Why new messaging rules in China could affect Tencent

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Tencent’s WeChat instant messaging service is second most popular after WhatsApp

In the previous part of this series, we discussed how China’s biggest e-commerce player and Internet player, Alibaba (BABA) and Tencent (TCEHY), respectively, are trying to enter into each others’ turf by making huge investments in smaller companies.

Tencent provides diverse services, including social networks, web portals, e-commerce, and online games. Its products and offerings include the instant messenger Tencent QQ, the web portal QQ.com, and the increasingly popular mobile chat service WeChat.

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Tencent is also trying to diversify its business into search advertising as well. Last year, Tencent invested in Sogou, the search engine arm of Internet company Sohu (SOHU), for a 36.5% stake. Although Baidu (BIDU) is the dominant player in China’s search market and considered the Google (GOOGL) of China, Tencent could gain from this partnership as the Chinese search market booms.

Earlier this year, Facebook (FB) acquired WhatsApp for $19 billion, boosting all instant messaging players. WeChat is the second biggest messaging app after WhatsApp, as the chart below shows. LINE and Facebook Messenger are some of the other messaging apps that are popular across the world. WeChat has a virtual monopoly in China.

Social messaging apps MAU

Impact of recent messaging restrictions in China on WeChat

Last month, for the first time, China applied restrictions on instant messaging services for national security purposes. According to the new rules, public account users will need to register and then sign an agreement that they will abide by laws and regulations. This regulation could impact Tencent’s WeChat operations in the short term due to the added friction before a new user registers.

But, in the long term, this regulation should help Tencent since it would have a database of real users. Tencent could use the real identities of its users by providing them with targeted ads, which are much more valuable to advertisers. Earlier in this series, we discussed this aspect of social networks using user data to provide customized ads.

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