economy, said William Chou, national managing partner of Deloitte's technology, media, and telecommunications practice in Beijing.

This month, when the consulting firm unveiled its ranking of Asia's hottest technology companies, 147 of 500 were Chinese. That's up from 97 a year ago, Chou says. "For a lot of companies, if they can take advantage of the huge consumption potential in China, they can grow very fast," he says.

Room to Grow in China's E-Commerce

The potential is especially strong for companies that do business online. Only about 30 percent of today's Chinese Internet users buy or sell goods on the Web, says Antony Yiu, managing director of marketing company iProspect. "There's a lot of room to grow," Yiu says. Chinese who have embraced e-commerce spend an annual average of 2,400 yuan ($360), he says. That's double the average from 2009. "So the market is looking good," he says.

Internet upstarts are taking cues from the success of Tencent and Baidu. Koo's Youku is one of the leaders of a new crop of Chinese Internet companies trying to carve niches before the heavyweights grow even larger. On Dec. 8, Youku's stock price jumped 161 percent in its first day of trading on the New York Stock Exchange. The initial public offering raised $203 million. On the same day, E-Commerce China Dangdang (DANG), which sells books, cosmetics, and other consumer goods online, raised $272 million in an IPO on the NYSE.

As Tencent and Baidu expand into new areas, they risk overreaching. Baidu has introduced an e-commerce service with Japanese partner Rakuten (4755:JP) that could go head to head with Dangdang. The search engine has also started a video-sharing service called Qiyi that competes against Youku, Tudou, and other young rivals. Tencent is pushing a search engine to compete with Baidu and in June formed a partnership with Youku rival Tudou to offer video-search services.

Antivirus Row's "Bad Social Impact"

Tencent also made headlines in November during a row with a Chinese antivirus company, 360.cn. After 360.cn accused Tencent of distributing spyware—a charge Tencent denied—Tencent said it wouldn't let people who have 360.cn's software installed on their computers use Tencent instant messaging.

Both companies apologized after some prodding from China's Ministry of Industry and Information Technology. The ministry has launched a probe into problems that the ministry says caused a "bad social impact."

Big Chinese Internet companies should be prepared for further scrutiny, Deloitte's Chou said. He predicts that China may consider trying to ensure that companies such as Tencent and Baidu don't become even more powerful. "The Chinese government will see how to provide a more competitive environment for all these technology companies," he says.

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