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Thursday, December 31, 1970

celebrating tencent the most extraordinary tech company young worlds have linkedin


Tencent: The Ultimate Outsider. Part I In A Two-Part Series On The Biggest Company We Know The Least About


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 About: Tencent Holdings Limited (TCEHY)TCTZF
Not Boring
Growth, Tech, Writes About Business Strategy

Summary
Tencent is the Chinese conglomerate behind WeChat, and one of the world’s most successful investment funds. There’s so much to say about this company that I’m breaking it into two parts.
Part I: Tencent’s history, its business, and its portfolio.
Part II: Covering Tencent’s Metaverse Dreams.
You should leave this two-part essay with a better understanding of what Tencent does, what it owns, and why it’s one of the most significant companies in the world.
Seeking Alpha is proud to welcome Not Boring as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more »
Tencent (OTCPK:TCEHY) is the Chinese conglomerate behind the recently-banned WeChat, and one of the world’s most successful investment funds. There’s so much to say about this company that I’m breaking it up into two parts:
  • Part I: Tencent’s history, its business, and its portfolio, including a bonus goody for the investing nerds out there: a link to a spreadsheet I made with the current value of 102 of Tencent’s investments.
  • Part II: Covering Tencent’s Metaverse Dreams, is live now!
This post isn’t meant to be political or to pass value judgments. It’s just an assessment of a fascinating company that most of us know far too little about.
Let’s get to it.

Tencent: The Ultimate Outsider

Tencent is the most important company that many Americans know the least about.
When President Trump signed an August 6th Executive Order banning WeChat from the United States, a lot of people said, “What’s WeChat?” Even those who knew about WeChat know very little about the octopoid company behind it.
Let’s fix that. You should leave this two-part essay with a better understanding of what Tencent does, what it owns, and why it’s one of the most significant companies in the world.
The Chinese pager-based internet service that Pony Ma launched in 1998 is now the world’s seventh most valuable company, right ahead of Berkshire Hathaway and right behind its bitter rival, Alibaba. As of Friday, Tencent is worth $628 billion.
In China, Tencent is like Facebook (FB), Nintendo (OTCPK:NTDOY), Shopify (SHOP), Netflix (NFLX), Spotify (SPOT), Slack (WORK), and PayPal (PYPL) rolled into one. Its flagship product, WeChat, has 1.2 billion users, and those users spend more time in the app every day than Americans spend on all social media apps combined. People use WeChat to message friends, shop, read the news, play games, pay for things in physical stores… pretty anything you can do on your phone, you can do on WeChat.
Tencent turned the profits from its social networking, ecommerce, and gaming cash cows into a global investment portfolio that includes many of the world’s most popular video games, the fastest-growing internet businesses in China, meaningful stakes in Tesla (TSLA), Spotify, and Snap (NYSE:SNAP), and a portfolio of international startup unicorns second only to Sequoia’s. It even financed A Beautiful Day in the Neighborhood.
Americans don’t know much about Tencent because, in addition to being Chinese, it’s really complex. It’s both one of the most profitable operating businesses in the world and one of the most ambitious investment funds. Tencent has been dubbed “The SoftBank of China” and “The Berkshire Hathaway of Tech.” Neither description does it justice. While it gets less hype, its performance puts SoftBank’s (OTCPK:SFTBY) to shame. It’s going to be one of the most important companies in the world for decades to come.
Today, in Part I, I’m going to explain Tencent in four sections:
  1. What is Tencent? An entrepreneurial story just like the ones you hear in the US, with all of the highs, lows, and near-deaths. An improbable journey from pager-based internet service to the giant holding company it is today.
  2. The Outsiders. William N. Thorndike’s 2012 book, The Outsiders, about eight of the most successful CEOs in US history, provides a framework for thinking about Tencent’s business. CEO Pony Ma shares all of the important characteristics with the eight that Thorndike wrote about.
  3. Tencent’s Operating Businesses. Tencent’s core business makes money in six main ways, and each of its business units rivals in, both scope and revenue, massive, standalone public companies.
  4. Tencent’s Investment Portfolio. There’s no great public source for all of Tencent’s 700-800 investments, so I created a database of 103 of its biggest and share insights around where it invests, in which types of companies, and the unfair advantages it has as an investor.
The founding stories of Apple, Google, Microsoft, Facebook, and Amazon are canon for the type of people who read Not Boring. They’re part of modern American mythology. It’s time for us to get to know Tencent.

What is Tencent?

Note: I’ve used Julia Wu’s summary of Wu Xiaobo’s book, Matthew Brennan’s presentations, and the excellent Acquired podcast on Tencent to piece together Tencent’s history.
We’ve been conditioned to think of massive Chinese technology companies as shady, government-controlled businesses out to steal your data and try to take over the world. It might surprise you, then, that Tencent started out like a lot of US startups: as an entrepreneurial itch that one 26-year-old nerd had to scratch with the help of some friends.
Ma Huateng was born at the right time and moved to the right place. Ma was born in the Hainan province in 1971 and moved to Shenzhen when he was 13. In the late 1970s, Chinese President Deng Xiaoping designated Shenzhen as a special economic zone as part of his “reform and opening policy.” Ma, whose family name meant “horse” and whose nickname, appropriately, was Pony, grew up in the one capitalist place in communist China.
Ma was prodigiously smart. He scored high enough in college entrance exams to go anywhere in the country, but stayed close to home, attending Shenzhen University. The school didn’t have the astronomy major that Ma was most interested in, so he settled for his second choice: computer science. He was a natural.
Ma regularly won student hacking contests, and built graphical user interfaces before they were a thing in China. While interning at one of China’s leading tech companies, Ma built a stock market analysis tool with a GUI as a side project, and sold it to his employer for 50,000 Chinese Yuan (CNY), or about 3 years’ salary.
If this were a novel, the fact that Pony Ma’s first product combined tech and finance and his first taste of wealth came from an M&A transaction would be called foreshadowing.
After college, Ma spent five years at a pager company, where he was exposed to the latest technology (pagers!) and became a manager. But Ma was living a second life in the early online chatrooms. He joined the growing FidoNet community, participating in and then hosting early internet bulletin board systems, where he met future billionaires like Xiaomi’s Lei Jun and NetEase’s Ding Lei.
Inspired by Lei’s early success with NetEase (which today is worth $65 billion), in 1998, Ma left his job and convinced his friend, Zhang Zhidong, to start a company with him. They planned to combine the internet and pagers, which were popular in China at the time, to build a mobile internet on which people could send email, news, and more.
Sticking with Ma’s equestrian nomenclature, they named the company Tengxun, which means “galloping message.” Tencent is the anglicized version of Tengxun.
As Tencent was building its pager-based internet, Ma noticed the Israeli internet communication tool and Instant Messenger competitor ICQ, which sold to AOL in 1998, and decided to build a version for the Chinese market. Creatively, he called it OICQ, and built distribution and features necessary to serve customers who didn’t own personal computers, but increasingly accessed them in internet cafes.
OICQ took off, and Tencent abandoned the pager internet. Users quadrupled every three months. After nine months, OICQ hit one million users. But this was pre-AWS (or Tencent Cloud) and servers were expensive. Plus, AOL sued Tencnent to change OICQ’s name. They were running out of money, so Ma launched a dual-track process to either sell the company or raise money.
Tencent was aiming for 3 million yuan in a sale ($431k at today’s exchange rate), but the highest offer it received was for 600k yuan ($86,327). The lack of demand turned out to be a pretty lucky break. Today, it’s worth 1,454,929x its 3 million yuan asking price.
With no acquirer, Ma sold 40% of Tencent to early US-based Chinese venture investor IDG Capital and Yingke, a fund led by Chinese billionaire Li Kashing’s son, for $2.2 million. But it wasn’t out of the woods.
Soon after, AOL won its lawsuit, forcing Tencent to change the name of its flagship product. It chose QQ. Server costs continued to increase as the company crossed 100 million users with no revenue model. Tencent was back on the market. It approached Chinese search company Sohu (SOHU) and Yahoo! China. Neither was interested. Then, in 2001, the South African firm Naspers (literally) walked in the door and offered to invest at a $60 million valuation. So that Ma didn’t lose majority ownership, IDG sold 12.8% of its 20% and Yingke sold its entire stake for an 11x gain (not bad!), giving Naspers 32.8% of the company for $19.68 million. Today, that investment is worth $205 billion, good for a 10,436x return!
With Naspers’ money in the bank, the Tencent team turned its attention to monetization. In 2002, a product manager discovered the Korean company sayclub.com, which monetized by allowing users to create personalized avatars. Tencent built its own version, QQ Show, and within 6 months, the product had 5 million users paying 5 yuan (a little less than $1) per month.
As Julia Wu points out, the ability to personalize an avatar was such a hit because under communism, Chinese people had been “dull and collective” in their personal representation. Tencent also launched a “red diamond membership” for 10 yuan per month, for VIP status, monthly virtual gifts, and discounts in the QQ marketplace.
This is a really important piece to understand. In the U.S., as we talked about in If I Ruled the Tweets, social media monetizes through advertising. In Asia, it mainly monetizes through digital gifts, subscriptions, and purchases. To this day, “Value Added Services” generate more than 3x the revenue for Tencent than “Online Advertising.”
Avatars were big business. In 2003, Tencent hit a $100 million run rate and moved beyond messaging by building a portal, like a Chinese AOL. The team also realized that a lot of its users were chatting on QQ while playing games in internet cafes, so it added games to the QQ platform, both by acquiring small studios and building games in-house. Within a year, games added another $50 million in annual revenue.
With monetization booming, Tencent IPO’d in 2004 at a valuation of 6.22 billion HKD, or $790 million USD. Cue Motley Fool headline: If you had invested $10,000 in Tencent at its IPO in 2004, you would have $7.9 million today.
Oh, you didn’t invest in Tencent at its IPO? Damn. To be fair, it’s a very different company today than it was then, thanks to two 2005 hires: Martin Lau and Allen Zhang.
After completing its IPO, Tencent hired the Goldman Sachs investment banker who took it public, Martin Lau. Lau had the pedigree - Chinese-born, undergrad at Michigan, engineering masters at Stanford, and MBA at Kellogg - and a skillset that was complementary to Ma’s. Lau became the English-speaking face of the business, taking on a role that the shy Ma hated, and the master capital allocator. In the beginning of his tenure, Lau focused on acquiring studios to grow its scorching games business as the Chief Strategy Officer. By the next year, Ma promoted him to President.
Tencent also turned its attention to competitive threats to the portal business, including Microsoft’s increasing presence in China via MSN. To combat the threat, it acquired competitor Foxmail in 2005 to build QQ Mail. The product was successful, but more importantly, Tencent acquired the developer behind Foxmail, Allen Zhang.
With Lau and Zhang on board, Tencent grew rapidly via desktop games and the QQ platform. Its revenue jumped 15x from $200 million in 2005 to $2.9 billion in 2010. But 2011 was the year when Zhang and Lau really made their mark.
In 2010, early in the rise of mobile, Zhang noticed the popularity of Canadian messaging company called Kik, and convinced Ma to let him build a Chinese version for Tencent. The next seven years changed the trajectory of the company.
2011: Working around the clock with a small team, Zhang launched Weixin in January. English speakers know it as WeChat(They’re actually two separate products - Weixin serves Mainland China and WeChat serves the rest of the world, but we’ll refer to the two interchangeably as WeChat.) After early competition with Xiaomi’s Mi Chat, WeChat pulled away by tapping into QQ’s existing user base, and then launching “Friends Nearby,” which was like an early version of Tinder. WeChat began adding 100k users per day.
2012: WeChat hit 100 million users. It took 433 days to hit that mark. By comparison, it took QQ ten years, Facebook 5.5 years, and Twitter 4 years. In April, WeChat launched the Moments newsfeed and Official Accounts, allowing publishers to distribute content and businesses to distribute products and services. By the end of the year, it had 300 million users.
2013: Tencent launched WeChat Pay to enable payment through the platform.
2015: WeChat crossed half a billion users.
2017: WeChat launched Mini Programs, allowing businesses to build full-functionality apps within the WeChat platform. Companies like Pinduoduo build on top of WeChat and tap into all of its customers’ existing social and professional networks. Mini Programs turn WeChat into a “super app,” and are the inspiration behind Snap Minis, which we covered in Oh Snap!. WeChat, for all intents and purposes, is the mobile operating system in China.
Back to Lau. While Zhang was building WeChat, Lau was busy acquiring games, laying the foundation for the next stage of growth. Two investments in 2011 and 2012 were particularly important. In 2011, Tencent acquired 92.8% of US game studio, Riot Games, creators of League of Legends for $400 million (they acquired the remaining 7.2% in 2015). The next year, in 2012, it acquired 40% of Cary, NC-based game company, Epic Games for $330 million.
Today, Epic and Riot are two of the gems in Tencent’s gaming portfolio. League of Legends is a cornerstone of a gaming division that brought in $5.5 billion in Q2 alone. As we will explore in “Tencent’s Future,” Epic may also be the engine (pun intended) that drives the next massive phase of Tencent’s growth and puts it at the center of a new, virtual world.
Over the past decade, Lau and his team have acquired or invested in over 700 companies, funded by the massive pools of cash Tencent’s gaming division and WeChat spit off.
WeChat has over 1.2 billions users today. And those users are incredibly engaged. WeChat users in China spend an average of four hours per day in the app, more time than US users spend on all social media apps combined.
Chinese users do everything on WeChat. They communicate with friends, co-workers, and clients through WeChat. Businesses communicate with customers through Official Accounts. They can also sell things through those accounts. Thousands of businesses, including ridesharing (DIDI) and food delivery (Meituan Dianping), launched on WeChat. Tencent monetizes WeChat mainly through transactions instead of ads.
So putting it all together, what is Tencent?
Tencent is a Chinese holding company that is the world leader in gaming and runs the largest messaging, social networking, and mobile payments platform in China. It uses the cash flow from those businesses to invest in the next generation of massive companies in China and around the globe. Tencent combines the diversification of an old school conglomerate with the growth and decentralization of an internet-native business into a company that may become the largest in the world.
From its roots as a product company, Tencent has become the best capital allocator of any non-investment company in the world. It’s running The Outsiders playbook to perfection.

The Outsiders

In 2012, William N. Thorndike unintentionally wrote the guide to understanding Tencent’s dominance: The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.
In it, Thorndike explores the things that eight CEOs -- including Warren Buffett, The Washington Post’s Katharine Graham, Teledyne’s Henry Singleton, and Capital Cities’ Tom Murphy -- did differently that made them more successful than their peers.
How does he measure success?
You really only need to know three things to evaluate a CEO’s greatness: the compound annual return to shareholders during his or her tenure and the return over the same period for peer companies and for the broader market (usually measured by the S&P 500).
By that measure, Pony Ma has been one of the world’s most successful CEOs. Since Tencent’s biggest competitor, Alibaba, went public in September 2014, Tencent has returned 305% versus:
  • 182% for Alibaba
  • -48% for Baidu
  • 68%, 141%, and 10% for the S&P 500, NASDAQ, and Hang Sen Index, respectively.
Over the past six years, Tencent has outperformed the index that tracks the largest companies in Hong Kong’s stock market by 30x.
Why has Tencent outperformed? For the same reasons that Thorndike highlighted in The Outsiders eight years ago. Pony Ma and Tencent share the characteristics common among the most successful CEOs, and take some to extremes.
Outsider CEOs were private, ran decentralized organizations, and masterfully allocated capital to the opportunities, internal or external, with the highest potential to drive their stock’s performance. Pony Ma is the ultimate Outsider! As a result, he’s now China’s richest man with a net worth of $56.2 billion.
And the business that he built is a master class in capital allocation, as we’ll see by breaking Tencent down into its two main businesses, which often interact with each other: Operating Businesses and Investments.

Tencent’s Core Businesses

Tencent’s core business makes money in six main ways:
  • Payments
  • Subscriptions (like video and music)
  • Social ads
  • Media ads
  • Games
  • Cloud
Here’s a breakdown of how revenue maps to business lines from a 2017 presentation by China tech analyst, Matthew Brennan:
All clear? Ok good, moving on.
JK, it’s super complex. Let’s break it down by looking at Tencent’s Q2 results, converted to USD:
  1. Social Networks. Instead of ads, Social Networks includes Value Added Services revenue like subscriptions for video and music and in-game purchases. It has 114 million paid video subscriptions and 47 million paid music subscriptions.
  1. Online Games. Games are Tencent’s biggest business. Tencent has 17 separate franchises that have exceeded 10 million daily active users, not including Epic Games’ Fortnite, in which it has a large, non-controlling stake.
  1. Online Advertising - Media. It includes ads on Tencent Video’s properties, as well as in Tencent’s various other digital, news, and video media properties.
  1. Online Advertising - Social and Others. This segment looks the most similar to US social media companies’ monetization. One of the biggest drivers is companies paying for ads in WeChat Moments, and analysts highlight the fact that WeChat still has a relatively light ad load and room to grow.
  1. FinTech and Business Services. Tencent’s second largest segment, it includes all of TenPay, the largest online payments platform in China encompassing WeChat Pay and QQ Pay, as well as WeChat’s wealth management business. When consumers and businesses buy from businesses on WeChat, via Official Accounts and Mini Programs, the fee Tencent takes is captured here, as does the fee Tencent takes when people use WeChat Pay to pay offline and across the web.
  1. FinTech and Business Services also includes its cloud business. Although it didn’t break cloud revenue out separately in Q2, it was a $2.4 billion business in 2019.
To give you a sense for Tencent’s scope and scale, here’s how Tencent’s business lines compare to entire industry-leading companies based on Q2 revenue.
  • Tencent’s Payments business is nearly as big as PayPal’s entire business, and it generated five times as much revenue as Shopify in Q2.
  • Its subscription revenue alone is 62% of Netflix’s.
  • It has some catching up to do in Social Ads, where it generates only 12% as much as the leader, Facebook, although it did generate more than 3x as much social ads revenue as Twitter.
  • Its small media ads business is bigger than the New York Times (NYT).
  • Games revenue is 64% higher than the world’s most valuable standalone gaming company, Nintendo.
  • Breaking cloud out of Payments and Business Services, based on last year ($600 million per quarter), it’s far behind AWS in cloud, with only 6% of the revenue.
It’s difficult to wrap your arms around Tencent, and as a result, the company likely trades at a discount to its more focused American counterparts. If you applied the same Q2 revenue multiples at which each of the businesses in the chart above is currently trading to the corresponding Tencent business segment, its operating businesses alone would be valued at $538 billion, 86% of the company’s current market cap.
And that’s before you get to the part of Tencent’s business that excites me the most, its expansive portfolio of investments.

Tencent’s Investment Portfolio

Did you know that Tencent owns 5% of Tesla12% of Snap, and 9% of Spotify (including a stake through Tencent Music)?
Those stakes are worth $15.4 billion, $3.9 billion, and $4.2 billion, respectively, and they barely scratch the surface.
In The Outsiders, Thorndike wrote, “CEOs need to do two things well: run their operations efficiently, and deploy the cash generated by those operations.”
In Q2, Tencent generated $5.4 billion in operating profit. Job 1: ✅
It’s how Tencent deploys the cash generated by those operations that’s so fascinating, though. Two of Pony Ma’s top lieutenants, President Martin Lau and Chief Strategy Officer James Mitchell, are ex-Goldman bankers. As one VC told the Financial Times: “When you put a basketball player in the room, you know what they’re going to do. If you hire Goldman Sachs bankers, you know what they are going to do.”
The analogy is a bit of a stretch, but the answer is clear: they’re going to do M&A. On its most recent earnings call, Martin Lau said:
Our M&A strategy has always been trying to invest in up and coming companies which have a great management, who have innovative products, and at the same time, they have synergies with our existing platforms. We now have more than 700 companies.
More than 700 companies!
There’s nowhere online to find all of Tencent’s biggest investments, their ownership stake, and the current value of the investments in one place… so I built it. I have only 103 of the 700 investments in there, but I think I have all the big ones, and it’s absolutely fascinating.
When you add the current value of just those 103 investments to the operating business value based on standalone business comps from the previous section, you land at a 15% higher valuation than Tencent is trading at today. The math is rough and not meant to be investment advice, but it’s helpful in thinking through how to build a complete picture of Tencent.
In Tencent’s Q2 earnings report, it mentions that the fair value of its investments in listed (public) investee companies, excluding subsidiaries (companies of which Tencent owns more than 50%), is $102.6 billion as of June 30, 2020. If you add that number to the $538 billion operating businesses value from the last section, you get $640 billion, almost exactly in line with Tencent’s current market cap of $628 billion.
So far, so good.
But that $102.6 billion is just part of the portfolio - the publicly listed non-subsidiaries. When you include investments in private companies, based on most recently announced valuations and some rough estimates, I get a current portfolio value nearly twice as big, at $187 billion. And that’s without 600 of the (likely smaller) investments that Tencent claims to have made.
Tencent is a really hard business to value accurately for a few reasons:
  • Just in its operating business, it does a lot of different things.
  • In addition to the operating business, it’s also a venture fund, a late stage fund, a private equity fund, and a hedge fund.
  • Startup outcomes are so unpredictable, even with Tencent’s muscle behind them.
But I have a sneaking suspicion that its venture investments are worth somewhere north of zero, so let’s take a closer look at its entire portfolio.
Where does Tencent invest?
Tencent’s investments are split fairly evenly between China and International.
Of the 103 Tencent investments I’m tracking, 54 are in China and 49 are international. Including acquired subsidiaries, the current value of investments by country break down like this:
Tencent uses the cash it generates largely in China to diversify away from China, which is particularly important given that, even with its largest companies, the Chinese government can be hard to predict. In 2018, for example, a government game review process slowed the growth of Tencent’s gaming business in the country and tanked its stock over 20%.
Just this morning, it announced an investment in French gaming company Voodoo, and gaming analyst Daniel Ahmad pointed out that Voodoo’s ad-based games would get around Chinese regulations requiring reviews of any games that monetize through in-game purchases.
What does Tencent own?
Tencent’s largest holdings include investments in some of the largest and fastest-growing gaming, music, and technology companies.
Tencent’s top 10 holdings span:
  • Familiar names like Tesla and Snap,
  • Chinese ecommerce giants Meituan DianpingJD.com, and Pinduoduo (Turner Novak on Pinduoduo)
  • China’s largest digital bank, WeBank,
  • TikTok competitor Kuaishou,
  • Beike, a Chinese Zillow which just went public last week in the largest US IPO of a Chinese company since early 2018,
  • Sea Ltd (SE), the Singaporean gaming, ecommerce, and payments company that looks like the Tencent of SE Asia (Julie Young on Sea)
  • Epic Games, the US gaming company, Fortnite creator, and owner of the Unreal Engine (Matthew Ball on Epic Games)
By my count, Tencent has 83 companies worth more than $1 billion dollars in its portfolio. 52 are unicorns, private companies worth $1 billion, which places it in the number two spot right behind #1 Sequoia Capital, which has invested in 109 according to the Hurun Global Unicorn Index, and ahead of third place SoftBank, which has 51. (In a January speech, Lau said that that company has 160 companies in its portfolio worth more than $1 billion, which would put it #1.)
At home, Tencent’s biggest investments are in ecommerce, and it plans to double-down on “smart retail” given the success of its WeChat Mini Programs. Abroad, almost half of the value of the portfolio is in gaming companies. In both its Chinese and international strategies, Tencent has unfair advantages, and those advantages shape what types of businesses the company invests in.
How do they do it?
China
Businesses in China run on WeChat. They can communicate with customers on Official Accounts, get distribution through group chats, build entire functioning products with Mini Programs, and accept payments through WeChat Pay. WeChat is Tencent’s unfair advantage in China. It’s the top of Tencent’s acquisition funnel.
Three of Tencent’s four largest holdings - Meituan Dianping, JD.com, and Pinduoduo - are Chinese ecommerce businesses that run on top of WeChat. Tencent uses data from WeChat to source investments, and then provides preferential placement to its investees’ Official Accounts and Mini Programs within WeChat.
For example, when Tencent invested in JD in 2014 to take on Alibaba’s Tmall, Reuters wrote:
The deal gives JD.com a headline slot on Tencent’s WeChat app that dominates China’s smartphones, an entry into eBay-style consumer-to-consumer shopping and a backer with the muscle to help it make the most of a logistics infrastructure that Alibaba lacks.
Today, Tencent’s investments in JD.com (JD), Meituan Dianping, and Pinduoduo are worth $68.5 billion.
No one else has the transaction data or the ability to boost a company’s distribution the way that Tencent does with WeChat. This will continue to be an advantage - in just three years, there are over 1 million WeChat Mini Programs. Tencent can cherry pick the best, invest, and practically guarantee their success.
International
Whereas Tencent’s China portfolio is top-heavy with ecommerce unicorns, its international portfolio includes everything from an 86-year-old American music label, Universal Music Group, to 7-year-old Brazilian neobank, Nubank.
Its biggest investment category, though, is games. It owns stakes in the companies behind popular titles including League of Legends (Riot Games 100%), Fortnite (Epic Games, 40%), Clash of Clans (Supercell, 81.4%), PUBG (Bluehole, 10%), Path of Exile (Grinding Gear Games, 80%), Call of Duty, Overwatch, Starcraft, and Candy Crush (Activision Blizzard, 5%). It even owns 1.3% of Roblox, which lets kids build their own games, and 2% of Discord, a chat platform used mainly by gamers.
Tencent invests in international game companies and distributes their titles to the Chinese market. This is Tencent’s unfair advantage: companies essentially need to partner with Tencent or Alibaba to operate in China.
This is true beyond games, too. The Canadian version of Dunkin Donuts, Tim Hortons, wants to expand into China, so it recently took on an investment from Tencent. Tencent invested in Universal and Warner Music Group in part to control the licensing of their catalogs in China.
In addition to strategic investments in games and music, Tencent makes venture-style investments in fast-growing companies that have the potential to win large markets. It has shown a particular affinity for non-gaming investments in India, the only other country with as large a population as China’s. It has invested in ecommerce standout Flipkart, transportation unicorn Ola, education startup Byju, food delivery app Swiggy, and fintech darling Khatabook, among others.
In the US, Singapore, and Indonesia, it has invested in the companies building super apps most similar to its own core product, WeChat -- Snap, Sea, and Gojek.
Tencent’s international portfolio is large, diverse, and complex, with bets at all stages, in all categories, and for all sorts of reasons. As a result, I think that investors undervalue it. But while the world catches up, Tencent keeps zooming further into the future. The real magic in the portfolio is just beginning to bloom. It’s that future that has me most excited about the company.

Tencent’s Future

We’ve gone on quite a journey today, covering Tencent’s history and what it’s up to today, including its core operating businesses and how it invests the massive profits that those businesses generate to participate in the internet’s growth at home and around the world.
In Part II we’ll get our crystal balls out and talk about what Tencent’s investments tell us about the future, and how the company has positioned itself to sit at the center of the next world: the Metaverse. That means we get to explore some hairier subjects, like the influence of the Chinese Communist Party, Epic’s fight with Apple, the threats to its current business and long-term mission, and much, much more.

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part 2
Summary
In Part I, we covered Tencent’s history, its current businesses, and its massive portfolio of investments.
Tencent is undervalued based on its current operating businesses and the current value of its portfolio alone.
But Tencent’s positioning for the future is even more compelling, and that’s what we’re going to discuss in Part II today.
In Part I, we covered Tencent’s (OTCPK:TCEHY) history, its current businesses, and its massive portfolio of investments. Tencent is undervalued based on its current operating businesses and the current value of its portfolio alone.
But Tencent’s positioning for the future is even more compelling, and that’s what we’re going to discuss in Part II today.

Tencent’s Dreams

Tencent’s critics argue that it gave up on its dreams by focusing on investing instead of product innovation. I disagree. Instead of building any specific product, Tencent is building an organization and ecosystem designed to be massively profitable in the short-term with asymmetric upside.
Through its investments, Tencent is in the best position of any company to usher in and profit from the Metaverse, the misunderstood and potentially mega-lucrative evolution of the internet.
I’m not the first person to realize that Tencent is in the lead. In his recent Invest Like the Best interview, investor Matthew Ball said, “So if you said ‘who is closest to the Metaverse today?’ the simple answer is not Fortnite or Minecraft, it’s Tencent.” But Tencent’s advantage extends beyond its lead position in gaming, because the Metaverse will be so much more than games.
Look closely at Tencent’s portfolio and you’ll find a group of companies across gaming, ecommerce, and social that will bring the Metaverse to fruition and share in its massive upside. Tencent’s structure and strategy -- provide capital and traffic -- is the perfect model to profit from the decentralized, competitive, creator-friendly ecosystem that the Metaverse is likely to be.
That’s a big claim, so here’s what we’ll cover to get there:
  1. The Metaverse. What the Metaverse is, which parts of it are here already, and how big the opportunity is.
  2. Tencent’s Strategy. Instead of building everything itself, Tencent invests. Its Capital + Traffic Flywheel is a smart way to bet on the Metaverse because while technologists are nearly certain that it will exist, no one knows exactly what form it will take.
  3. Platform + Content. The Metaverse will comprise the Platforms on top of which it’s built and Content that users interact with for entertainment, socializing, learning, and commerce. Tencent owns leading Platform candidates - Epic’s Unreal Engine (VR), Snap (AR), Spotify (Audio), and WeChat (internet / super app) - plus companies through which people will play, shop, learn, and socialize.
  4. Where Tencent Might Invest Next. Tencent has announced its intention to invest in infrastructure and “Smart Retail,” and it is likely to invest in remote work and collaboration products like Figma and Agora to round out its business offering.
  5. Obstacles. Tencent faces government regulation and well-resourced competitors.
This post is fun speculation combined with practical implications. Tencent’s valuation doesn’t properly price the Metaverse opportunity -- it can’t, it’s so early and so speculative -- which means that with Tencent, you get a business that is undervalued today and a free call option on the future.
I want you to leave this post with a better understanding of the Metaverse, and an appreciation for the opportunity that Tencent has to make it a reality and profit from its rise.

What is the Metaverse?

Oh no, not another Metaverse thinkpiece…
Hear me out. The term, first introduced by sci-fi author Neal Stevenson in his 1992 Snow Crash, makes the idea sound silly and game-like. It sounds a little like talking about the World Wide Web in the early 1990’s. Like the Web back then, the Metaverse is an important idea in need of a rebrand.
So what is it?
In The Metaverse, Matthew Ball says the Metaverse will be an always-on, real-time world in which an unlimited number of people can participate at the same time. It will have a fully functioning economy and span the physical and digital worlds. Data, digital items, content, and intellectual property (“IP”) will work across the Metaverse, and many people and companies will create the content, stores, and experiences that populate it.
Epic Games CEO Tim Sweeney agrees, adding, “it will be a massively participatory medium of a type that we really haven’t seen yet,” with “ a fair economy in which all creators can participate, make money and be rewarded.”
The Metaverse sounds a lot like the real world, layered with digital components at varying degrees of immersion.
A participant might walk through a virtual mall and buy a digital Mickey Mouse costume in the Disney (DIS) store for his avatar to wear, then pop over to the food court to pick something to eat to be delivered to his physical house via Uber Eats, and then pop into a live Beatles concert in the Spotify (SPOT) Performing Arts Center. He can keep the concert going in his AirPods on Spotify when he wants to go for a run in the physical world, racing against his friends in an AR Peloton-like experience. The whole thing feels seamless - his data and purchases carry across and among physical and digital worlds.
Ball, Sweeney, and everyone else I’ve read on the topic agree: the Metaverse won’t happen overnight. There won’t be a clearly demarcated “before the Metaverse” and “after the Metaverse” divide, and it won’t be built and run by one company. The Metaverse will be the result of the evolutionary convergence of many separate tools, platforms, and worlds underpinned by shared infrastructure, standards, and protocols.
In fact, Marc Geffen makes the case that the Minimum Viable Metaverse is already here in games, the democratization of ecommerce, the rise of “premium” social media, and the adoption of decentralized, distributed, and remote productivity tech.
The Metaverse won’t be any one thing. It’s not just one big video game. It’s not just Second Life. It’s not just a huge shopping mall. It’s not the scene from Wall-E that I like to include whenever I talk about the future.
It’s all of those things, and the connections between them, and more. The Metaverse will be a way to blend the physical and digital worlds while allowing us to be fully present in either - it’s the real world, AR, VR, and the internet all rolled into one.
With regards to Tencent’s business, three things are important to realize about the Metaverse:
  1. The Metaverse isn’t science fiction, it’s an inevitability even if its final form is unclear.
  2. Games and game engines are important, but they’re just one piece of the puzzle.
  3. Owning large swaths of the Content and Platforms underpinning the Metaverse and of the content and commerce taking place within it will be highly lucrative.
Ball believes that even in a conservative case, the Metaverse will be worth trillions of dollars. But it’s impossible to quantify, like trying to predict how big the “net” was going to be back in the early 1990s. We knew it was going to happen, and we knew that it was going to be big, but we couldn’t have imagined exactly what it would look like, or that it would spawn multiple trillion dollar companies and many more multi-billion dollar ones.
While we can’t know the exact what or how, the Metaverse represents an unprecedented wealth creation opportunity. And Tencent, through its investments and consolidated assets, is in the driver’s seat. Which brings us back to Tencent’s dreams.

Capital + Traffic

A strategic decision nine years ago accidentally set Tencent up to create more value from the Metaverse than it does from its entire core business by focusing on investment over organic growth.
After reading Part I, Rui Ma pointed me to the Tech Buzz China podcast in which she and Ying Lu discuss Pan Luan’s 2018 piece titled “Tencent Has No Dreams.” In it, he argues that a 2011 decision at a management team offsite caused Tencent to lose sight of its product-focused roots.
Back in 2011, Baidu passed Tencent as the most valuable tech company in China, and Pony Ma called a meeting of his top management to chart a new course for the company. In the meeting, dubbed “The Conference of the Gods,” he asked his 16 top executives to list out Tencent’s core competitive advantages. Two winners emerged: capital and traffic.
Led by President Martin Lau and his former Goldman colleague James Mitchell, who he brought on as Chief Strategy Officer, Tencent built its strategy on this flywheel of capital and traffic.
Attract companies to build on its platform with huge traffic, invest in the winners, give them more traffic, invest more or acquire the winners, generate more traffic, attract more companies, and so on. It runs essentially the same playbook with foreign companies who want access to China.
The strategy seems to be working. Since that 2011 meeting, Tencent’s stock has increased nearly 15x, from $44.5 billion to $660 billion.
Luan warned, though, that “Hidden behind the ten-fold increase in market value is the investment banking thinking that focuses too much on short-term ROI.”
He cites the fact that Tencent missed out on short-term video, kills internal projects quickly based on ROI calculations, and failed to internationalize WeChat. Luan also argues that Tencent’s intolerance of failure leads to a lack of innovation and talent development, painting the picture of Tencent as a place where, “Smart people just make PowerPoints and quarrel with each other.”
Luan’s argument boils down to one that’s familiar to the American tech giants: they can’t innovate anymore, so they just copy and acquire. Facebook’s (FB) internal projects are flops, so it acquired Instagram and Oculus and WhatsApp and copied Snap Stories. Google can’t create anything new beyond search (remember Google+??), so it acquired Android and YouTube and DoubleClick.
But Tencent’s focus on investment over organic innovation is really smart for two reasons. First, building a startup is an exercise in innovation; running a large company is an exercise in capital allocation (recall The Outsiders). At this point, Tencent creating all of its own products would actually be inefficient. The company’s best minds should be focused on building an organization and ecosystem that sets it up to catch the next major wave of growth.
Second, investment versus full ownership is the right way to play the Metaverse opportunity. If the Metaverse is going to be decentralized and more profits will accrue to creators, it makes financial sense to spread bets across both platforms and content creators instead of trying to build one central platform, like a WeChat version of the Metaverse.
Historically, Tencent has evolved its approach to meet evolving tech trends. It launched QQ to capitalize on the rise of the internet in China and it built WeChat to ride the mobile wave. Now it’s building a portfolio of companies that position it to profit from the shift that has the potential to create more economic value than either of the previous two.

Tencent’s Metaverse Dreams

There are two big components of the Metaverse: Platform (where) and Content (what). Tencent owns stakes in more of the components of each than any company in the world.

Platform

The magic of the Metaverse is that it will seamlessly integrate the myriad platforms on which we socialize, work, and consume - merging Augmented Reality (NYSE:AR), Virtual Reality (NYSE:VR), audio, the internet, and the physical world. Tencent owns key players in each, including Epic, Snap (SNAP), Spotify, WeChat, and even physical retail.
VR: Epic (Unreal Engine)
In Tencent’s Metaverse solar system, Epic is the sun. In many ways, its major title, Fortnite, is the closest thing we have to the Metaverse today.
  • Looks Like the Metaverse We Think Of: It’s a persistent, synchronous, live virtual world, complete with shared group experiences like the Travis Scott concert.
  • IP Melting Pot: Competing IP co-exists in Fortnite - you can buy both Marvel and DC skins, NFL jerseys and Jordan sneakers, or be John Wick or Ariana Grande (link).
  • Cross-Platform: Players can play against each other on competing consoles or platforms - players on Mac, Playstation, Xbox, and Android can all play against each other.
  • Participatory: In Creative Mode, players can build their own worlds, and Epic has partnered with creators from the community to develop and sell their skins.
Epic is running the Traffic side of the Tencent playbook - because all of the players are on Fortnite, it can get consumer-friendly deals out of parties -- like IP holders and game console makers -- that others cannot.
Fortnite is just a trial run for a bigger prize, though. It puts Epic’s Unreal Engine in the prime position to become the Platform on top of which many of the virtual components of the Metaverse are built.
Game developers, filmmakers, and architects alike use its Unreal Engine to build rich, immersive digital renderings and worlds. Popular game Gears of War, Disney+ hit The Mandalorian, and leading architects Foster + Partners and Gensler all build with Unreal.
A shopping mall designed in Unreal Engine, Source
As more games, movies, cities, and buildings are built on the same engine, it becomes easier to stitch together a full virtual world. And more will build with Unreal and Epic, because the company is practically giving away its best-in-class tools for free.
Epic has the lowest store fees of its competitors (12%), the most publisher-friendly publishing tools, and the most open ecosystem. If a competitor wants to work with Epic, Epic will work with it. Epic does all of this in service of the creators, large and small, who it sees as crucial to pulling the Metaverse forward in time, and to creating a massive Total Addressable Market. The more money creators can make, the thinking goes, the more likely they are to create, the more attractive it will be for users to spend time in the Metaverse, and the more lucrative it will be to be the engine building the Metaverse.
Tencent owns 40% of Epic, which recently raised at a $17.3 billion valuation, and looking 10-20 years into the future, that 40% stake could be worth more than all of Tencent today. But it’s just one component of Tencent’s Metaverse Platform play. Another crucially important piece is Snap.
AR: Snap
Tencent is Snap’s largest shareholder, with 12% ownership (although no outside investor has voting rights or control). If Epic is a leading contender to build the virtual world components of the Metaverse, Snap is a leading contender to build the AR components, or Mirrorworld. As I wrote in Oh Snap!:
Mirrorworld, according to Kelly, won’t take place in Virtual Reality (VR), but rather in Augmented Reality (AR). It will blend digital and physical, layering bits’ infinite possibilities on top of atoms’ realness.
Snap is employing the Amazon (AMZN) “First and Best Customer” strategy. It builds products for its own app first - like Lenses, its first AR hit - and then opens up the tools to both its community to create within Snapchat, and third-party developers to incorporate Snapchat’s features into third-party apps.
Snap is building a wide-ranging set of products that build off of each other and work together to lead to a future in which Snap powers the Mirrorworld.
Here’s a glimpse from Snap’s Partner Summit:
Like Epic, Snap isn’t building a closed ecosystem. It’s building the tools that others can use to build and profit from AR experiences, inside or outside of the Snapchat product, so that it becomes the platform on top of which developers build the Mirrorworld.
  • Camera Kit: Gives any developer the power of Snap’s Camera, the most widely used piece of AR technology in the world.
  • Bitmoji: Snap owns Bitmoji, which gives everyone their own personalized avatar to use within Snap Games and Minis, and across many external apps, platforms, and OS’s.
  • Snap Kit: Powers 20 of the top 100 apps in the iOS and Google app stores.
  • Local Lenses: Allow users and businesses to build digital worlds on top of the physical one.
Snap will be a leader in AR and continue to grow as its user base matures, which will put it among the tech giants in terms of valuation. Today, it’s valued at 1/70th of Apple (AAPL) and 1/30th of Google (GOOG). If it catches up to where the tech giants are today, Tencent’s stake will be worth over $100 billion. (Insert $100 billion in 10 years meme here)
Audio: Spotify
There’s a version of the Metaverse that looks less like Ready Player One and more like Her. That is to say, audio-based. We are decades or centuries away from being able to do everything we need to do in the virtual world, which means that we will still need to spend plenty of time in the physical world. During much of that time, we will plug in via audio. Today, Americans spend four hours per day listening to audio, including one hour of spoken word content. Tomorrow, we will listen to even more, as the lines between conversation and entertainment blur.
Spotify, of which Tencent owns 9%, is best positioned to capture that earshare. Spotify currently has 286 million monthly active users and is proving out its ability to deliver them different types of audio content beyond music, including podcasts, and soon, audiobooks. According to CEO Daniel Ek, Spotify has 10-15x growth ahead of it. As I wrote in Earshare, it is investing heavily today to ensure that it owns consumers’ ears as audio grows.
In the Metaverse, Spotify will fill the space between - when people are not fully immersed in the digital world, they will be able to continue the conversation with friends who are, interact lightly with AR through audio, or just relax and listen to some music.
At 10x where it is today, Tencent’s investment in Spotify would be worth $35 billion.
Internet: WeChat
Tencent’s core asset today is WeChat. As we discussed in Part I, Chinese consumers do everything on WeChat - message, read the news, shop digitally, interact with businesses, communicate for work, pay for things in the real world, and more. With the launch of its Mini Programs, companies are able to build richer experiences within the WeChat ecosystem. In some ways, WeChat is a mini, 2D Metaverse.
As Tencent quietly orchestrates the adoption of the Metaverse via its minority investments, it will be interesting to watch how much inspiration the Metaverse takes from the WeChat ecosystem. Snap has already started to look more like WeChat with the launch of its own Minis, and the super app’s influence will continue to shape the way that we build new digital economies.
Infrastructure and Smart Retail
Tencent already owns stakes in the platforms of the future, and it has more cash to spend. The company said that it will invest $70 billion in infrastructure including cloud, AI, cybersecurity, blockchain, 5G, and quantum computing over the next five years. It will also be investing heavily in Smart Retail, further bridging the gap between digital and physical retail through payments and other shopping tech. Together, its infrastructure and Smart Retail investments will help build more of the underlying technology and connective tissue the Metaverse will need.

Content

Taken together, Tencent owns stakes in the leading companies building the Platforms on which the Metaverse will be built: VR, AR, Audio, and Internet. Epic, Snap, Spotify, and WeChat are all building true platforms -- on which the majority of the profit is made by creators. For the Metaverse to be interesting enough for people to adopt, creators are key. There need to be games to play, music to listen to, rich social experiences, ways to make money, and things to buy with that money. In other words, there needs to be Content.
Tencent’s Platform investments enable content creation, and it also invests in Content creators. Capital and Traffic for the next wave. When you lay Tencent’s investments on top of Geffen’s graphic, its Content play emerges.
Tencent owns stakes in four of the companies that Geffen included in his original graphic (circled in blue): Snap, Discord, Roblox, and Epic. I’ve added more of Tencent’s holdings to the chart to show that Tencent is already a leader in three of the Minimum Viable Metaverse categories, which are the early Content layer: Games, Premium Social Media, and Democratized Ecommerce.
Virtual Worlds and Spatial Software (i.e. Games)
Games are the first Metaverse Content that many people will engage with, and Tencent is the leading video game company in the world.
  • Its online games segment did $5.5 billion in Q2 revenue, more than any other company.
  • It owns Riot Games, which makes League of Legends, the most popular esports title in the world by over 4x as judged by Twitch streams and 40% of Epic Games, which makes Fortnite (350 million players). Unreal Engine is Platform, Fortnite is Content.
  • It owns 1.5% of Roblox, which has 164 million users and is played by half of people under age 16 in the United States.
Matthew Ball talks about games as the “on-ramp” experience for the Metaverse, the thing that will get early adopters to try it out. Tencent owns that on-ramp, and the titles that will keep people engaged and immersed in early versions of the Metaverse.
Democratization of Ecommerce
For the Metaverse to become more than just an immersive game environment, it will need to support a functioning economy. For that to happen, people will need to be able to sell things in the Metaverse, which is to say, in a seamless way across the digital and physical worlds. Try on a shirt with AR, buy a digital version for your avatar, and have the physical version shipped to your door.
Tencent owns stakes in some of the leading ecommerce companies in the world, many of which “arm the rebels” instead of vertically integrating, with publicly stated plans to add more:
  • WeChat allows companies to easily set up stores and experiences that reach over a billion customers, and WeChat Pay lets people buy things online or in the real world.
  • Paystack powers digital payments in Africa, Khatabook does the same in India, as do Gojek in Indonesia and SeaMoney in Singapore. Seamless payments will be crucial to power Metaverse stores.
  • Pinduoduo’s Customer-to-Merchant and social commerce models are reshaping ecommerce in ways that may work even better in the Metaverse than they do on mobile.
Tencent’s current portfolio and future investments in Smart Retail will continue to blur the lines between digital and physical shopping. They will be crucial in defining the shape of the Metaverse economy, and its assets stand to benefit from the Capital and Traffic Flywheel across its Metaverse Platforms.
Premium Social Media
The Metaverse will let friends, family, and colleagues from across the world gather in immersive environments even more easily than walking next door. It will also let strangers with shared interests find and engage with each other.
Tencent has an impressive portfolio of Premium Social companies:
  • Tencent owns 50.1% of Huya and and 38% of Douyu, China’s versions of Amazon’s game streaming product, Twitch. Game streaming mechanics may underpin broadcast activities beyond gaming.
  • Discord, of which Tencent owns ~2%, bills itself as a “place to talk and hang out.” It represents a proto-version of persistent hangouts in the Metaverse.
  • Snap is both a Platform and a Content play, and is a more intimate social network in which young users mainly interact with their closest friends instead of strangers.
  • Tencent owns ~5% of Indian education platform, Byju’s, the most valuable online learning company in the world.
Like a party or a new social network, people will only hang out in the Metaverse if their friends are there. As the Metaverse comes into focus, these Premium social communities will continue to merge with the other aspects like ecommerce and gaming, making many of the things we do more social. We’ll go to the mall, movies, or concerts with friends, just like the real world pre-Corona.
Through its Capital and Traffic approach, Tencent has built a portfolio of internal and external products, platforms, and services that perfectly position it to own the Platforms on which the Metaverse is built, and the Content with which Metaverse users will engage to play, build communities, learn, and shop. So what is it missing?

Where Tencent Might Invest Next

The one area from Geffen’s map in which Tencent is underweight is “decentralized, distributed, and remote productivity tech,” particularly compared to Metaverse competitors Microsoft (MSFT) and Google. Assuming that remote productivity will be an increasingly important component of the Metaverse, I expect that remote productivity tech will be a main area of focus for Tencent in addition to previously announced infrastructure and Smart Retail plays.
If I were doing corp dev at Tencent, here are a few companies I would be interested in:
  • Figma. The collaborative design tool that I use to make all of the beautiful graphics in Not Boring would be a strong addition to the portfolio because it is both a work collaboration tool and a potential on-ramp for people to design new worlds and experiences in the Metaverse. People use Figma to synchronously co-create shared environments, like WFH Town.
  • Agora. Tencent brazenly copied Zoom with VooV, which it launched in 100 countries on March 20th. Agora (API), which went public in June, allows anyone to embed video or voice in their applications. I think that the future of video will look more like use-case specific video environments versus everyone using Zoom, and Agora is both a good way to play that trend and a way for Tencent to spread into thousands of products as a Platform.
  • ZapierWhen I wrote that Google should acquire Slack, Schlaf replied that Zapier is more strategic because “it’s plumbing and glue. It ties together a whole ecosystem of applications, services, and developers.” In a Metaverse defined by the connection among platforms, worlds, and content, its connective plumbing may be even more important.
  • Remix Machines. In The Generalist, Mario Gabriele cited a wave of products unbundling the Microsoft Office Suite with slicker UI and more collaboration. Many of the companies he discusses, like NotionCodaRoamAirtableCausalCanvaProjectorKapwing, and Webflow are well-suited for the Metaverse, which will be largely multiplayer as opposed to one-to-one or solo.
Many of these companies are too early in their lives and their trajectories are too steep for them to sell to one of the American tech giants that would swallow them whole. Tencent’s more passive investment approach is likely preferable to the companies. Within the Tencent portfolio, they can get access to capital, traffic, and a seat in the early Metaverse.

Obstacles to Tencent’s Dream

Tencent’s success in the Metaverse is not a foregone conclusion for three reasons:
  1. Government. Tencent is a Chinese company, and the Trump Administration recently issued an Executive Order to prevent people in the US from using WeChat, which the Administration views as a security threat. Were Tencent to take a leading position in the Metaverse the government would very likely intervene.
    This is one of the areas where Tencent’s structure is advantageous. It’s impossible to imagine the American government (or Indian government, or many other governments) allowing its citizens to spend the majority of their waking hours in the Metaverse by Tencent™️, but it will be harder to prevent people from spending time playing Fortnite or League of Legends, interacting with the world through Snap’s AR, or listening to music on Spotify. Even still, world governments could force Tencent to divest ownership in businesses operating in their countries. Even the Chinese government has been an impediment to Tencent’s dream when it imposed restrictions on in-game purchases in 2018, driving Tencent’s stock down 20%.
  2. Competition. Tencent will face opposition from bigger competitors and new entrants alike who have their own designs on controlling the next big platform shift. Facebook bought Oculus to own VR. Microsoft owns Minecraft and the Hololens, and may own TikTok, which is already stealing attention from Tencent’s properties. Google is gunning for cloud gaming with Stadia and won’t give up its place as the home page for the internet easily. Amazon is the world’s largest ecommerce business and its largest cloud provider, owns Twitch, and is the best of the bunch at developing new business lines. Apple is currently engaged in a battle with Epic over its 30% app store fee, and has shown that it is willing to play hardball to hold on to its hard-won place in the content ecosystem.
  3. The Metaverse is Uncertain and Likely Distributed. Ultimately, no one company will own the Metaverse, and it’s important for Tencent to work with competitors, as Epic has done, in order to maintain its advantage. It will have to convince the other major tech companies that accelerating the arrival of the Metaverse will be positive sum for all of them, and then work arm-in-arm with competitors to convince regulators across the world that what they’re building, and how they’re building it, is good for society.

Tencent’s Opportunity

Despite the obstacles, investing in Tencent is the best way to invest in the Metaverse. It is the only way for you and I to invest in Epic, which many believe to be the most important Metaverse builder. If it ends up being more AR than VR, Snap will do well. If audio plays a larger role, Spotify will do well. If it blends multiple media, all three will boom together. Even if another giant or startup builds the infrastructure, many of its Content plays stand to benefit from a richer digital / physical economy.
If Tencent can nudge its portfolio companies to work together, it will accelerate the Metaverse’s development and solidify its own leading role. Even if it can’t, many of its bets stand to perform well independently, and the likelihood of one or more massive winners is high.
And if the Metaverse doesn’t emerge at all? If we continue to use the internet in the way we do today for the next century? Tencent owns a portfolio of companies that stand to benefit from the simple straight line continuation of existing trends towards more gaming, ecommerce, audio, digital communication, and digital healthcare. The more we do online, the better Tencent does.
This feels like the kind of opportunity that most of us missed to buy a basket of Apple, Amazon, Google, and Microsoft in the early 2000s, buffeted by a massive, profitable, and growing core business. Ultimately, Tencent is an undervalued portfolio of many of today’s top internet assets and a free call option on a new world.
Thanks for reading,
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extra links

dont forget alumni of ten cent
eg co-founder charles yidan wanted to spinoff tencent foundations
first he moved to hong kong
then he announced 2 by one million dollar teacher prizes every year for 50 years
in his year round cycle - he celebrates prize winners eg both at a global summit out of hong kong and a euro summit out of cambridge, and a us summit out of the other cambridge-
his panel are surveying who should win next year - see yidanprize