China's Tencent Has Quietly Built An Entertainment Empire That Western Tech Giants Can Only Envy

Yue Wang.
In their battle for people’s screen time, U.S. technology giants are all targeting the entertainment industry, with companies including Apple, Amazon and Facebook each setting aside billions of dollars to develop original content and shows.
But for a glimpse of a future where one digital powerhouse rules every facet of entertainment, people should look to China, where web giant Tencent is edging steadily towards that goal.
The Disney of China?
Tencent, headquartered in the Chinese technology hub of Shenzhen, is best known as the operator of WeChat, an instant-messaging app with 963 million users that also offers services such as shopping, payment and online food delivery. But in recent years the company has quietly built another juggernaut – a media and entertainment empire encompassing music, film and television shows. This entertainment behemoth is poised to rival many of its competitors in creative prowess, and already has an inbuilt online reach that western companies cannot hope to match.
The company did it through aggressive investments. Just last week, Tencent forged an alliance with Spotify, with the company and its music division, Tencent Music Entertainment Group (TME), acquiring a minority stake in the Swedish music streaming service provider. They are expected to collaborate in an 18 billion yuan ($2.7 billion) market that Tencent dominates: It already owns China’s three largest music apps by installment base – QQ Music, Kugou and Kuwo – where a combined 700 million monthly active users are not only listening to domestic hits but international stars such as Katy Perry and Rihanna. TME is widely expected to go public next year, raising $1 billion at a valuation of at least $10 billion.
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When it comes to film and television shows, Tencent is modeling itself after Disney, seeking to emulate Star Wars or The Avengers in building franchises with long-lasting appeal. And the company knows where they will come from -- its online books division. China Literature Group owns almost 50% the country’s e-reading market, according to its prospectus. The unit, which counts some 6.4 million writers and had a blockbuster initial public offering in Hong Kong in November, provides an ample amount of original materials – including the country’s biggest fantasy hits -- that can be adapted into movies and online shows.
IP power
“Tencent has a system of intellectual property (IP) production,” said Chen Yuetian, a partner at Chinese investment firm S. Capital, which focuses on the media and content industry. “While others in China can only buy IPs, Tencent controls how they are produced.”
Unlike Disney, which just acquired most of 21 Century Fox’s assets for $52.4 billion to beef up its digital offerings, generates a good part of its revenues from theme park visits and related merchandise sales, Tencent’s ultimate cash cow is already online. The final building block in this IP adaptation chain is video games. Tencent is the world's largest video game publisher, and games routinely contribute to more than half of its revenues.
Fighter of the Destiny , an e-book published by China Literature in 2014, is just one property that is being leveraged in this way. It was adapted into an anime series and a television show this year, with an eponymous movie still under production. A related smartphone game is likely to go online next year, with more than 10 million users already signing themselves up for early promotions.
By middle 2018, the series can probably bring Tencent 30 billion yuan ($4.5 billion) in book, IP and gaming sales, according to Charlie Chai, an analyst at Shanghai-based 86 Research.
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To users, this gives them few reasons to leave Tencent’s apps. For example, Sunny Niu, a 30-year-old employee at a government agency in Beijing, listens to QQ Music every day, while spending hours watching shows on Tencent Video at night. If Niu is in the mood for something else, she sometimes flips through books on Qidian, the e-reading app developed by China Literature.
“I think I will keep using Tencent’s apps,” Niu said in an interview with Forbes. “All my favorite titles are updated there.”
Global reach
Western companies seeking to tap China’s burgeoning entertainment market are also counting on Tencent. This year, Tencent Pictures has invested in Hollywood Blockbusters Wonder Woman and Kong: Skull Island. Both films have run banner advertisements on Tencent Video, Tencent-backed ticketing platform Maoyan and WeChat, where close to 1 billion users have the option of buying tickets and downloading film-related emojis.
This doesn’t mean Tencent is free of competition. In online video, for example, it competes fiercely with Baidu-backed video streaming site iQiyi for the top spot, with each boasting more than 300 million monthly active users. Both are seeking to capture a greater share of the video subscription market – which is now home to 144 million subscribers as more and more users are willing to pay for professional content.
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In the meantime, Alibaba, whose Youku Tudou video site has fallen to the third place, is also doubling down on original programming, signing last week a multi-year agreement with NBCUniversal and Sony Pictures Television to stream their films in China.
And despite some early success with Fighter of the Destiny series, Tencent’s IP adaptation is still at an early stage. Compared to Disney, it faces a shortage in industry professionals, often relying on user voting or outside studios to select works with the best commercial value, according to 86 Research’s Chai.
But if done right, entertainment could catch up with gaming in revenue potential by 2020, provided that Tencent can create an in-house production team that can save it tens of billions of yuan in fees now paid to partners like Shanghai-listed Huace Film&TV, Chai said.
“Tencent has the most comprehensive entertainment strategy in China,” Chai said. “Except for online video, the company already built a monopoly in all the other areas. If it can be more like Disney, than it has a huge upside.”