"Start Up: 1998 - 2004"- Chopsticks Series: <The Story of Tencent> Vol. 2

April 16, 2018

 Start Up: 1998 - 2004

"How is it possible that a timid and quiet boy like Ma Huateng could become an entrepreneur?"  Every individual I interviewed from Ma's high school and university, both classmates and teachers all expressed their surprise. Even Ma himself could not quite believe that he would one day build a mega company. He and his co-founder Zhang Zhidong had once planned that in the third year of business, their employee number would increase to 18. When OICQ - known as QQ after going online, the user capacity was set to be 100,000. Also, Ma Huateng had tried many times to sell his company but no one would take it over.

 

Luckily enough however, Ma Huateng was in a great industry and in a great time. Richard Tedlow, Professor of Business Administration at Harvard Business School, when describing the impact on business of the railroad network and telegram said that "any improvement that can break the restrictions on dimensions of people, products and information, will impose a significant influence on the business strategy." In human history, the rising internet economy from the 1990's that reshaped the manner and nature of information transfer, was apparently an invention as important as the railroad and the telegraph. During the time China sailed the first wave some twenty years after Deng's reform in opening up China to the world, one could say iif America was the train locomotive, then China would have been the first carriage. It is safe for us to say that China as a country has benefited the most from the internet revolution.

Ma Huateng is the third generation of Chinese entrepreneurs after China's opening up to the world; and comes from quite a different background from the peasant-turned business owners, "marginal urban people eg. ex-convicts, unemployed etc." or former government officers starting a business.  Ma’s enthusiasm of creating Tencent was a result from his own innate passion of information technology. Shenzhen was the third city in China connected to the internet, and Ma was among the earliest hundreds of netizens who were administrators of a well-known website. Ma and his four other co-founders all came from the middle-class, four of them being schoolmates and all sharing a reverence of the internet--instead of money per se.

In his research on primary industrial and commercial enterprises in America,  Alfred Junior Chandler introduced his famous "four-phase growth" theory as accumulating resources, utilising the resources properly, sustaining growth and utilising the expanding resources properly. The same logic could be found when we look back on Tencent's early days: accumulation of the user resources through QQ and then monetising them through an innovative profit model. However, it was not a necessary procedure.

From mid-1990's to 2000 the internet bubble burst, all Chinese network companies were imitations of their American counterparts - portal sites, email services, web search engines and even instant messaging (IM) services. One major concern about Tencent was that the one it copied from in ICQ, had never made any profit; in fact, no other IM service providers ever had, not even to the time I started writing this book. So Ma must have done something right,  something unprecedented even when compared to his American counterparts.

Firstly, Tencent’s imitation of  ICQ was based on micro-innovations. Data was stored on the server instead of the customer terminal, making it compatible with the contemporary network environment in China.  Other innovative features such as breakpoint transmission, group chat and screen shots were also invented by Tencent, demonstrating that when it came to experimental innovation, Chinese network companies are competent on capability and speed; quite different a situation compared with other fields such as electronics and vehicle manufacturing, medicine and machinery.

Secondly, other than technical micro innovation, commercial applications on internet were influenced by other objective factors, for instance local network environments, customer preferences, transactional systems, and state regulations. Therefore, local Chinese businesses are usually conferred with more advantages. Tencent has long put forward the concept of user experience, and creatively launched membership services, virtual props, Q coins and other service innovations. This enabled QQ to gradually transform from a cold instant messaging tool into an acquaintance-adjacent network social platform. Thus, Tencent is a world-leading social network pioneer.


Thirdly, Ma started to seek for the capital ventures support not long after he started his business. Fortunately, global venture capitalists had just entered China when he was looking for money, including IDG and Pacific Century MIH, which played an important role in Tencent's early development; indeed Tencent was only the second Chinese internet company to list on the Hong Kong Stock Exchange.

 

Another often disregarded phenomenon was the fact that value-added services for cellular services in China was initiated much earlier than in America. By the end of 2000, the newly established China Mobile Company launched its Mobile Dream Net service that offered a variety of value-added information services to mobile phone users through SMS push., This created a unique SMS explosion where all the value-added service providers involved in the project made considerable profits.Tencent was once  the biggest partner on Mobile Dream Net, and thus the biggest beneficiary. In June 2001, Tencent unexpectedly became the first internet company to make a profit.

 

From its establishment at the end of 1998 to its first IPO in June 2014, Tencent survived the full exploring circle of product model imitation, application innovation and profit model construction and was in itself a model of the network industry in China. After the global Internet bubble burst in 2000, Chinese internet companies had discovered  their own methods to make profit and exploit user value and in ways drastically different from their American counterparts. By 2003, the internet industry in China and the United States had seen a historical diversion and two years later, Chinese companies outperformed their international competitors in almost all areas, including web portals, search engines, email providers, online games, and instant messaging platforms. An entirely different Chinese internet world had come into prominence.

 

Ma Huateng had not demonstrated his qualities as an entrepreneur right from the beginning. He seized the opportunities that seemingly were obstacles, but his ability appeared to be a vitally flawed armor--his overreliance on Mobile Dream Net's profit model has been questioned, especially when virtually every other internet company launched its own instant messaging platform. There was a big challenge dangerously looming over him. Through its services, Tencent had been helping young people find their identity in a virtual world, but ironically for a long time Tencent itself was like a rapidly growing child, curiously asking, “Who am I?”

 

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