On Jan. 26, 2011, the Chinese internet tycoon Tencent released its new mobile app Wechat in a highly competitive market. Wechat had a modest start only by featuring instant messaging but within a year, it added in more features of differentiation such as voice messaging and social functions such as “Finding People Nearby”. In 2012, it upgraded with “Moments” – a major breakthrough which later developed to be the Chinese version of Facebook and Twitter combined with improved user experience such as no advertising and strong privacy. After that, Wechat thrived and continued to upgrade with new features including mobile wallet, gaming, O2O services and online market places.
By Q1 2015, Wechat achieved 1.1bn registered users, among which 46% claimed Wechat was the No.1 app in their life. Wechat became the undisputable largest social platform in China. Its unique innovation and wide variety of features made it tremendously successful in China and took the other two seemingly unbeatable platforms Renren (Chinese equivalent of Facebook) and Weibo (Chinese version of Twitter) out of business. As Xiaolong Zhang – Wechat Devision Director in Tencent remarked, Wechat is not one app, it’s actually more than a hundred apps combined in a very organized and neat fashion with the ambition to become China’s largest mobile portal through which consumers can access everything in daily life.
Wechat has not fully commercialized yet. Particularly when Zhang saw the previous biggest social platforms fail largely due to excessive capitalization of users by advertising that jeopardized user experience, he decided to move very conservatively towards commercialization and would not be willing to sacrifice even a little bit of user experience. Wechat potentially has three major source of revenue – Value added service, O2O third-party revenue sharing, and advertising.
The majority of Wechat services are free to users. Tencent launched sticker shop and game center in Wechat to provide value added services which are a key revenue source for Tencent’s another popular platform QQ. These services normally charge $0.99 for each purchase.
O2O third-party revenue sharing
With the innovative function of Wallet, Wechat can virtually link with any third party apps to access numerous of functions. Currently Wechat already linked with third party websites with functions to order taxi, book flight tickets, shop on JD.com, pay utilities fee and reserve for hospital visits, etc.
In order to attract more third party apps to cooperate to the platform, Wechat hasn’t charged any entry fee or negotiated revenue sharing contract with other apps. However, with the huge base of consumers and rising transaction volumes, it’s foreseeable that third party revenue sharing will become a huge revenue source for Wechat without compromising any user experience.
Before 2015, Wechat was explicitly against any advertising on its platform to ensure the best-in-class user experience. Meanwhile, the 1.1bn user base is so attractive that many companies and advertising agencies proposed creative ways to ask Wechat to open the advertising opportunity. Finally, in 2015 it opened two ways of advertising for brands to take initial trial – Branded stickers and Moments post.
Branded stickers – I personally led M&M’s Wechat sticker project. 16 different M&M’s stickers were launched in Wechat as the first trial with 5 other brands. M&M’s didn’t pay anything to Tencent but reached the deal with resource exchange. Some other brand spent $500,000 to get the contract.
Moments post – BMW became the 1st advertiser on Wechat’s moment (the most protected space from advertising) to post an ads combining words and pictures with a link for consumers to learn more. This one time post cost $1 million for BMW and any other following advertisers.
Tencent intends to acquire data from these two trails and design a feasible advertising model that guarantees perfect user experience.
Wechat Design Division operates as a separate team in Tencent. Their sole objective is to constantly improve user experience by optimizing current features and launching new functions. In Tencent, sales function is integrated and responsible for every product line in order to better serve the needs of clients to advertise in multiple platform. Surprisingly, Wechat is the only product in Tencent with no revenue or profit related KPI. While in most of the other internet companies, sales is in dominant position and has the power to ask Design team to change certain features according to clients’ needs, the most important distinction of Wechat is that the Design team has the power to reject any proposals from sales had they have concern on user experience.
In order to build Wechat as the No.1 online portal, Tencent intentionally invested or acquired many relevant companies to build strategic linkage with Wechat. In 2014, it acquired 17.9% share of Jingdong.com (Chinese equivalent of Amazon). In 2015, it also acquired Didi Dache ( Chinese equivalent of Uber) and integrated them into Wechat’s Wallet function. Tencent spend $100 million in 2014 purely in M&A.
The two key features of operation model well supported its business model to capture value in a way that doesn’t impact the best-in-class user experience.
The biggest debate of social platform is when and how to capitalize it. There are numerous of examples that companies prioritized profit over user experience and resulted in tragic failure. Wechat sticks to its belief that user experience is the top priority and it would rather sacrifice advertising revenue in exchange of protecting user experience. Meanwhile, it is proactively building the online portal presence with integration of third party apps that would potentially generate huge revenue for Wechat. Would it be the right formula to monetize the platform while maintaining user experience? It’s at least working very well for now.