Ironically named Tencent is one of the leading Chinese internet and communications providers. As of last year, it is the owner of world’s largest social network. Qzone isn’t much bigger than Facebook. But it earns four times more money. How come?
The print ad market is in decline, and the internet advertising market is growing (see my industry update). So it comes as a surprise that only a quarter of Tencent income is produced by advertising. The rest ($719.1 million in 2008) was earned through so-called IVAS: Internet value-added services.
What is IVAS? It’s a telecommunications industry term for non-core services. It can be used in any industry where company provides additional services to promote their main business. On a conceptual level, value-added services add value to the standard offering, making the subscriber use their phone or computer more, and consequently spend more money. Example: free Skype service provided by mobile operator 3 in the UK. IVAS can enhance your experience of a website, provide extra functionality for a bit of hard cash. Virtual gifts, a weak Facebook feature, is also an example of IVAS. Zynga, a successful MMO game developer, famous for FarmVille and Mafia Wars, provides games for free, but asks for real money to boost your performance or get rare items. IVAS are charged for through microtransactions: small sums of money transfered online with the help of systems such as PayPal, or charged to your mobile phone bill. Microtransactions can serve as a viable alternative to advertising revenue, but the concept is still developing, and there are varying degrees of successful use.
Another important reason for great financial performance of Tencent is in distribution of Virtual Goods. VG are non-physical objects that are purchased for use in online communities or online games. Virtual goods include such things as digital gifts and digital clothing for avatars. They don’t cost money to store or distribute, and have absolutely no manifestation in the real world.
Qzone is much more than just a social networking site. It’s a colossal structure which unites instant messenger, dating services, online shops, mobile applications, multiplayer games and more. This broad spectrum of products allows Tencent heavy use of IVAS. Furthermore, the system uses single avatar service, meaning increased importance of signs of status. Yes, you can create a basic avatar free, but to make it truly unique, you will need to part with a bit of money.
The success of Tencent and similar companies makes me think about the changing nature of our world. We are still quite far away from The Lawnmower Man style virtual reality, but we have already started collecting virtual possessions. I believe that in our lifetime humanity will pack it’s bags and move online completely. The question is, how do we determine value in the virtual world? What is worth paying money for? Are microtransactions just a psychological trick, designed to make us spend less, but a lot more often? Are the Chinese more prone to invest in signs of virtual status due to their culture? Rapid internet development in China could make it the leading online society in the world. Which means everyone from tech enthusiasts to corporate CEOs should pay close attention to this country, and the weird but wonderful solutions it produces.
