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Wechat – Leaving Money on the Table or Disrupting Social Platforms with Innovation ?

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The biggest struggle for social platforms is when and how to monetize the platform without sacrificing user experience. Has Wechat found the right formula?

Background

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.

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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.

 

Business Model

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.

Value-added service

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.

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Exhibit 1: Wechat Game Center

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.

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Exhibit 2: Wechat Wallet Function

Advertising

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.

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Exhibit 3: M&M’s Sticker in Sticker Shop

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.

Picture1
Exhibit 4: First commercial post in “Moments”

Operation Model

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.

Conclusion

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.

 

Sources

  • http://www.businessofapps.com/wechat-revenue-and-statistics
  • http://www.businessinsider.com/wechat-why-it-dominates-china-2015-8
  • https://www.quora.com/Whats-WeChat-apps-business-model
  • https://www.techinasia.com/5-ways-wechat-is-innovative/
  • http://venturebeat.com/2015/09/07/wechat-really-wants-you-to-understand-what-its-all-about/
  • http://www.tencent.com/zh-cn/content/ir/fs/attachments/InvestorPresentation.pdf
  • http://a16z.com/2015/08/06/wechat-china-mobile-first/

11 thoughts on “Wechat – Leaving Money on the Table or Disrupting Social Platforms with Innovation ?

  1. Kevin, nice post! I’m going to China for FIELD 2 and I’m already realizing the power of wechat before even getting there. It seems like a lot of businesses, including my global partner, use wechat to attract and retain customers, and to sell merchandise. We were told to download it as it is necessary for communicating and conducting research in-country. The app seems so robust – I’m curious how many employees wechat has to make such an experience possible for so many people.

  2. Kevin — you really broke down WeChat for me because everyone always explains it several generalities without going into specifics. It seems like a core lever it has pulled is multiple acquisitions, including buying a car-on-demand service Didi Dache, just like Google Ventures invested in Uber. Much of what WeChat has done really reminds me of Google, too. What do you think has allowed WeChat to succeed in ALL its product launches / additions (as it sounds like), including Wallet, whereas Google has a far lower success rate? Or, rather, what are product launches or components of WeChat that are far less successful? What differentiates WeChat’s successes from its failures, both within the company, and it comparison to similar companies such as Google?

  3. It’s very interesting that either social media or mobile instant messengers such as Kakaotalk and Line(Korean equivalent of Wechat) try to monetize their huge user base by linking them with game service.

  4. Kevin, Fascinating post. Like Carolyn, I had not hear about we chat until we started working with our global partner for the Chengdu project. Its definitely very prominent in the Chinese market. I wonder if Facebook’s buying of What’s App was inspired by them!

  5. Kevin – This was incredibly helpful to read, so thank you for the post! Similarly to Carolyn and Aaron, I first heard about WeChat through our FIELD2 global partner in Shanghai. WeChat has continued to amaze me since, largely due to the vast array of functionality it offers. One concept that I have struggled to understand is O2O (or online-to-offline), particularly how apps can be used to drive customers who typically shop online towards shopping offline. You gave examples of how WeChat collaborates with third parties for O2O (e.g., “order taxi, book flight tickets, shop on JD.com, pay utilities fee and reserve for hospital visits, etc”). Aside from hospital visits and taxis, I view the other examples as things that can be done more easily online, and I am particularly interested in understanding how the WeChat collaboration with third parties is more conducive to consumers switching to engaging in these activities offline.

  6. Hi Kevin, fascinating read on Wechat! I see that wechat is trying to be everything for everyone. Tencent started off as a online game company for hard core game players. According to your post, it seems like tencent is now becoming more like an advertising company in order to monetize its most valuable asset Wechat. What are the challenges do you see where its most valuable asset now has little connection with its core gaming asset? I agree that you can put game in wechat as a way to monetize but doing so will annoy the non game players like me.

    1. Tencent is actually not a gaming company. It started with QQ – still the most popular software in every computer and phone. It’s an instant messaging platform mainly attracts people below 18 years old. So I would say advertising is always the biggest revenue for Tencent. They definitely developed other revenue sources such as gaming, skins, and emoji etc. So in Wechat, the gaming function is very seperate and totaly doesn’t impact user experience in chating and twittering.

  7. Kevin – great post. It’s amazing to me that WeChat has integrated so many different functions in one app! I was also surprised by the fact that local businesses can setup their own online stores. My global partner, a recycling company in Chengdu, actually has an online shop where customers go to buy cleaning products and other household items using points they earn by recycling. Thanks for sharing.

    1. Thanks for your comment. It’s very comment to use Wechat to communicate in business settings in China. It can quickly and easily send files and pictures, and communicate with voice messages. So in my previous work, we have multiple Wechat groups communicating issues and arrangement both at work or off work.

  8. Kevin, I’d definitely heard about we chat being an all purpose app. This was a great post that provides insight into all that they’ve achieved. And I think you hit the nail on the head with they need to be very careful with their monetization strategy. I was wondering if you ever did research into why they have not expanded to a have a more global presence. Is it a language barrier or a partnership challenge.?

    1. Sagar, I think Wechat may has missed the best timing to enter international markets. So in China Wechat best leveraged the mobile trend to launch its product 4 years ago. By that time, it was committed to create the best app user experience to compete with other platforms who were not so good in mobile and won tremendously. But in the US and a lot of other countries, Facebook has already grown into a mature app with good user experience. There’s still opportunity of Wechat which is integration of large numbers of Apps. However, it’s very hard to integrate US local service companies into Wechat without scale first. Another perspective is that CHina market is still very competitive. Wechat’s primary focus is to optimize its product first so that it would not be replaced by another app. I think in the following year Wechat would definitely want to expand internationally. Let’s see how it goes.

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