July 3. 2017 Bloomberg Businessweek

• Shenzhen, China • By Brad Stone and Lulu Chen • Photograph by # Hong Kong Pierf rancesco Celada Bloomberg Businessweek Global Tech July 3, 2017

It's up to the company's The leadership committee of Tencent, Ma founded Tencent 19 years ago in president, Martin Lau (left, the Chinese internet colossus, usually a cramped Shenzhen office with three holds its annual off-site at a comfortable college classmates and a friend. For their in his Hong Kong office), Japanese resort or Silicon Valley hotel. first product, they cloned an Israeli-made to help Tencent do what no Last fall it went for something more epic: instant messaging service and adapted it a two-day hike through the harsh wastes for the Chinese market. Unlike Jack Ma other Chinese business has of the Gobi Desert. (no relation), the billionaire co-founder done: become a worldwide The committee traveled in a manner of Alibaba, Pony Ma had little over• consumer-tech power befitting the 14 most senior executives seas exposure, knew only rudimentary of China's most valuable company. English, and rarely appeared in public. Helpers assembled their tents, and water Colleagues and friends say he's a typical was trucked in at considerable expense Guangdong province businessman, shy for showers. Yet by the end of the first and wary of the spotlight. In a widely dis• day's 26-kilometer (16-mile) hike, some tributed photo, taken at a 2015 meeting of members were petitioning to pack it in Chinese President Xi Jinping and 28 of the and go home early. Martin Lau, Tencent world's most famous technology execu• Holdings Ltd.'s president, and "Pony" Ma tives, including Jeff Bezos, Tim Cook, and Huateng, its co-founder and chief exec• Jack Ma, everyone is smiling and looking utive officer, insisted on forging ahead. at the camera. Except for Pony Ma, who's On the second day they hiked another staring at his feet. 26 kilometers and, weary and blistered, While Ma is Tencent's chief visionary, made it to Dunhuang, once a frontier Lau, 44, is the lead strategist and steward town on the Silk Road. While the exec• of day-to-day operations, as well as utives had been wandering the desert, the one who fields questions during Tencent's stock had risen to make it the Tencent's quarterly conference calls most richly valued company not only in with investors and analysts. Slender and China, but in all of Asia-a record it now bespectacled, he's a devout Christian, trades back and forth with its archrival, an avid gamer, and widely liked and Alibaba Group Holding Ltd. The Tencent respected-at least among those who've team launched into an enthusiastic cele• heard of him. bration during a hotel banquet. "I actually think most people in The executives would like it to be Silicon Valley have no idea who Martin known, though, that their exuberance Lau is at all," says Sean Liu, a China- wasn't about the stock. It was about born investment manager at the San the journey. "The trip is representative Francisco office of venture firm Vy of the culture of the company," says Capital. "It's shocking, because it would Lau, months later, from the comfort be the equivalent of people not knowing of Tencent's high-rise offices in Hong who Sheryl Sandberg is if they cared Kong. "We are much more focused on about Facebook. Except that Martin the direction of where we are going and Lau is even more powerful and influ• the process than the share price." ential within Tencent and in China's Where the company wants to go, technology community." eventually, is outside its home market. Indeed, though Lau attended college Tencent, which is based just north of in the U.S., speaks English fluently, and Hong Kong in Shenzhen, permeates is what passes for the public face of daily life in China. More than two-thirds Tencent, he has until now largely evaded of Chinese people use its two messag• Western media attention. But there's no ing apps, WeChat and QQ, for every• hiding any longer, now that he has one thing from texting to shopping, flirting, of the most formidable challenges in all • dating, watching videos, playing games, of business: taking a quintessentially and ordering food and taxis. According to Chinese company to the world. venture capitalist Mary Meeker, Chinese users collectively spend 1.7 billion hours Lau first encountered Tencent in 2003, a day on Tencent apps, more than they when the company was five years old and spend on all other apps combined. he was still a banker at Goldman Sachs Group Inc. Back then, Tencent had about 1,000 employees and was known primarily for its QQ messaging service- the first to allow Chinese youth with MAYBE common interests and backgrounds • Bloomberg Businessweek Global Tech July 3, 2017

•4 to find each other online-and for its backgrounds, but they had little interna• Stanford and an MBA from the Kellogg winking, scarf-wearing penguin mascot. tional experience and knew they needed School of Management at Northwestern Tencent made 735 million yuan help building a sustainable business. As University. After school, he went to work ($108 million) in revenue that year their banker, Lau thought it was a conflict at McKinsey & Co., then Goldman. selling ads and upgraded services (such of interest. But he also admits that he Tencent's second offer resonated as fancier user names) on QQ, and it wasn't entirely sold on the job's prospects. with him, he says, because it would was beginning to add games. But the "To a certain extent, I was trying to see if allow him to tap his engineering skills. dot-com bust had left its original inves• this was real or not," he says. He accepted-taking, he says, a signifi• tors skeptical of its prospects, and they'd The company went public in cant pay cut. Ma initially gave Lau the sold the majority of their interest to June 2004, raising HK$1.4 billion title of chief strategy officer and placed the South African media company ($180 million). Its early games showed him in charge of investor relations and Naspers Ltd. Now, Tencent was planning promise, boosting revenue 55 percent mergers and acquisitions, two fields to go public-one of the first listings of that year. By the end of 2004, Pony largely unknown at the time in China. a Chinese internet company since the Ma and his co-founders, by then Lau brought standard U.S. corpo• downturn. Lau specialized in telecom• multimillionaires, once again offered rate practices, such as setting revenue munications and media for Goldman's Lau a job. goals, to Tencent and developed a five- Hong Kong office. In the course of In a sense, Lau had been working year plan to enter new businesses such angling to handle the initial public offer• toward such a role all his life. His as social networking and digital media. ing, he and his colleagues scrambled to parents, both electrical engineers, were "This was a discipline that was urgently appear sawy, even skirting their firm's foreign-born Chinese (his father was needed for a young company growing computer-network firewall by asking a born in India, his mother in Indonesia) extremely fast in 2004," says Hans Tung, colleague in Beijing to sign them up for who'd met and married in Beijing. Lau managing partner at GGV Capital and a QQ accounts. Then they printed their and his older sister were born during the co-investor with Tencent in Didi, the user names on new business cards final years of the Cultural Revolution. Chinese ridesharing company. before meeting up with Tencent. The family left for Hong Kong when he In 2006, Ma promoted Lau to presi• Goldman got the IPO. The Tencent was 6, during the reformist regime of dent and put him in charge of day-to-day management team was so impressed by Deng Xiaoping. "History happened, operations. Although Tencent's revenue Lau, in fact, that on the roadshow before and eventually they needed to find a doubled that year, the five founders real• going public, they offered him a job. Ma better future for their kids," Lau says ized the company would soon need and his co-founders had computer science in lightly accented English. "It was a more professional management. In painful period of time." an internal exercise at the time, they Lau, whose full Chinese name is Lau all named hypothetical successors. Ma -•Tencent vs. the World Chi Ping, spent the rest of his childhood chose Lau. in Hong Kong, playing video games on Top ¡0S apps by country, Developer his family's Apple lie and dreaming Tencent grew quickly in the following May 2017 LIFacebook about building rockets. His parents, he five years, scouring Asia for games and Google Tencent says, "gave us this notion that if you're adapting them for QQ. It had four of an engineer, you can always survive in the five most popular titles played in a lot of turbulence, because your skill Chinese internet cafes in 2011 and did is always needed." He tested at the top a brisk business selling virtual body Russia of his prep school class, then, after armor, healing potions, and other digital France concluding that only Americans could baubles to gamers. The company also Italy join the space race, decided instead had a popular social network, Qzone. Brazil to study electrical engineering at the "The combination of social and gaming is U.K. University of Michigan in Ann Arbor. really what they pioneered," says Russian Turkey Lau was picked up at Detroit venture capitalist Yuri Milner. Mexico Metropolitan Airport by Arthur Yeung, Tencent also developed a rep• India a professor of management who would utation as the king of knockoffs, U.S. become his mentor and eventually a feared and loathed by Chinese entre• Indonesia Tencent adviser. Yeung was also from preneurs who believed that if they Israel Hong Kong, and he often helped his created something cool, Tencent Taiwan countrymen get situated. He intro• would copy it. Western publications Netherlands duced Lau to a church near campus. Lau such as Business Insider belittled its Germany started attending regularly; there he met creativity and business model. The Spain his future wife, Millie, a business school magazine China Computer world put China student also from Hong Kong. a bloodied Tencent penguin on its Japan In the spirit of all overachievers, Lau cover above a profanity that translated South Korea WeChat loaded up on academic credentials, roughly as "Tencent has sexual rela• Honor of Clash graduating from Michigan and then tions with dogs." The company also Kings Royale getting an engineering master's from engaged in an embarrassing legal • Bloomberg Businessweek Global Tech July 3,2017

•4 spat with the Chinese internet secu• initiative to JD.com Inc. and invested rity company Qihoo 360 Technology $214 million in JD for a 15 percent stake. Co., with each side accusing the other Before these deals, Tencent "was of anticompetitive behavior. (Tencent involved in everything," says Zhang Lei, eventually won the lawsuit.) founder and CEO of Hillhouse Capital In 2011, Lau and Ma decided the Group and an earlyJD.com and Tencent time was right for some institutional investor. After the deals, "it only focused self-reflection. Tencent invited 72 indus• on what it did best and entrusted other try experts to a series of 10 closed-door sectors to partners." Zhang gives much meetings, which employees refer to as of the credit for these moves to Lau. the "conference of the gods." The invitees "Martin is first and foremost a great busi• were asked to address executives with ness analyst," he says. "He knows what their criticisms and recriminations-and wars to fight." the visitors didn't hold back. "Tencent staff were quite clueless to how strong WeChat now has 937.8 million active and blunt the feedback would be," says users, more than a third of whom spend Hu Yanping, founder of the Beijing-based in excess of four hours a day on the internet consultant DCCI & FutureLab, service. To put that in context, consider who took part in the sessions. "It was that the average person around the world the first time high-level management at spends a little more than an hour a day Tencent faced such a fusillade." on Facebook, Instagram, Snapchat, and The feedback helped the execu• Twitter combined. Tencent's services tives understand that their problems are so pervasive in China that startups • "Pony" Ma ran much deeper than lousy public there find it difficult to refuse forging relations. "We started to realize, OK, alliances with or accepting investment Lau has been going to great lengths there's something wrong," Lau says. In dollars from the company. "It's a little bit in search of profile-raising interna• particular, the company needed some• like the Godfather Don Corleone saying, tional M&A deals. Tencent is nearing thing to help shake its reputation as a 'I'm going to make you an offer you can't market saturation in China and has to ferocious copycat. refuse,'" says Andy Mok, founder and look elsewhere if it wants to continue Fortunately for Tencent, the answer president of Beijing-based consultant Red to grow at the same torrid rate. He says was already being developed. One Pagoda Resources LLC. "If you don't take that in 2013 he wanted to make a signifi• very late night at the end of 2010, a their money, and they invest in a com• cant "strategic" investment in Snapchat programmer named Allen Zhang, the petitor, it can be deadly." but had to settle for investing a smaller founder of a Guangzhou-based email With WeChat's rise, Tencent has tried amount. He declines to reveal the exact startup acquired by Tencent, had sent a to act like, or at least look like, a global numbers he had in mind. "There was a message to Ma asking if he could develop technology leader. Later this year it will time when Evan wasn't sure whether it a social network tailored for smart- join Apple, Amazon.com, and Facebook was a good thing or not," he says, refer• phones. Ma, who usually doesn't go to in opening pricey new headquarters-a ring to Evan Spiegel, Snapchat's CEO. bed until 4 a.m., consented. Zhang and pair of conjoined glass skyscrapers "At the last minute, he decided he didn't 10 of his colleagues went to work in a designed by Seattle-based architecture want to have a strategic investor." blackboard-covered office and came up firm NBBJ Design LLP. The towers, linked In early 2014, Tencent was inter• with Weixin, or WeChat. by three angular skybridges, resemble ested in buying the messaging service The service was released in giant, slow-dancing robots. Ma and Lau WhatsApp. An acquisition would have January 2011 and rose in tandem with will have adjacent offices. shocked the world and given Tencent booming smartphone sales in China, These days, Ma focuses on products immediate global reach. But as they reaching 100 million users in 2012 and and technology development, chairing neared the final stages of an agree• triple that number a year later. Learning the company's marathon fortnightly ment, Ma, who took an interest in the from its obsessive control of QQ, Tencent management meetings, which can last deal, had to undergo back surgery, allowed corporations to set up "official 10 hours or longer. He also handles which delayed a visit to Silicon Valley accounts" to broadcast messages and government relations, because Chinese to negotiate with founder Jan Koum. interact with users, which in turn gave Communist Party officials expect to talk Mark Zuckerberg then swooped in and the network momentum. to the head honcho. Lau's Hong Kong acquired WhatsApp for $19 billion, more At the same time, the company was origins handicap him in this regard; than twice what Tencent had consid• also learning how to cut its losses and when former Chinese President Hu ered paying. play to its strengths. In 2013, Tencent Jintao visited Tencent in Shenzhen in Last year, Lau finally landed an gave up on its floundering search busi• 2010, because of government security attention-grabber. SoftBank Group ness, turned it over to a competitor, protocols only executives who were Corp., the Japanese tech conglomer• Sogou Inc., and invested $448 million considered part of the Communist ate, was putting Finnish mobile game in Sogou instead. The following year it Party apparatus could ride the elevator company Supercell Oy on the market. sold its equally unsuccessful e-commerce with him. "When SoftBank told us they were • Bloomberg Businessweek Global Tech July 3,2017

4 looking to sell, we took a deep breath have a huge market advantage pretty and an interest in exploring the future and said we should look at it very seri• much everywhere outside China. Going of transportation. ously," Lau says. Tencent entered nego• overseas, Lau says, "is essentially the As ever, Tencent is still making tiations to buy the company, maker of challenge of every Chinese company. We enemies-potentially some extremely the international megahit strategy game tried to make WeChat international. The large, rich ones. Earlier this year, the Clash Royale, and Lau flew to hours to reality was that there were other prod• company introduced what it calls Helsinki, despite a high fever, to meet ucts in the market already." "mini-programs" that allow smartphone the company's senior executives. In Perhaps Tencent's greatest hope users to access other companies' services preparation, he did what any top exec• for overseas expansion rests with the on WeChat without downloading their utive in his situation would: He played increasing number of its Chinese users apps. Many internet observers viewed Clash Royale. A lot. So much, in fact, moving or traveling abroad and carry• this as Tencent positioning WeChat as that he notched what at the time was the ing the gospel of WeChat with them. But an operating system for phones and an 97th-highest score in the world. "It's a there's a challenge here as well. Civil assault on Google Inc.'s Android and way for me to do due diligence," he says, rights researchers at the University of Apple's app store. A few months later, with no discernible sarcasm. "I still play Toronto recently reported that Tencent Apple Inc. forced Tencent to disable it. But at that time, it was very inten• scans user submissions for certain key• a feature that allowed WeChat users sive playing." When Ilkka Paananen, words and removes content and images on their iPhones to leave gratuities for Supercell's CEO, heard about the score, related to controversial political and cul• bloggers, because it bypassed Apple's he apparently expressed skepticism tural topics-as all Chinese internet com• own app payment system. Was this a and challenged Lau to play against an panies must. Tencent also censors the brewing war between behemoths? Lau accomplished Supercell employee. Lau accounts of China-registered WeChat dismisses the idea. "People from the won. Soon after, Tencent acquired a users who travel internationally, even outside like to have this giant-playing- controlling interest in Supercell. if they switch cell phone numbers. The against-giant story," he says.

"IF YOU DON'T TAKE THEIR MONEY, AND THEY INVEST IN A COMPETITOR, IT CAN BE DEADLY"

Tencent has also tried to expand company won't comment on the report, But even by the standards of China, globally the natural way, by introducing but if the findings are true, the practice land of authoritarian one-party rule, its products in different countries. But could put it in a difficult spot. "To gain Tencent has to be careful about coming some of the very things that make it a wider success, the app must maintain its off as a bully. The company ignited juggernaut at home have handicapped it base in China, all while staying within the another controversy in May when elsewhere. Design, for example: Chinese Chinese government's boundaries and it added to WeChat its own search users have developed an affinity for presenting a compelling experience to engine and a Facebook-style news feed. complex bundles of features jammed attract international users," says Masashi Outsiders worried it gave the company into dense, supersized apps. In the U.S., Crete-Nishihata, research manager at too much control over news and other where there are different streamlined Citizen Lab at the University of Toronto. posts presented to users. Anti-Tencent apps for booking movie tickets, ordering Tencent, Lau says, "ascribes to the memes quickly started popping up meals, reading news, and so forth, it's a notion that if you operate in a country, in Chinese social media. One image much tougher sell. you have to abide by their law." that went viral is a screen grab of the Another local hit that Tencent is new WeChat interface, annotated in a just starting to try to translate abroad All this means his job is only going to bright red font with all the companies is WeChat Pay, used in China by about get more difficult. Lau and Ma are also that Tencent was threatening with each 6oo million people-and even embraced placing bets on different technologies, feature in the app. by its onetime legal adversary, Qihoo. taking Tencent far from its original Lau waves off the criticism that The service takes advantage of Chinese businesses. This spring the company Tencent is some sort of predator. Adding banks' low processing fees, allowing announced plans to open artificial intel• search and news, he says, allows the users to send very small monetary gifts ligence labs in Shenzhen and Seattle; company to use data and AI to serve up dubbed "Red Packets" to each other. Lau also says it's developing a coun- more personalized material. In the West, bank fees are consider• tertop smart speaker, which could be Then he smiles and reaches for his ably higher, which makes such small released in a few months. And Tencent own phone. It turns out Lau also saw the transactions impractical. recently took a 5 percent stake in Tesla screen grab meme. With an amused look Then there's the matter of Inc.-the result, Lau says, of several on his face, he scrolls through his WeChat Facebook Inc. and WhatsApp, which meetings with Elon Musk in California feed to show it off. ©