Foreign Ambition Sets Tencent Apart

An enviable mix of confidence and cash seems to be powering Tencent’s ongoing international expansion, recently extended in dramatic fashion with the purchase of just over 10% of Russian internet giant Digital Sky Technologies (DST).

The stake cost the Chinese social networking and gaming giant US$300 million, small change for such a cash-rich company as Tencent, which is also sitting on a comfortable US$38 billion valuation.

Investing in another large emerging market also makes sense, given Tencent’s experience in building one of China’s biggest internet operations over the last decade or so. The tie-up with DST follows deals with gaming and social networking companies in two other major growth markets, India and Vietnam.

DST hit the headlines last year after shelling out US$300 million of its own for a 3.5% stake in Facebook - a catalyst for recent speculation that Facebook could use the DST-Tencent deal as a bridge into China, where it is currently unavailable.

Big bets on social media
DST CEO Yuri Milner says he wants to spend more than US$1 billion on social media over the next five years, plays that may prove useful to Tencent too. Milner followed the Facebook deal with major investments in Zygna, the company behind some of Facebook’s most popular games, as well as in Groupon, a US company that uses social media tools to deliver special offers to consumers.

Shortly after teaming up with Tencent, DST also became the successful bidder for AOL’s IM service, ICQ, a prize also targeted by Tencent and its chief investor, Naspers.

Tencent’s partnership with DST could be a fruitful one, in line with Tencent’s long-term strategy of tying up with leading local internet companies in emerging markets through strategic investments and partnerships.

Nevertheless it takes a dash of bravado to divert management time or money away from China’s hyper-competitive and still-developing internet market.

Just last month, CEO of search leader Baidu Robin Li chided those who thought that the country’s 400-million user strong internet market was starting to mature, warning that the future landscape of the web has yet to be determined.

A dominant player in China’s search market, Baidu also has the market share and the market cap (US$24 billion) to develop overseas. The company has been strengthening operations in its three-year-old Japanese service, where it has made slow but steady progress, but launch in another market looks unlikely any time soon.

Unfinished business at home
As Li alluded to, Baidu faces plenty of future competition within China, and not just because two thirds of the population have yet to go online. The development of e-commerce and mobile search, both relatively nascent in China, will reshape its search market.

In the near term Baidu must also contend with plenty of rivals, Tencent among them, hoping to benefit from a weakened Google, which has been losing staff and share since clashing with the Chinese government over censorship earlier this year.

Tencent is feeling the competitive heat at home too, from the rapid rise of local Facebook-style social networks such as Kaixin and RenRen. That didn’t stand in the way of a move into Russia however, and with a partner that opens up all kinds of new possibilities for the future.

Gaming giants on the move
Furthermore, as China’s biggest gaming company, Tencent is operating in one sector of China’s internet industry that is becoming increasing visible overseas. “Gaming companies have much more exposure to international markets,” notes Scott Spirit, Asia strategy director for WPP. 

In January, Shanda announced it was paying US$80 million for US gaming company Mochi Media while Perfect World revealed in April that it was buying Japanese online gamer C&C Media for US$21 million.

Tencent meanwhile has invested in two online gaming outfits in the US, Riot Games and Outspark.

Having built businesses by importing games from abroad, and now starting to sell their own to the rest of the world, Chinese gaming giants are becoming increasingly bold players on the international stage.

Most online leaders in other sectors, however big, have so far chosen to stay in China, where fresh opportunity goes hand-in-hand with fierce competition. Tencent, a hybrid company that straddles the gaming sector and the internet media sector, is a notable exception to the rule.

Now it must prove that expansion abroad need not stall momentum at home.

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