Chapter Iii Internal & External Analysis

CHAPTER III INTERNAL & EXTERNAL ANALYSIS

3.1 Vision & Mission

Vision

To be the most respected Internet Company.  Earn the respect of consumers by listening, satisfying and exceeding their needs and expectations.  Earn the respect of employees by continuously improving our corporate reputation so that Tencent is a company employees are proud to work for.  Earn the respect within the industry by promotion the healthy development of the Inernet industry and win-win collaboration with partners.  Earn the respect of society by actively assuming corporate responsibility and contributing to community development.

Mission

To enhance people’s quality of life through Internet services.  Treat the Internet like electricity: a reliable service that makes life easier and more enjoyable.  Address the diverse need of different regions and consumers by offering differentiated products and services  Build a healthy and win-win Internet ecology based on open collaboration with partners.

3.2 PEST Analysis

PEST, as an analysis framework of macro-environmental factors, which can be considered as macro-environmental factors and its usefulness line in the assumption that the success of a particular organization or management solution cannot be understood without having the information relevant to the specific business environment (Buchanan and Gibb, 1998).

3.2.1 Political factors

As a majority of Tencent’s operations are located in China, therefore its results of operations, financial condition and prospects are subject to regulatory developments in China. The China’s Internet and telecommunications industries are highly regulated. Regulations issued or implemented by the State Council, MIIT, MOC, GAPP and other relevant government authorities cover many aspects of its telecommunications and Internet information services, including entry into the telecommunications industry, the scope of permissible business activities, licenses and permits for various business activities and foreign investment. For example, because a significant portion of our revenue from online games and other products and services rely on large Internet user communities, any regulation that affect Internet access and usage, such as those relating to online game addiction, operations of Internet café and other establishments, Internet privacy, important games, mobile subscriber cancellation policies and other regulations will affect the ways the company operation and provide its services and products.

3.2.2 Economic factors

Most of Tencent’s operation and financial conditions are affected by economic conditions in China and, to a lesser extent, the economic conditions of the rest of the world. The socialist marketing economy of China is the world’s second largest economy by nominal GDP and by purchasing power parity after the United States. It is the world’s fastest- growing major economy, with growth rates averaging 10% over the past 30 years. China’s

GDP growth eases to 7.8% in the year 2012, reaching a total 51.93 trillion Yuan ($8.28 trillion) (National Bureau of Statistics, 2012). (See Figure 3.3)

Figure 3. 1 Annual Variation of gross domestic products (GDP) in %

Source: National Bureau of Statistics of China and Focus Economic calculations

Since the second half of 2008, the global economic slowdown has resulted in an adverse impact on the overall China’s economy. Although the price of most of Tencent’s products and services at an affordable level for the average users, which also result in the earnings and cash flows being more resilient to economic cycles, macroeconomic conditions such as the debt crisis in the European Union, the unprecedented downgrade of the U.S. credit rating and increasing concern about a global recession, may impact the growth of the China’s economy and China-focus business like Tencent. The advertising industry is particularly sensitive to economic downturns and a negative economic outlook could cause expenditures for Internet access, infrastructure improvements, and consumer discretionary spending to decrease, thereby affecting the online advertising business. Further, it is unclear how China’s economic conditions could impact China’s regulations, taxation or monetary policies, which could also affect the company’s growth strategies, business operations and access to additional capital.

3.2.3 Social factors

After experiencing over ten years of rapid development, Internet has seeped into every aspect of China’s citizens’ life, and become an indispensable part of daily life. According to statistics concerning China’s Internet development over the years, China’s netizen population surged from 59 million in 2002 to 564milion by 2012, suggesting the Internet penetration rate rose from only 4.6% in 2002 to 42.1% 2012. As the penetration rate trade up, the growth in netizen population progressively slowed down to 10%. Nevertheless, China Everbright Limited (CER) forecast Internet penetration rate will keep growth and reach to 55% by 2015.

Figure 3. 2 China’s netizen population growth

Source: Historical Internet Development Status Statistics Reports, CER

Given the growth in netizen population levels out due to higher Internet penetration, the boost from new Internet users to the development of the whole industry is very limited. Nevertheless, as Internet seeps into every aspect of our work and life, web traffic usage per user is set to increase further, bringing huge business opportunities to the Internet industry.

Internet is not only a communication tool and also is lifestyle. When a lot of people can`t meet face to face, chatting on the Internet has become the best lifestyle to communicate with each other among young people, even some old people. And at that moment, Tencent

15 give those people a chance to do this on the Internet, So Tencent catch this trend to become popular in our life.

According to CNNIC’s data in 2008, 75.4% of Internet users use IM, while only 56.8% use e-mail in China. It means Chinese Internet users are more turned to IM than e-mail, while the situation in US is the opposite. There are few factors contribute to the situation: (1) a reliable and free IM platform has been offered by Tencent since early days of Internet development, while free e-mail services in early days were not very reliable. (2) From a cultural perspective, Chinese users prefers IM over email, given IM is a real-time communications tool versus e-mail. (3) Viral networking effects helped IM growth, with more users already on the IM platform. Therefore, in the future, with the popularity of mobile broadband, IM will be well positioned to integrate into mobile devices through a real-time connection. These advantage should continue to drive the popularity of IM as a cross-platform community tool. As the instant messaging in China, Tencent should be able to benefit from the long-term growth of IM.

3.2.4 Technological factors

Information technology processes can drive sully chain efficiency and save on costs: for example, Internet companies can reduce real estate and labor cost as well as foster improved communication. When the third time the science and technology revolution coming, the computer and the Internet and the prevalence of greatly promoted the development of science and technology, for the development of the Tencent Company to provide the necessary foundation. Today， people have a lot of scientific programming appearing in people's vision, let Tencent technology products more perfect and human nature. All that the progress of science and technology for the development of Tencent has brought great to help and inspiration. In Januray 2009, 3G came to China, the telecommunications operators iin China have making substantial investments to develop their 3G mobile networks. According to MIIT, 3D mobile service subscribers increased from approximately 12 million to approximately 81 million between December 2009 and

2011. Right now 4G network is expected to further facilitate increased penetration of mobile Internet usage. It will be another chance and challenge for the related companies like Tencent.

Modern science and technology is an information revolution affect deeply. Modern science and technology revolution's core is information revolution. We can also say it is computer network and communication technology's revolution. In one hand, modern science and technology can combine with manufacture. Tencent can make full use with modern science and technology .In another hand, modern science and technology make Tencent's resource allocation has a great change. Information and knowledge improve Tencent's development. People through those information technology can enjoy an interesting Internet life. Now, more and more people know about Tencent because of information technology. Tencent is so popular to modern people.

3.3 SWOT analysis

3.3.1 Strength

Tencent has diversified the product and service to offer various communications and media service to different market segment. The products have a rather close relationship with the netizens’ life. These products and the services include Tencent QQ, QQ Enterprise, Tencent Massenger, Real Time eXchange, Tencent Traveler, QQ Doctor, QQMail, Foxmail, QQPlayer, QQ Pinyin, QQDownload, QQ Software Manager. Tencent diversified business portfolio, to fulfill in the complex online lifestyle needs, has a great influence on netizens’ daily life. Tencent is strength on the platform. QQ instant messenger is one of the most popular IM platforms which attracted 789.2 million active Tencent QQ instant messenger user accounts The company keeps adding new products and services to its IM platforms, which increase user stickiness and monetization.

Tencent has mature technology and rich experience. In 2007 Tencent established China’s first Internet institute- Tencent Research Institute whose chief task is the research and development of core technology on Tencent. As the 11th ranked at the Forbes the most innovative companies in the world, Tencent has its own excellent facility with strong research and development ability.

3.3.2 Weakness

Among Tencent diversified product and services; some of them have similar function features. Therefore, different departments of Tencent have competition for users. Beside, since Tencent have so many users, the diverse products also need a larger data processing system.

Tencent is lacking the ability of self-innovation. Even Tencent has its own excellent research institute with strong research and development ability. Some netizens still realized that many products and services of Tencent are imitation from other companies’ most popular products and services. Tencent have very strong learning capability but without innovation ability, Tencent may have less advantage in the competition.

3.3.3 Opportunities

The Internet Market is keep growing. Because growing Internet users and the expended their needs, the Internet usage are growing in various fields.

Mobile phone Internet has a rapid development. In 2012, China has over 420 million mobile Internet users which increased by 74.5%. As a result, all the Internet operators must compete for the mobile Internet market. It will bring more opportunities for Tencent to expand its mobile market. Tencent has its own mobile phone software, like mobile QQ, wechat, QQ Input. In 2013, Tencent launched another mobile phone game Timi very successful.

With the process of globalization, the Internet has developed into an era of globalization

18 regional entomic integration. The ASENAN Economic Community (AEC) will be formed of in 2015. Tencent has space to expand its international market. At the end of year 2010, Tencent published QQ International, and in 2011, the company launched a mobile chat software, which aims at get the international market share

3.3.4 Threats

Because Tencent offers comprehensive range of products and service which are widely ranged among Instant Managing, Internet value-added services, mobile and telecommunications value-added services, online advertising and e-Commerce Transition, thus each single type has related competition. For example, the battle between Tencent and Qihoo 360. This indicated that Tencent are facing urgent competition.

China’s online gaming market is becoming more competitive with more large local players and the entry of foreign gaming companies.

3.4 Porter’s five forces

3.4.1 Threat of intense segment rivalry

The Internet industry is rapidly evolving and competition is expected to further intensify. Tencent face significant competition in almost every aspect of the business, particularly from companies that provide communication, online games, social network, social media, e-commerce, search and others. Many of these companies are well funded by private equity or venture capital funds, which are resulted in an increasingly competitive industry landscape. The competitors for providing IVAS are mainly local Internet companies who offer various online games, SNS, online video and other online entertainment and communication services. In the MVAS sector, Tencent keep competition from a large number of competitors along the entire value chain of the telecommunications industry including mobile chip manufacturers, telecommunications operators and mobile service providers who are leveraging their traditional lines of business to enter and compete in this sector. The company also need to compete for online advertising with other websites that

19 sell online advertising services through display and search adverting. In addition, it also indirectly compete for advertising budgets with traditional advertising media such as terrestrial or satellite broadcasting media like television and radio stations, printed media such as newspapers and magazines, and major out-of-home media.

3.4.2 Threat of new entrants

In recent years, more foreign investors have begun to explore the opportunities arising from the emerging China’s Internet industry. Tencent’s QQ IM, command an 88% market share in 2010, versus the second player MSN, with a 7% market share, and Aliwangwang 1%. It is very difficult to the new entrants to enter the market. But China’s telecom companies could potentially introduce their mobile messaging applications to compete with Tencent’s products and/or services

3.4.3 Threat of substitute products

According to CNNIC’s data in 2008, 75.4% of Internet users use IM, while only 56.8% use e-mail in China. It means China is the opposite with situation in US, Chinese Internet users are more turned to IM than e-mail. At the same time, Tencent’s main product QQ and Weixin or Wechat enjoy high user stickiness due to the large user base and the community it creates within these applications.

3.4.4 Threat of buyers growing bargaining power

Thecent’s paying users are all separate individual users who do not possess much bargaining power over the company.

3.4.5 Threat of suppliers’ growing bargaining power

Tencent’s suppliers include a number of telecommunications operators, online game developers, content providers, application developers, device manufacturers and

20 advertising agencies. Substantially all of the fees for MVAS, and a small portion of the fees for IVAS, are collected through the network of China Mobile, China Unicom and China Telecom, which have a high bargaining power to Chinese Internet companies. Device manufactures assist in the distribution of Tencent’s services by making the client software and applications readily available in the devices they manufacture. At the same time, Tencent’s applications create market demand for more sophisticated devices capable of supporting and interfacing with its application. Therefore the power of device manufacturers is not high. The content providers and application developers are helped to expand our value-added services but are also depended on our platform to make profit. Their bargaining power is low.

3.5 Products and Services

Table 3. 1 Tencent major products & services

Product name Category QQ Mail Email QQ Browser Browser QQ Music Music streaming/ downloading QQ Video Player Video Player QQ Thunder (Xuan Feng) Downloading software SNS QQ IM Instant massager Q+ Desktop software Qzone SNS Tencent Pengyou Real name SNS Wechat Mobile social network app Tencent micro-blog Micro-blog QQ membership VAS for Tencent QQ members Yellow diamond noble Qzone VAS Red diamond noble QQ show VAS Green diamond noble Qzone music VAS Game VAS QQ game platform QQ Speed VAS QQ Speed purple diamond QQ R2Beat VAS QQ Tang purple diamond QQ Tang VAS Cross Fire VIP Cross Fire VAS DNF black diamond DNF VAS Blue diamond noble Board & Chess games VAS Pick diamond noble QQ pet VAS QQ Pet Online pet Online Media QQ. com Portal Portal

Tencent Mind Advertising system Tencent Online Video Online Video Mobile Internet Mobile QQ QQ IM mobile app QQ Mobile Manager Mobile app manager QQ Contacts Cell phone contact manager QQ mobile browser Mobile browser QQ mobile game platform Mobile game platform QQ App Center App Center Soso Mobile Search Mobile search engine Soso Map Mobile Map Enterprise software development RTX Enterprise IM plat form TM IM Ecommerce/payment Paipai C2C website QQbuy B2B2C website QQshop B2C website Tenpay Online Payment QQ group buying Group buying Soso group buying Group buying Paipai group buying Group buying QQshop group buying Group buying QQ Travel OTA QQ tickets OTA QQ Ding(Meishi) Local information portal

Source: Tencent Holding Limited, company data

3.6 Distribution and Payment Methods

The distribution and payment of Tencent’value-added services principally through these channels: prepaid Q-Coin card, e-sale system, telecommunications operators and online banking. A major of our revenue form value-add services are prepaid through Q-Coin cards, e-sales system and online banking, which help the company to minimize the credit risk.

 Q-Coins Cards Tencent has arrangements with retailers and sub-distributors to sell prepaid Q-Coin cards at approximately 500,000 distribution points in China, including Internet cafes, newsstands, convenience stores, software stores and book stores. The company sell prepaid Q-Coin cards in bulk at wholesale rates and do not offer any refund or return mechanisms after the Q-Coin cards are sold to retailer and sub-distributors. Each prepaid Q-Coin card contains a unique access code and password that enables users to redeem the stored value to increase the balance of their individual online accounts or purchase Tencent’s services.  E-sales System Tencent sell Q-Coins and usage credit through an e-sale system. Under the e-sales system, Internet cafes and other retails purchase Q-Coins and usage credit in bulk at a wholesale rate form Tencent via bank transfers, and then re-sell them to users at the local retailers. The e-sale system is an efficient way to sell services to the customers because they can access Tencent’s services immediately at the retailer’s premises, and no physical distribution of prepaid cards is required.

 Telecommunications Operators Substantially all of the fees for the MVAS and a small portion of the fees for the IVAS are collected through China Mobile, China Unicom and China Telecom. The telecommunications operators collect the fees for the services from their customers and pass such fees to Tencent after withholding their portion of their service fee and imbalance fees. On a periodic basis, Tencent confirm with each telecommunications operator the subscription information and the data transmission volume between Tencent’s network gateway and the operator’s mobile gateway. Each affiliate or branch operator of China telecommunications operator will also provide Tencent with a summary on a monthly basis as to the

net fees payable to Tencent by the affiliate or brand operator. Tencent also receive information on customer payment status and coordinate with the telecommunications operators for final billing and collection of revenue.

 Online Banking Users can directly purchase Q-Coin and a majority of the Tencent’s services and products through online payment systems that facilitate online payments from most major commercial banks within China.