Seeking Alpha
Long/short equity, growth, contrarian
Profile| Send Message|
( followers)  

Summary

  • Tencent’s Wechat 5.4 update could potentially compete against Baidu, Alibaba and the Chinese telcos.
  • The search function likely to hit Baidu traffic, and the payment function diminishes the value of Alipay and audio calling, putting pressure on telco ARPU.
  • Reiterate my bearish view on Baidu and Weibo.

Tencent (OTCPK:TCEHY) recently unveiled new features in its Wechat 5.4 update that include enhanced search function, mobile payment/money transfer and integrated audio calling. I see the new updates could potentially become a threat to the current incumbents that are dominating the respective verticals, namely Baidu (NASDAQ:BIDU) on search, Alibaba (NYSE:BABA) on payment and the Chinese telcos on voice calling.

Tencent delivered a nearly flawless execution of its Wechat strategy to capture additional user base. With the Wechat 5.4 update, I expect user base expansion to accelerate as the company enhances its Wechat ecosystem. I reiterate my bearish view on Baidu as I see the search function a direct threat to Baidu's search traffic and on Weibo (NASDAQ:WB) as I believe Tencent will capture additional engagement and time-spend at the expense of WB.

Search to eat Baidu's lunch

Wechat's 5.4 update introduced enhanced search features that allow users to search for content within public accounts, in addition to searching for content within individual/group chats. Chinese media reported that there are already over 5.8m public accounts in Wechat, implying that a significant amount of content could potentially be relevant to the users. The enhanced search function could allow Wechat to become a search gateway where traffic is routed from Wechat directly to the intended destination rather than from a traditional search engine.

In my view, search is an inevitable function that Tencent needs to have in Wechat due to content/information proliferation and the expansion of functionalities (ie. payment, taxi, movie ticketing). In essence, the search function directs the user to the relevant content/services without placing a large number of in-app links that could potentially jeopardize the user experience. A good example would be the comparison between Yahoo's (NASDAQ:YHOO) earlier homepage vs. Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) homepage. Evidently, GOOG's search-oriented business model prevailed as internet content proliferated over the past two decades.

Given Tencent's 400m-plus user base and a growing number of public accounts posting content and information within their Wechat accounts, the amount of information grows exponentially. Although I admit that the amount of Wechat content can never rival that of the internet, it will likely include relevant content that users look for, and that will limit their need of the traditional search engine (ie. finding information via Baidu).

Payment to step on Ali's toe

Wechat also introduced a peer-to-peer mobile payment function earlier this year that has grown in popularity. During the first half of the year, Tencent partnered with Didi Taxi to promote its mobile payment function by giving RMB5-20 rebates to users who book a taxi using the function. Wechat's mobile payment/money transfer function could grow in importance and become an important non-cash payment solution in an area that is typically dominated by Alibaba's Alipay. Again, the driver behind this adoption lies in Tencent's growing user base and the formation of the Wechat ecosystem that is becoming increasingly sticky.

While Alibaba currently has a first-mover advantage in the e-pay/m-pay space, such advantage is likely to diminish over time as users shift their time-spend to a stickier ecosystem that is also incorporating ecommerce, online travel and other services. As such, I expect more vendors to incorporate the Wechat payment, in addition to Alipay, on their platform as the Wechat ecosystem expands.

Voice calling to pressure the telcos

Video calling over Wechat has long been a standard function, but Wechat recently introduced the voice calling function (similar to Skype) to cater to low 3G penetration in China. I see this move putting more pressure on the incumbent telcos, namely China Mobile (NYSE:CHL), China Telecom (NYSE:CHA) and China Unicom (NYSE:CHU), in that this feature encourages users to sign up for a more data-oriented plan that is potentially in a lower price tier while taking advantage of free public wifi for voice calling. ARPU will likely to come under pressure, and this trend could diminish the value of talk/text and force the telcos to stop charging for minutes and text while only charging for data (as it is done in North America). Furthermore, this further opens the door for Tencent to deploy its own MVNO services (ie. cheap data package, unlimited Wechat data?) to compete head-on with the telcos.

In conclusion, Tencent has executed flawlessly in its development of the Wechat ecosystem that is growing to become a threat to Baidu on search, Alibaba on payment and voice calling on the telcos. Readers of my research also know my view that Wechat is a direct competitor to Weibo for user time-spend and engagement. I reiterate my positive view on Tencent and my negative view on Baidu and Weibo.

Source: WeChat 5.4: Pressuring Baidu, Alibaba And The Chinese Telcos