WeChat is Tencent's ace in China's online entertainment race

YG Entertainment

12/05/2015 22:00

By Paul Carsten and Lisa Richwine 
    BEIJING/LOS ANGELES, May 13 (Reuters) - In a multi-billion 
dollar dogfight with Alibaba Group Holding Ltd  BABA.N  for 
leadership in China's online entertainment market, mobile 
messaging app WeChat is Tencent Holdings Ltd's  0700.HK  trump 
card. 
    The wildly popular app allows Tencent to channel 500 million 
monthly active users to its entertainment services, a huge 
consumer base for subscriptions or marketing - pay dirt for 
media and advertising partners. 
    Combined with a willingness to throw cash at top-tier film, 
television, game and music content, Tencent has locked down 
exclusive deals with some of the biggest names in Hollywood, 
eager to piggyback on the $190 billion Chinese group's growing 
success. 
    Shenzhen-based Tencent, whose WeChat and QQ social networks 
are as ubiquitous in China as Facebook Inc  FB.O  is elsewhere, 
has spent billions of dollars in recent years building up its 
content library and on stakes in entertainment firms, though the 
company declines to give specific details on its investment. 
    Last month, Tencent added streaming rights to Twenty-First 
Century Fox Inc's  FOXA.O  FOX, FOX Sports and the National 
Geographic Channel to its media arsenal, which already includes 
various rights for Sony Corp's  6758.T  Sony Music 
Entertainment, Warner Music Group, Time Warner Inc's  TWX.N  HBO 
network and the U.S. National Basketball Association. 
    "We've paid aggressively to buy some of the most popular 
content, the most established brands," Tencent's Chief Strategy 
Officer James Mitchell told Reuters in a recent interview. 
    Founded 17 years ago by CEO Pony Ma, Tencent already 
operates an online gaming business to rival those of Sony, 
Microsoft Corp  MSFT.O  and Nintendo Co  7974.T . It also owns 
China's biggest music streaming service by subscribers, and by 
some measures runs the country's most popular Internet video 
platform. 
    The pairing of Tencent's active dealmaking with the success 
of WeChat and QQ is critical, says Mathew Alderson, who leads 
the China media and entertainment practice at Harris Moure in 
Beijing. "I consider them to be ahead because of the reach and 
sophistication of their social networking tools," he said. 
    The stakes are huge. Revenue in China's online entertainment 
industry is set to double to more than $46 billion by 2018 for 
online games and video streaming alone, according to iResearch 
data, prompting China's biggest Internet companies to spend 
lavishly on TV shows, films, games, music and sports rights. 
    "When we have the key content, our traffic makes it more 
popular than it would otherwise be," said Mitchell, noting that 
Tencent's online advertising business revenues jumped 65 percent 
last year, to 8.3 billion yuan ($1.34 billion). Video 
advertising revenue has at least doubled year-on-year in all of 
the past six quarters. 
    Tencent reports January-March earnings later on Wednesday. 
     
    KNOWING THE SPACE 
    Alibaba, meanwhile, is flush with cash after its record $25 
billion share sale in New York last year and, alongside its 
affiliates, has spent more than $3.5 billion since the start of 
2014 on stakes in video, music and gaming firms, including a 
minority share of Youku Tudou Inc  YOKU.N , one of China's 
biggest Internet video services. 
    Alibaba's entertainment business claims music distribution 
deals with Germany's BMG and two of Taiwan's biggest labels. It 
has also teamed up with Hollywood studio Lions Gate 
Entertainment Corp  LGF.N  to offer a subscription streaming 
service in China. Its operations are led by former members of 
Tencent's video business, who left following a leadership 
reshuffle around 2013. They include Patrick Liu, current head of 
Alibaba's digital entertainment unit and former head of Tencent 
Video. 
    Other firms staking a claim in China's online entertainment 
market include Internet search leader Baidu Inc  BIDU.O  and its 
online video unit iQiyi; Sohu.com Inc  SOHU.O ; and Leshi 
Internet Information and Technology Corp Beijing  300104.SZ . 
    Dealing with Tencent won't be easy, says Mark Natkin, 
managing director of Beijing-based Marbridge Consulting. "They 
understand what users want in terms of entertainment content, 
they understand how to deliver it," he said. "Tencent knows that 
space better than anybody." 
    Tencent's content library, which also includes South Korean 
YouTube  GOOGL.O  sensation Psy through a tie up with YG 
Entertainment Inc  122870.KQ , is arguably deeper than that of 
its rivals. 
    "You clearly see the growth of (Tencent's) position," said 
TCL Multimedia CEO Hao Yi, who works with many of China's 
Internet companies, about the firm's video business. "A couple 
of years ago they were nowhere. The WeChat thing, indeed, this 
is a killer." 
    In recent months, Alibaba and Tencent have taken their 
rivalry overseas, both setting up offices in Los Angeles to slug 
it out for programming deals with Hollywood studios and 
producers. 
    While both groups have financial firepower, WeChat could be 
a clincher for Tencent in winning deals with content producers. 
    "You can use content to drive very good margins - if you 
have the right pipes," said one Hollywood executive. 
    ($1 = 7.7520 HK dollars; and 6.2092 Chinese yuan/renminbi) 
 
 (Editing by Ian Geoghegan) 
 ((paul.carsten@thomsonreuters.com;)(Reuters Messaging: 
paul.carsten.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA TENCENT/