For Chinese IM Portal Tencent, The Money Is In Micro-Transactions

[TechCrunch]

In China, the money isn’t in Web advertising. It is in micro-transactions. At least that is the case for Tencent, which operates the largest instant-messaging network in China and is one of the largest overall portals. Tencent—which includes the QQ IM service, QQ Show (an avatar social network modeled after Korea’s Cyworld), and QQ Pet (virtual pet portal)—is the No. 21 Web property in the world and the second largest in China after Baidu (the two keep switching the No. 1 and No . 2 spots). According to comScore, it attracted 66.2 million unique visitors in February, half a million less than Baidu and about 10 million less than all the sites run by New York Times Digital (which includes NYTimes.com, About.com, Boston.com,and a bunch of other newspaper sites).

Tencent is publicly traded. In 2007, it made $523 million in revenues, and $224 million in operating profits. That gives it a 43 percent operating margin. In contrast, Yahoo’s operating margin is 10.4 percent.


A big reason for the difference in this profitability is that advertising makes up only 13 percent of its revenues. The rest are in micro-transactions for digital goods, online games, and other services that Chinese Web surfers gladly pay for, as well as mobile services. Here is how Tencent’s revenues break down:

Internet services (digital goods, games, micro-transactions): $344 million (66%)

Mobile services: $110 million (21%)

Online ads: $67 million (13%)

Total Revenues: $523 million

Digital goods are a big revenue driver for Chinese Web companies and are extremely profitable. In the U.S., with a few exceptions (the virtual economies in virtual worlds and online video games), Web surfers don’t really like to pay for digital goods. Is this a cultural thing, or can it change? It is important to remember that there are other ways to make money on the Web besides advertising.


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[Fanatic]

There is a huge lesson to be learned from tencent. Mobile phone companies already understand this. That's why you get dinged for every little thing you do ($0.15 per text message, $0.99 to download a ringtone, etc.).

And some people are listening, and learning that advertising is not the only path to profitability -- Animoto comes to mind.

[Gandalf]

I was thinking the same thing, Fanatic. Animoto looked pretty cool, and they don't use advertising at all. Yet according to their founder, they get a pretty decent conversion rate of people upgrading to the paid service.

I think there's room for this in a lot of areas, but it needs to be done with caution. MSN kinda tried this with American Greetings, selling display pic and emoticon packs. They didn't charge much, but I don't think it went over well, since they are free now. Maybe the key users didn't have an easy way to pay for them?

That's one thing that the cell phone companies have going for them. You can "buy" things without really paying for it at that moment. It just shows up on your next bill. That's the easiest way to make micropayments work. Have an existing account where you can easily charge for little increments.

Xbox Live does this as well, with their Points system. Some of the downloads are free, and some cost "points" (which do not directly relate to dollars). Points have to be purchased in blocks of 500 or more, so mom and dad can "gift" their kids with points to use, and when they're gone, they're gone. It's another good example of micropayments that seems to work.

I can't think of too many other examples, although I've heard that in in Japan, you can even use your cell phone to make purchases at vending machines!