Season 3, Episode 10: Tencent

[0] Also, I did have Tesla that they invested in Tesla, and I have one other that is kind of surprising that they own a good bit of or owned a good bit of.

[1] Excellent.

[2] Do you know that one?

[3] Snap?

[4] Snap.

[5] Yeah.

[6] Oh, yeah.

[7] Tencent is everywhere.

[8] Welcome to Season 3, Episode 10 of Acquired, the show about technology, acquisitions, and IPOs.

[9] I'm Ben Gilbert.

[10] I'm David Rosenthal.

[11] And we are your hosts.

[12] Today we are covering a company that Wikipedia describes as a Chinese multinational investment holding conglomerate founded in 1998.

[13] Of course, this is 10 cent.

[14] All of that and so much more.

[15] All that and a bag of chips.

[16] And a bag of chips.

[17] And a 12 % stake and snap.

[18] David.

[19] We'll get to that later.

[20] Spoilers.

[21] Well, so what is 10 cent besides that very long, definitely?

[22] definition that feels conglomerity.

[23] Well, first off, they're notoriously bad at PR, and they actually talk about this as a company.

[24] You probably don't have them in your mind as one of the world's most important companies unless you're in gaming or maybe social media.

[25] So starting off with that first, Tencent is the world's largest gaming company.

[26] They're a game publisher, and they take most of their money from games.

[27] It's where they make most money as a company, but they certainly didn't start this way, and we'll dig into that in a minute.

[28] Tencent rivals Facebook.

[29] for the world's largest social networking company by market cap.

[30] It is the world's largest music service that actually IPOed this week with over 800 million monthly active users.

[31] That music company that just IPOed on the New York Stock Exchange on its own has a $21 billion market cap, of which Tencent owns most of it.

[32] I think they raise like $1 .1 billion in their IPO.

[33] So, you know, just a little blip on the radar of all that is 10 cent.

[34] Last year at one point before their stock fell, it had a market cap of half a trillion US dollars.

[35] In this year's WPP brand rankings, it has the fifth largest brand in the world even ahead of Facebook, David.

[36] Well, the brand stock in one of those is falling right now.

[37] The other is, I don't know if it's rising, but it's not falling as much.

[38] But this company is a juggernaut.

[39] And I could think of no better way to wrap up not only our China miniseries, but all of season three.

[40] There's going to be so much back and forth through this episode between Alibaba and its founder Jack Ma and here now, Tencent, and it's founder Pony Ma.

[41] They're very different, as are their companies, as we shall see.

[42] Well, listeners, we want to let you all know about our latest limited partner bonus show topic.

[43] So last week on the LP show, the topic was the art of pitching your company for investment and how to craft the narrative.

[44] So we had a blast doing this.

[45] We got to share a bunch of personal experiences.

[46] Super fun, David, to be able to kind of branch off of the standard format and dive into topics like this.

[47] If you want to listen, you can become a limited partner by clicking the link in the show notes or going to kimberlite .fm slash acquired, which is, of course, also on our website, acquired .fm, along with our Slack.

[48] We're turning into 10 -7.

[49] We have a media empire of properties here.

[50] My gosh, I know.

[51] I know.

[52] We got to start sub -brands.

[53] We need a we -chat to our QQ.

[54] Yeah.

[55] Or maybe a penguin mascot.

[56] All right.

[57] Okay, listeners, now is a great time to thank one of our big partners here at Acquired, ServiceNow.

[58] Yes.

[59] Service Now is the AI platform for business transformation, helping automate processes, improve service delivery, and increase efficiency.

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[62] They're also a major partner of both Microsoft and NVIDIA.

[63] I was at NVIDIA's GTC earlier this year, and Jensen brought up ServiceNow and their partnership many times throughout the keynote.

[64] So why is ServiceNow so important to both Nvidia and Microsoft?

[65] companies we've explored deeply in the last year on the show.

[66] Well, AI in the real world is only as good as the bedrock platform it's built into.

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[73] And when you get in touch, just tell them Ben and David sent you.

[74] Thanks, ServiceNow.

[75] Well, before we dive in, David, I think we have a little bit of follow up from the Netflix episode.

[76] Do we have a glaring omission from our Netflix two -parter?

[77] So do you, do you want to do you want to do it?

[78] We're keeping everybody in suspense here.

[79] One of the coolest things about our little mini Netflix series was learning about the spinouts from the company, of course, of Redbox and Roku.

[80] And several listeners wrote us after they listened to Part 2 and said, guys, I was waiting for the third spinout, quote unquote, quasi spin out.

[81] And it never came.

[82] Not in the shareholder perspective, but in the people that left and were instrumental in building Netflix and now we're building something else.

[83] And building something else.

[84] And of course, we were totally remiss.

[85] Movie pass.

[86] How could we have missed it?

[87] Only like the, the meme, the company everybody loved to love and hate on in 2018 was founded and is run by Mitch Lowe, who was the one and only.

[88] The one and only.

[89] Not only original Netflix executive, but then Red Box president.

[90] And now CEO and founder of Movie Pass Embattled Movie Pass He's founding just keep getting worse and worse So I'm thinking maybe This should be the last one Hey, product market fit I mean customer demand is there Yes, yes Boy, you can sell dimes for nickels At insane rates Insane rates, insane rates So we apologize for Leaving that fun bit out of the the history and facts for Netflix, but I wanted to make sure to include it in the follow -up.

[91] All right.

[92] So is it time?

[93] I think it's time.

[94] Let's get into Tencent.

[95] Yeah, I think starting with a couple of thank yous to really great sources that we found for the episode and actually some from listeners.

[96] I have three thank yous in particular.

[97] I want to throw out.

[98] First to Bernard Liang in the Slack, in the Acquired Slack, who is the host of the Analyze Asia podcast.

[99] Also, a great show.

[100] Recommend, especially if you've enjoyed our China miniseries, that you go listen to it.

[101] So he wrote us after we said, and we released an episode of our LP show last week.

[102] And in it, we said we were going to be covering Tencent today.

[103] And he said, you really gave us a couple podcasts to listen to.

[104] Also said the canonical book on Tencent is called Tencent Story.

[105] It's by Shaobo Wu.

[106] Unfortunately, it's only in Chinese, but fortunately, we were able to find an English language summary on medium by Julia Wu.

[107] So huge thank you to Bernard, to Xiaobo for writing the book, and then to Julia for writing a really excellent English language summary, which we will link to in the show notes.

[108] And lastly, on my end, the China Econ Talk podcast had a great episode with Matt Brennan, who's a chat expert and analyst.

[109] He was a guest on the show and just gave an unbelievable sort of blow -by -blow history of the development of WeChat, which contributed to the research for today.

[110] And lastly, friend of the show, Brad Stone, did an awesome piece in Bloomberg Business Week on Tencent this past June.

[111] We got, we have Brad back on for another show at some point, David, because he's a, he's a plus.

[112] He is a plus.

[113] All right.

[114] So with all that, let's dive in.

[115] So before we get to Tencent and its founder, Pony Ma, I think it helps a lot of little bit like Netflix to talk about the geographical place where Tencent is located.

[116] And that is the city of Shenzhen, which is probably familiar to, I would assume, all listeners of the show at this point, the quote unquote Silicon Valley of China.

[117] Yeah, anyone who's had an iPhone ship to them have probably seen this on their tracking.

[118] So in the China miniseries this season, we covered Xiaomi, which is based in Beijing.

[119] Baidu is based in Beijing.

[120] We haven't covered Baidu yet.

[121] We covered Alibaba, which is based in Hongzhou.

[122] But this is our first Shenzhen company.

[123] So what's so special about Shenzhen and why is it the Silicon Valley of China?

[124] So it's in the south of China.

[125] It's the very southern part of the country.

[126] It's part of the Pearl River Delta region named Regional Economic Zone.

[127] It is located right across the Bay of Shenzhen from Hong Kong.

[128] So this is super important.

[129] important.

[130] The history is really interesting.

[131] So before the post -Mao reforms in China and the kind of opening up of China and the introduction of the capitalist market system, the legend is that Shenzhen was just a fishing village.

[132] It was a little more than that.

[133] It was a market town, but it was very small.

[134] And fishing was one of the main industries there.

[135] The city itself had about 30 ,000 people.

[136] And during the cultural revolution, you know, when things were really bad in China, people would go out to fish and they would just keep going in their boats and they'd go right across the bay to Hong Kong, which of course was a British protector at the time and never come back.

[137] Some people would even jump in the bay and physically swim across.

[138] It was right on the border, you know, of kind of like the east and west and capitalist and Chinese communist party in the 60s and 70s.

[139] But after Mao during the reforms, of course, Deng Xiaoping takes over the party and he starts, you know, this is probably the most radical transformation in world history, you know, introducing capitalism to China.

[140] He calls it socialism with Chinese characteristics.

[141] You could argue this leads directly to acquire doing this mini -series, which is the most important, you know, outcome of all.

[142] Of course, we just.

[143] So Dang, when he wants to introduce capitalism, he wants to do it very, very slowly and in specific areas.

[144] And he picks Shenzhen as the first area where capitalism is going to be introduced in China.

[145] This is so special.

[146] Like, think about if we try to do that in the United States.

[147] Like, well, we're going to change this, the economic structure, but we're only going to do it in this state.

[148] In one city.

[149] It is only going to happen in San Jose or Bellevue.

[150] Like, that is the equivalent here.

[151] It's pretty crazy.

[152] Yeah.

[153] I mean, it literally is like if you're familiar with the Seattle area geography.

[154] It's like Bellevue, right?

[155] Like there was Seattle, Hong Kong, and then across, you know, a body of water, there is Shenzhen.

[156] And so it becomes the first special economic zone where, you know, capitalism and the free market is not only allowed, but encouraged now by the government.

[157] And Deng has this famous quote about this where his concept is, let some people get rich first.

[158] And that will kind of draw the rest of the country along.

[159] And that's what starts Schengen on the path from a 30 ,000 person kind of market and fishing village to, you know, people start flocking there from all over the country.

[160] First, importing and exporting becomes a huge business there from Hong Kong and across the it's now one of the busiest container ports in the world then manufacturing obviously which lots of people know about and of course now high tech so today there are over 12 million people that live in shengen proper and then the pearl river delta region which i think has about nine cities around it it's all one continuous urban area has 60 million people it's the largest continuous urban region in the world which is nuts it's like if you took all of california and you condensed it into like the Bay Area or or maybe the the Los Angeles area is probably more comparable.

[161] It's great.

[162] So this is the soil that Tencent gets planted in.

[163] So in 1971, a boy named Mahwaten is born in a small city in the province of Hainan, which is an island south of Shenzhen and Hong Kong.

[164] It is the southernmost Chinese province.

[165] He eventually adopts the English name Pony, which is a reference to his last name Ma, which means horse.

[166] So he is pony horse.

[167] And when he's 13 in 1984, his father gets a job as part of this great, you know, rise of Shenzhen, gets a job as a port manager at a shipping facility in Shenzhen, and they move there.

[168] Now Ma is super precocious.

[169] He's like a great student, totally excels at everything.

[170] He graduates from high school in 1989.

[171] He does, knocks it out of the park, like, I don't know if he was technically first in his class, but like, top of his class in his college entrance exams.

[172] He could go wherever he wants, but he and his parents choose for him to stay at home and go to Shenzhen University instead of going elsewhere to better schools in the country because this is 1989.

[173] And if you know your Chinese history, there's something else going on in 1989, which is the student protests and unrest.

[174] And they decide it's better for him to stay at home and stay in the special economic zone.

[175] So he goes to Shenzhen University.

[176] But again, he's super precocious.

[177] He majors in computer.

[178] science.

[179] Apparently, he originally wanted to be an astronomer, but that wasn't offered at Shenzhen.

[180] And so everybody, the sort of talk of the town is that just like Jeff Bezos and Elon Musk, we might see pony as he moves into the kind of second phase of his life, get into space and rockets and be a Chinese version of these U .S. tech billionaires that get into space.

[181] It wouldn't surprise me. He's already, he's moved millions or I think billions of dollars.

[182] into his private philanthropic work.

[183] So.

[184] Yeah.

[185] So instead, he studies computer science.

[186] And while he's in school, he develops a little app.

[187] And this company that he's interning for, Lee Ming, ends up buying this side project of his for 50 ,000 R &B, which is like three or four years worth of salary of a new college grad at the time.

[188] Not a bad way to enter the workforce.

[189] Contrast him already with Jack Ma, who's like, doesn't do well at math.

[190] It was nothing about technology and can't code and is like making a living as an English teacher.

[191] He's already sold his first company.

[192] He's still in college.

[193] And Jack Ma, I don't think he had already done this by this point.

[194] But another interesting contrast is was obsessed with Western society and ended up spending a lot of time in the United States.

[195] Pony Ma does none of this.

[196] I don't think he'd ever visited the U .S. or gone to Europe.

[197] Doesn't speak English.

[198] So he graduates a bunch of his friends who are also at the top of his class, kind of want to stay and go on to graduate degrees.

[199] But Pony is like, no, I want to get out into the working world.

[200] I've already sold, you know, kind of my first project.

[201] I want to go make an impact and build things that people use.

[202] So he goes and he works for a company called Shenzhen, Runchen communications.

[203] I may be buttering that.

[204] But that's his first job.

[205] And he works in R &D.

[206] And they're sort of like a telecom company.

[207] And so he's working in all sorts of advanced tech.

[208] One of the main things that they do is they make technology for pagers.

[209] Pagers are like really big in China at this point in time.

[210] They're big everywhere, but especially in China where like PCs aren't really a thing yet.

[211] Like lots of people are using pagers to communicate.

[212] And so that's kind of his first taste of like communications tech.

[213] Again, remember Jack Ma, he has to like go on this crazy trip to the U .S. to get exposed to the internet.

[214] Pony is getting exposed to it through his work.

[215] So he's one of the very, very few people in China that, like, even though the internet is a thing, let alone have access to it.

[216] So he gets really deep in the early BBSs on the internet, like the bulletin board systems.

[217] And amazingly, a whole bunch of Chinese entrepreneurs come out of this.

[218] So like, again, the only people who have access here, like people who are super geeks working at tech and communications companies in China.

[219] So Lay June, the founder of Xiaomi and the previous CEO of KingSoft, who we discussed in our Xiaomi episode, he's on there on the bulletin board systems.

[220] Pony's hanging out with him.

[221] Also, Ding Lay, who would go on to start Nettys, which is another huge Chinese portal that we've talked about on the Alibaba episode, he's there as well.

[222] And so all these guys, they're all like starting companies as they see the internet company.

[223] Is there like a future billionaires, BBS, that they all sort of hang out on?

[224] Totally.

[225] Talking about what planes they're going to buy, you know, how many rockets they're going to build.

[226] 19 ,000 square foot homes.

[227] Yeah.

[228] Which I think you're referring to Pony has a current very private secluded mansion in Hong Kong.

[229] Yes.

[230] Ma is like super inspired.

[231] He sees Ding start netis and like he's like, man, I got to get in this game.

[232] So 1998, remember he graduated in 93.

[233] So he's five years out of.

[234] college.

[235] He reunites with his old college friends who had stayed and done graduate degrees and they're finished showing up their studies and he's like, guys, we got to do this.

[236] The time is now.

[237] We got to start a company.

[238] And the initial idea that he pitches them on, remember, he's working on pager technology.

[239] Well, he's like, we're going to develop internet services for pagers.

[240] So like all these people in China, they have pagers.

[241] We're going to provide like a better like mobile internet on pagers.

[242] Ben, I don't know if you remember.

[243] remember in the early days of like quote -unquote smartphones before you know before blackberry before the iPhone in in the US like there was this mobile internet.

[244] Oh yeah dude wow the carriers had.

[245] Yeah, WAP exactly.

[246] So I think this is what the idea is.

[247] WAPs required sort of like a I guess not necessarily a color screen but some kind of like actual dot matrix thing that you could display almost HTML on right.

[248] It was like some janky images and really low quality gifts and text that you could scroll.

[249] So I think, like, it's, it's like a slightly more primitive precursor to Wap.

[250] So they start the company.

[251] They need to choose a name.

[252] And they come up with, uh, tungshun, uh, I believe is how it's pronounced, uh, tension, tungshun, which literally in Chinese means galloping message.

[253] So, of course, his name is pony, pony, pony mop, but that's amazing.

[254] I didn't catch that.

[255] Yeah.

[256] And, uh, because I was, I was doing all this research.

[257] I was like, where does Tencent come from?

[258] And I've always wondered that.

[259] It is the westernized version of tension.

[260] Wow.

[261] Galloping message.

[262] There you go.

[263] Dude, we should, I'll send you a galloping message after the show.

[264] We can talk about how we thought it went.

[265] Yeah, on our many communications platforms.

[266] You can page me. Perfect.

[267] Well, two other things about the incorporation of galloping message.

[268] One, Pony Ma was 26 at this time.

[269] So multi -hundred billion dollar company founded by 26 -year -old.

[270] not exactly the sort of Mark Zuckerberg or Evan Spiegel crazy early but still pretty pretty young dude he's still pretty young and his co -founders of course had just finished their you know grad degrees right right the other interesting thing that I caught was it was incorporated in the Cayman Islands I don't know if this is exactly the same structure but if you remember from the Alibaba episode Yahoo couldn't invest in a Chinese company I think it was that the Chinese company couldn't have major international shareholders so there was a Cayman entity set up for Yahoo to invest in that then had a contractual relationship with the actual entity of Alibaba in China.

[271] It's interesting to see probably a slightly different thing since they actually started it as a Cayman entity, but sort of interesting to see that structure here.

[272] I assume they did this because they intended on raising venture capital.

[273] It's kind of like how you and I all these start these Delaware Corps.

[274] Yeah, exactly.

[275] It's the Delaware Corporation.

[276] The Cayman Islands is the Delaware of, uh, we'll just call our registered agent down there and have them spin some up.

[277] Yeah.

[278] Yeah.

[279] So they do this.

[280] They're working on the page or software.

[281] Meanwhile, this is 1998, late 1998, going into early 1999.

[282] What's going on in the rest of the world on the internet?

[283] It's like the first wave of real consumer internet and social, quote unquote, although people didn't call it yet that, is blowing up.

[284] So you've got Napster in the US, and of course you've got AOL, and then MSN and all sorts of other kind of portals and early instant messengers are popping up.

[285] And so the first instant messenger was this company called ICQ.

[286] Israeli company.

[287] Oh, man, I used to live in ICQ.

[288] And that was the first PC -based instant messaging client ends up getting acquired by AOL in 1998, so right before Tencent is started and really starts taking off.

[289] Entrepreneurs see the power of the network effect in these communications businesses.

[290] And now there's an exit in ICQ.

[291] And they're like, okay, great, we're going to start building these things.

[292] So it's like, you know, the first example of what we would see later, you know, with messaging apps on mobile and ride sharing.

[293] It's like you have, they start popping up all over the world.

[294] And so Pony and his co -founders see this and they're like, okay, forget this page or software thing.

[295] We're going to go clone ICQ.

[296] Send the guy.

[297] Appeloping messages over instant message.

[298] Yes, on a computer.

[299] And again, to be fair, like, the pager thing wasn't totally crazy because people had them.

[300] And what people did not have in China were their own, you know, personal computers.

[301] But what it was starting to emerge now was internet cafes.

[302] And people would go and spend tons of time in internet cafes on PCs there.

[303] And so they realized we can still get distribution into consumers' hands, even though they don't personally own PCs.

[304] we just get it into these internet cafes.

[305] People install our version of ICQ which they call open ICQ very creatively, O ICQ on the internet cafe PCs and we're going to access a huge amount of the Chinese market, which they do.

[306] Just to drive this point home about like when we say people in China didn't really have PCs at home.

[307] So in 1999 there were 50 desktop computers for every 100 people in the United States.

[308] It's about, you know, half people, as you would sort of expect, if you rewinded to 1999, you think about what you were observing around you.

[309] Well, in China at that same time, it was one home computer for every 100 people.

[310] The internet and, you know, even computing really hadn't come to China yet, particularly at home.

[311] But these internet cafes had, and it works.

[312] And people start spending a ton of time.

[313] And I remember reading about this at the time thinking, like, this is crazy.

[314] Like, I use the computer in my house, but in not just China, but Korea.

[315] I don't, I don't think it was as much in Japan, but definitely in Korea.

[316] This whole internet cafe thing became a huge meme.

[317] The birth of the PC bang.

[318] I'd been to one.

[319] Have you been to one?

[320] No, I haven't.

[321] I've read way too many articles to have not been to one.

[322] It's cool.

[323] Depressing, but cool.

[324] When I was at Stanford in business school, we did a, everyone has to do like an international trip experience.

[325] And mine was to South Korea.

[326] And it was funny.

[327] PC bang was not on the official itinerary.

[328] So it was like one evening when we were free, I was like, I cannot not go to a PC bang.

[329] So I just wandered off by myself and like, is it like just everybody playing StarCraft?

[330] Yes.

[331] That is exactly what it was.

[332] So within nine months of this pivot to OICQ to copying and it wasn't just copying.

[333] And Pony Ma actually, he talks about this.

[334] Because Tencent has a reputation for copying others' ideas, as we will see multiple times throughout this episode.

[335] But he's like, it's not just copying.

[336] You had to adapt it to the Chinese market.

[337] Like, ICQ wasn't going to work or any of the competitors in China, A, because it wasn't, you know, in Chinese, but also be like the way that like the market operated was different.

[338] Again, people didn't have PCs.

[339] They went to internet cafes.

[340] And so you just had to do a bunch of stuff with the product to adapt it to the local market.

[341] You couldn't make assumptions around.

[342] this user is always logged in and stuff like that.

[343] Well, stuff like mailing a CD to your house, you know, that AOL, of course, so famously used for distribution.

[344] Right.

[345] Our distribution was different.

[346] Yeah, it makes sense.

[347] Yeah.

[348] Like, that's not going to work.

[349] So within nine months of the pivot, they have a million users, which obviously is a drop in the bucket compared to the whole population in China, but still, like, huge and huge enough that AOL notices them and notices this open ICQ that is taking off in China that they do not own.

[350] when they thought they owned ICQ.

[351] So they serve them a lawsuit and demand that they take down the service or at least change their name.

[352] So now they're kind of up a creek without a paddle.

[353] They have no business model.

[354] They're giving away all this for free.

[355] They're presumably having to pay something or at least employ a lot of people to go get this service installed in internet cafes around the country.

[356] They have ballooning server costs.

[357] Yeah, I was going to say you actually have to build data centers and buy servers and rack them and have IT people that are, you know, maintaining all that.

[358] All this stuff.

[359] So they're like, okay, we're going to do a dual track process.

[360] We're going to try to sell the company.

[361] We're going to be, you know, we're the ICQ of China.

[362] Or we're going to raise venture capital.

[363] And we'll see what happens.

[364] This, this flexibility was shocking to me. The fact that Pony Ma is like, look, I have a clear vision.

[365] We're going to bring messaging to China.

[366] And like, it's not as important to me to do it in a way where I, you know, maintain control.

[367] the whole company and like I just want to see my mission through and of course I'm sure everyone had a profit motive there but like it was really about like we have an opportunity that makes this thing huge and I'm open to whatever process gets us there just like Netflix right like you know they tried to sell Netflix I think what three times yeah once to blockbuster for 200 million dollars or something yeah well first to Amazon and uh it was like I think Bezos offered like nine million or something like that and it was too low anyway listeners it's amazing how quickly David and I have about a nine -hour span where we can actually do an episode where we have enough of the information in our heads and like the notes collated in such a way where we can actually do the episode.

[368] And then it all just like jumbles after that.

[369] So it's good that we get them out when we do.

[370] Yeah, totally.

[371] It's the problem with getting old.

[372] So nobody wants to buy the company.

[373] But in 2000, they do have two people who are interested in investing.

[374] So one is IDG venture capital, which is one of the most prolific, at least kind of first wave VCs in China, it was a U .S. VC.

[375] I believe IDG, I believe it's a publishing group.

[376] I think it was like a, they did a lot of the early trade shows and kind of like computer trade shows and sort of like internet 1 .0.

[377] And they had a venture arm that was very successful in China.

[378] So IDG wants to invest.

[379] In this particular fund, I believe, was quite small.

[380] Think about it like a much, much smaller than you would think about a seed fund today, which will be important in a moment.

[381] Which is probably why they need to bring in extra capital.

[382] So they bring in one of the companies owned by Lee Kashing, the very famous Hong Kong -based billionaire investor, a telecom investor.

[383] So the two of them as a syndicate are willing to invest, and they are willing to invest $2 .2 million USD for 40 % of the company.

[384] So $5 .5 million post -money valuation for a business.

[385] that has a million users in a million users back then.

[386] Is there harsh terms, man?

[387] That's a lot of the company to give up.

[388] I know, I know.

[389] Well, you know, the VCs, they want their 20%.

[390] And in this case, they both want their 20%.

[391] Yeah.

[392] But Pony and Tencent, they kind of have no choice.

[393] They take the money.

[394] They sell the 40 % of the company.

[395] Immediately afterwards, they lose the judgment in the matter with AOL.

[396] I don't know exactly know what jurisdiction it was in.

[397] It was international law.

[398] But they're ordered to stop using the open.

[399] an ICQ name.

[400] And the story is, so they're trying to figure out, like, how can we rebrand this thing?

[401] Supposedly, a Tencent employee is on the bus one day in Shenjin, and he hears a couple users who use the service, just talking about it on the bus, and they're referring to it as QQ, as the like acute kind of diminutive of OICQ as is QQ.

[402] And he's like, hey, we need something.

[403] A star is born.

[404] A star is born.

[405] So not only do they rebrand OICQ.

[406] Q to QQ.

[407] They fully embraced the cuteness.

[408] And they design and adapt the cute little cuddly penguin that if you're familiar with Tenson and with QQ you probably know of as their mascot.

[409] Which I didn't know about till doing this research.

[410] And thank God I did because then I got your penguin jokes earlier.

[411] Well, and I think what that means probably most of our listeners didn't get the penguin jokes.

[412] But now you get the penguin jokes.

[413] Now I think I wasn't totally able to confirm this because like, you know, the internet way back machine doesn't really, you know, work in China.

[414] But I believe not only before this switchover were they using ICQ as their name and ripping off of that.

[415] I believe the default avatar images for users on the service before were straight up ripped Disney characters like Mickey Mouse and Donald Duck.

[416] It's like, wait, wait, we should get away from this trademark infringement with ICQ.

[417] So bring in Mickey Mouse.

[418] I heard they're not to just...

[419] No, that was before.

[420] I think now they're afraid of international litigations.

[421] Like, we've got to clean up everything.

[422] So I think this is also where the penguin comes from is we got to replace Mickey Mouse and Donald Duck.

[423] Let's use...

[424] Let's design our own cute, furry little animal.

[425] Phenomenal.

[426] It is worth noting at this time.

[427] So doing a little bit of research on IDG.

[428] So I thought I knew the name from somewhere.

[429] They run Macworld.

[430] So they own Macworld, computer world, PC World, all those things.

[431] They also, they're really old.

[432] They started in 1964.

[433] Like, this has been a publishing group for a long, long time.

[434] And they, you know, run all these expos and skipping ahead to tech themes.

[435] But, oh, how often we see these, you know, immensely successful sort of spin -off funds of companies such as SoftBank or IDG getting in the ground floor of something huge.

[436] Like, this is the global instantiation of our theme from, I forget what episode, it was probably, a year or two ago now about like how at this point in time in tech and on the internet there were like 11 people in the whole world working on it right right right it's crazy you know and a bunch of characters who we have seen before are going to pop up as well as some new ones as we go along here okay so they raise the money they change the name to QQ they've settled the lawsuit but they still have a problem which is that they don't really have a business model they're giving away the software for free.

[437] They're making some revenue from telecom carriers for delivering QQ messengers to pagers.

[438] So like the pager thing is still part of the company.

[439] Which actually makes sense.

[440] You know, you're not an internet cafe.

[441] Somebody sends you a message.

[442] You want to know about it.

[443] You get it through the pager.

[444] Like, okay, I get it.

[445] The other thing that happens in 2001, of course, is the dot com crash happens in the U .S. And that cools, you know, the venture financing market globally.

[446] The company is still growing like a weed.

[447] They're adding 500 ,000 users a day.

[448] In 2001, they surge past 100 million users.

[449] Like, this is crazy.

[450] And again, remember, internet cafes, like nuts.

[451] They're beating the bushes, though.

[452] They're still trying to sell the company because they're like, okay, great, we've got 100 million users.

[453] We're super valuable to somebody.

[454] We've cleaned up all these legal issues.

[455] Somebody is going to have to want to buy us.

[456] And from a shareholder's perspective, IDG doesn't have any ability to do follow -on capital because they're in that kind of very small fund.

[457] They syndicated just that $2 .2 million round.

[458] And IDG is starting to feel like, you know, this company that we have that is growing, that's great, but we're a little skittish post .com bubble.

[459] Like, let's liquidate some stuff.

[460] As is Lee Kashing.

[461] Now, I don't know, I didn't do enough research to know here for sure, but my understanding of Lee Kashing is his, he made his fortune in the telecom industry.

[462] And the one industry that was hurt harder than tech and the Internet, in the dot -com bubble bursting was, of course, telecom.

[463] He's probably hurting and needs liquidity.

[464] So he's looking to get out of his investment as well.

[465] So they meet throughout this process, the Tencent and Pony meet and Pony's co -founders, meet the most incredibly random group you could even think of.

[466] They meet the investment arm of Naspers, which is a big South African media conglomerate.

[467] This is like the news corp of South Africa.

[468] So, like, they're, you know, a Shenzhen -based Chinese company that stole their original name and product from an Israeli company that's being affected by the U .S .com crash.

[469] Sure, South African Media Company.

[470] Why not?

[471] And there are people out there who are listening who have definitely heard of Naspers.

[472] In this day, like in 1999, when this is all happening, you would not have heard of Naspers.

[473] Like, it's not something where you're like, oh, yeah, no, I don't know much about it, but it's kind of this big international thing.

[474] Not a big international thing yet.

[475] No, no. And yeah, now, well -known tech investor because of what they're about to do here.

[476] So they say, look, we don't want to buy your company, but we've got capital.

[477] We're looking to diversify out of the media, I believe mostly print media business in South Africa.

[478] We will invest.

[479] And not only we want to invest, but we want to invest, we want a meaningful ownership stake.

[480] We're willing to buy out your existing investors.

[481] So like echoes of the Alibaba episode here.

[482] We'll take that 40%.

[483] The Goldman investment that gets bought out.

[484] Yeah.

[485] So not only are they willing to buy out of existing investors, they're willing to do so at a $60 million valuation.

[486] So remember, just a few months ago, this company was valued at $5 .5 million post money.

[487] The existing investors, they're trying to get liquidity.

[488] They're like, great, 11x, $60 million.

[489] I'll hit that bid.

[490] I mean, gosh, a couple of years.

[491] that feels really good to me. Let's do it.

[492] Yeah, let's do it.

[493] 10X returns.

[494] Oh, boy.

[495] Oh, boy.

[496] So Lee Cushing sells his entire 20 % stake.

[497] Fortunately, for IDG, they sell only 12 .8 % of their stake.

[498] So they retain 7 .2 % of ownership in Tencent.

[499] NASPERS acquires 32 .8 % of Tencent in total, just under a third, for $20 million.

[500] we're going to get to grading in a little bit and well this will come back up but this was to say this was prescient would be the understatement of the century yeah and listeners just to plant the seed now we're not going to be grading like we called this episode 10 cent like we called Tesla Tesla or like alibaba Ali Baba this isn't really going to be about sort of the 10 cent IPO because it's part of a much longer journey but this is acquired and we have to grade stuff so we're going to end up grading this particular investment against other sort of very successful investments.

[501] You might imagine which ones.

[502] Okay.

[503] Meanwhile, though, the company is still not really making any money.

[504] Yeah, but David, they have a lot of eyeballs.

[505] So, I mean, they have a lot of eyeballs.

[506] And not only that, but this transaction that happened, the company didn't get any money.

[507] Like, the investors just cashed out.

[508] Funny thing about secondary sales.

[509] Yeah, funny thing.

[510] So they got to figure out a way, you know, to, arrive here.

[511] In 2002, a PM who's working at the company, here's about this Korean company that is selling quote -unquote digital goods for their users to customize their, you know, avatars on this, you know, digital service.

[512] And yeah, people are like laughing about it.

[513] People aren't even laughing about it in the world.

[514] People don't even know about this yet.

[515] But apparently it's doing pretty well.

[516] And so Tencent's like, well, we got to do something.

[517] Let's try that.

[518] So they, once again, copy this business model and they launch what's called, they call QQ Show as part of the QQ platform.

[519] And it's basically a customization for your avatar on QQ.

[520] You can buy digital articles of clothing, digital avatars, hair, you know, all sorts of stuff to make you have a different appearance.

[521] And it takes off like wildfire.

[522] So within six months, they have over 5 million users on the QQ platform that are paying an average of five Rmb a month.

[523] So that works out to a 300 million RMB annual run rate.

[524] So that's about $50 million in USD within six months.

[525] And this is 2002 in the like, you know, the nuclear winter of the internet.

[526] Yeah.

[527] And so fascinatingly, I mean, American companies won't catch up to sort of micro transactions for, you know, a while.

[528] There's portal games, like on MSN and AOL, which we use it a little bit, but it's not really until you get into sort of the Facebook and Zingo world and then really the mobile world in sort of 2008 to 2012.

[529] Mobile and Riot Games and League of Legends, which we're going to come back to in a little bit.

[530] But here, Tencent is understanding the power of this super early.

[531] They're not a gaming company yet, but they understand the power of microtransactions and of virtual goods, and it's 2002.

[532] And I want to just flash forward to something that I read today is.

[533] a Wall Street Journal piece about the Tencent Music IPO, and they mentioned the sort of differences between Spotify and Tencent Music, and they say Tencent Music's main revenue source isn't actually music streaming.

[534] Instead, it generates billions of dollars from selling virtual gifts with which users can tip entertainers who stream live performances in its apps.

[535] And so Tencent, like, this is a completely formative moment for the company that will dictate future business models across verticals.

[536] Totally.

[537] And this is the business model of Tencent.

[538] As we'll see, Tencent grows into having so many different products and portfolio of things that they're in.

[539] But this is the common thread that they've figured out and they know more than anyone.

[540] And I didn't have time to actually read the full Wall Street Journal article.

[541] But from what I did read, I think they were sort of dismissive of this as like, oh, well, Tencent music isn't as, you know, isn't as good as Spotify because people don't actually pay.

[542] It's this.

[543] And it's like, it's like, no, come on.

[544] Like this is a better business model.

[545] Like, if you guys heard of Twitch, like, you know, have you seen TensorFlow?

[546] Like, this is how it works.

[547] You know, it's a better business model.

[548] It's at least, it's at least different and powerful and, and could be better for different.

[549] Yeah.

[550] You know, this isn't as egregious, but this is, it reminds me of, you know, the 711 Blockbuster CEO coming in and be like, I don't believe in internet businesses.

[551] Like, I don't believe a micro -transaction, but no, like, yeah, they work.

[552] Dev, you played Fortnite.

[553] Fortnite, which somebody might own most of.

[554] Oh, who would that be?

[555] Spoiler.

[556] it's Tencent.

[557] Everybody around the table is like high -fiving now, and especially Naspers.

[558] Lee Cushing is not high -fiving.

[559] 11x, baby, what do you want?

[560] Yeah.

[561] Naspers pays $20 million.

[562] And then within like a matter of months, they own 32, 33 % in a company that is at a $50 million revenue run rate and growing like gangbusters.

[563] And not just $50 million revenue run rate.

[564] Like, think about the margins on this.

[565] Like there's no cost of goods sold when you are selling.

[566] digital goods.

[567] Pretty good business model.

[568] 2003, the next year, they do over 100 million USD in revenue.

[569] They start thinking about two things.

[570] One, going public.

[571] And two, what else they can apply this new business model that they've figured out of freemium goods and digital goods and micro -transactions?

[572] What else they can apply this to around their core kind of communications and IAM platform that they own with QQ?

[573] And before they take the plunge into doing what I think you're about to say, they really enter the portal market.

[574] Like if you look at what AOL was doing, what MSN was doing, Yahoo is doing, there's all this content that flows through them.

[575] Like they get to own distribution to customers.

[576] And QQU is blown up to the point now where they say, you know what, we're now a portal too and we're China's portal.

[577] Yep.

[578] They're thinking about a portal.

[579] They're thinking about what else can we add to the QQ platform.

[580] And one thing that the company is really good at to this day is like they are a very, very good product organization.

[581] And so they go and they spend time with people who are using QQ with users.

[582] And they realize that the segment of people are using QQ to chat with each other in these internet cafes while they are playing games on the PCs, playing online games of all types.

[583] And they're like, that's interesting.

[584] What if we added games to our platform, to our portal?

[585] it's kind of like you know discord like like finally figures this out well discord figured out like this product insight you know many many years later in the u .s like it's amazing how far behind we are here like this is the 10 cent business model um they're like games okay they start adding games to the platform they go out they start acquiring some games they start studios in -house developing their own games adding them to the QQ platform within the year it adds another $50 million of revenue to the company.

[586] So huge success.

[587] And not to success, like the core virtual goods business on QQ is growing like crazy.

[588] Now they have an even faster growing games business that's also part of the portal that they've added.

[589] So in the process of realizing all this, they're like, okay, a couple things.

[590] One, we got to get public because this is like a great business.

[591] Two, you know, all the founders are computer scientists.

[592] There's one founder who had some sales expertise, but it was kind of from the telecom world.

[593] They're like, we need some like real business folks.

[594] And Pony like is great.

[595] He's a total visionary product visionary.

[596] But like, as you said, Ben, he's fairly reclusive.

[597] He doesn't speak English very well.

[598] They realize now they need to be going out doing deals around the world acquiring these games, bringing them to China.

[599] They need their equivalent of Alibaba's Joe Si.

[600] I mean, in addition to sort of the business development skills, you really need someone here who's a great capital allocator who sort of understands like, because by putting all these games on their platform.

[601] Some they're buying, some they're investing in.

[602] They're already sort of starting to take a conglomerate form, though all of the things do feed into this portal they've created.

[603] So they look around and they're like, well, we kind of have somebody who fits that bill who's been hanging out with us a lot.

[604] And that's our banker from Goldman Sachs who's working on taking us public, whose name is Martin Lau.

[605] Martin is super interesting, just like Joe Sy in Alibaba.

[606] he's a TMT banker at Goldman in Hong Kong his parents are Chinese but he was educated in the US he went to Michigan for undergrad studied engineering got an engineering masters from Stanford did an MBA at Kellogg then worked at McKinsey and then moved to Goldman over in Hong Kong and so Pony is like dude Martin you got to like forget this banking thing like this is where the this is where the future is you got to come work with us Martin declines at first it's sort of similar to you know it reminded me of when Josai you know declined the first offer from Alibaba.

[607] And it's like, I got to have my wife come over and meet you guys.

[608] Very similar.

[609] He declines.

[610] He's like, this is kind of a conflict of interest.

[611] Like, I'm your banker.

[612] I'm working on taking you public.

[613] He's like, let's get the IPO done first.

[614] They get the IPO done in June of 2004.

[615] They go public on the Hong Kong Stock Exchange.

[616] They raise $180 million.

[617] And pretty shortly afterwards, Lao is like, okay, this is a really special company.

[618] I'm going to, I'm going to leave Goldman and I'm going to join.

[619] So he becomes the chief strategy.

[620] officer in charge of investor relations and importantly, MNA, which is like kind of a, like there are not many Chinese internet executives that are in charge of MNA at this point.

[621] Lau is really like blazing a trail.

[622] He does really well, totally jails with the team.

[623] 2006, he gets promoted to president of the company.

[624] And he's really the one who starts driving this idea that like Tencent is now this platform and Tencent is this business model that can go around and bring all of these types of.

[625] of various types of content and experiences into both the QQ platform and use this business model to create, you know, amazing businesses.

[626] So they launch QZone, uh, which is a kind of a more, even more full -fledged social network by 2011.

[627] So a few years later, Tencent now operates four of the five top games in China.

[628] And they do a pretty important thing that we will come back to in 2011 deal.

[629] They acquire a majority stake in Riot games based in L .A., maker of League of Legends.

[630] Little game in the e -sports world.

[631] But not super well -known in 2011 in the West, but enormous in China.

[632] And, I mean, big around the world.

[633] I think Tencent was their publisher in China, where they were able to, Riot didn't really have the capacity to reach customers in China, though the game was going to be beloved.

[634] So partnered with Tencent to be the publisher there.

[635] Yep.

[636] So they're the publisher already in China.

[637] They're seeing, and of course, for listeners who aren't familiar, League of Legends was natively built with the with the Tencent business model.

[638] So it's free to play.

[639] Cost nothing.

[640] Anybody can, anybody can play.

[641] And the way the game monetizes is through people buying digital goods for their characters, both characters and then goods to put on the characters that have no effect impact on gameplay.

[642] So the playing field is level for everyone.

[643] But people just want to customize their characters, and it works amazingly well in China.

[644] Just a couple days ago, Riot released the 2018 League of Legends e -sports by the numbers.

[645] They had 99 .6 million unique viewers just watching the world's finals, the world championship finals.

[646] I mean, this is 44 million viewers tuned in concurrently at peak.

[647] Like this is one of these really insane global.

[648] phenomena that was not quite like this when 10 cent bought them.

[649] I mean, this is, we may be foreshadowing that it'd be fun to do an episode on this at some point.

[650] And David and I are smiling at each other.

[651] nodding in agreement.

[652] Yeah.

[653] Most of the growth of League of Legends has happened in China and under 10 cents watch.

[654] And so they're really sort of to credit for the growth of this global phenomenon.

[655] I think we will have much more to say on a future episode about this, but I believe they paid $300 million.

[656] Is that right?

[657] Three or four.

[658] Yeah.

[659] Three or $400 million for like a 90 % -ish stake in Riot Games, the maker of league at this point.

[660] Absolutely crazy, crazy pressure on investment.

[661] The other thing they do, the next year in 2012, and then we're going to take a step back from the gaming part of 10 -7 for a minute.

[662] This is going to come up.

[663] They acquire a 40 % staker in North Carolina -based epic games.

[664] Which made this like Unreal tournament, which was beloved by a small group of people.

[665] The Unreal Engine, which was used by a bunch more people, but it's not a global phenomenon.

[666] It was more of like an infrastructure play and like, who knows what they were thinking, but they're like, maybe this is a way that like we can start to compete with Valve and Steam.

[667] Anyway, let's park that to the side for a minute.

[668] The other thing, let's move back to the core Tencent platform and QQ and kind of the engine that makes all this possible is all the attention and communication and network effect that they have of their users.

[669] Yeah, because remember, 10cent is a social media company or a social networking company that started with the messaging platform QQ and of course their most profitable area is gaming which we've sort of caught up on but there's a thing that happens at 10 cent in the social networking world in the communication world that really dominates them today that we haven't talked about well so IPO happens in 2004 basically from 2004 till 2010 2011 like growth is rampant QQQ is dominant they're like unassailable growing to hundreds and hundreds of millions of users throughout China, but as 20, you know, we get to this time frame, there's this thing called mobile that's happening.

[670] And people are starting to realize this is not just like the next big wave in tech globally, but like particularly in China.

[671] We talked about this a bunch on the Xiaomi episode.

[672] And remember, Le June, the founder of is pony mazzled buddy from the bulletin board days.

[673] Xiaomi's already started at this point.

[674] Lejeun sees, like, he realizes that mobile, like China internet users are going to jump directly from using PCs and internet cafes and not owning PCs to owning mobile phones.

[675] And this is going to be a complete product and business model paradigm shift for the way Chinese users interact with the internet and their personal relationship to it.

[676] As you'll remember on other episodes of Acquired, such as the Facebook IPO, there were companies that had an existential moment where they either missed mobile or almost missed mobile, and it was company defining.

[677] And for Facebook, it was actually sort of behemoth creating.

[678] And so Tencent is about to hit this very same cliff where they have their moment where they go, oh, we need something on mobile.

[679] Because QQ, you know, for all of its greatness, it's, for those of you who are big on AOL and Instant Messenger, do you remember when the AIM app came to?

[680] to the phone and how it was kind of garbage and how it wasn't made for the phone and native to that platform.

[681] Well, they need an answer to that.

[682] This is happening.

[683] And they realize this two years ahead of when Facebook realizes this.

[684] So they do, they have the whole management team at Tencent.

[685] They, they know they have to deal with this.

[686] They call a big offsite strategy retreat for the top management.

[687] They call it the conference of the gods.

[688] I'm clear if they call it this themselves or if the other employees of the company call this the conference of the gods.

[689] They come out of it.

[690] They decide that like, yep, this is wartime.

[691] We got to go all in on mobile.

[692] We have to solve this problem.

[693] Like, we need our equivalent of what Facebook two years later would get with Instagram.

[694] So what do they, what do they look at?

[695] What did they decide to do?

[696] What's the landscape here?

[697] If we rewind a little bit in summer 2009 at WWDC, Apple launches push messaging.

[698] And this is what the moment that really enables this.

[699] So like before this, you could have apps on the phone, but like, there was no way to know, like, that something happened in the app.

[700] So a messenger app was useless.

[701] I'd have no way to know that, you know, somebody had sent me a message with push messaging.

[702] Now you get the little red, you know, notification badge.

[703] And I know like, oh, there's something here waiting for me to check.

[704] So a group of students in Canada at the University of Waterloo, they see this and they're like, oh, cool, we'll build a mobile messenger app.

[705] And they call it Kik, K -I -K.

[706] Uh, still around today, raises a series A from Fred Wilson at Union Square adventures gets a bunch of traction, starts adding users like crazy.

[707] I want to take a pause just because one of the things that's heralded is added users like crazy.

[708] It's, you know, it's almost like virtuous how fast they grew and how this great product market fit.

[709] Do you remember the first time you installed kick on your phone?

[710] What happened, David?

[711] Did you ever go through this user experience?

[712] I remember being a total early adopter, loving it.

[713] It was so much better than text messaging and getting all my friends and family to sign up for it.

[714] Well, that's the thing is I didn't intentionally get all my friends and family to sign up for it.

[715] They, like, far worse than LinkedIn.

[716] Oh, no, they did the LinkedIn.

[717] Like, way worse with your phone book for the first time before Apple had requesting permissions.

[718] And I remember this thing where I sent an invite unknowingly to every single member of my contact list inviting them to kick.

[719] Like, they were the champions of the sort of exploit and abuse and then apologize later strategy.

[720] All your professors at OSU were getting kick invites.

[721] But the good news was there were several other people that, like, I got that same spam from lots of people.

[722] So I was like, ah, I see what's going on here.

[723] Oh, man, I forgot about that.

[724] Shoot, actually, maybe I never knew.

[725] Maybe I spammed a bunch of people and never knew it.

[726] David alone invited millions of people to kick, and it grew with an unprecedented rate.

[727] Well, unfortunately for kick, they basically become the ICQ of the, uh, of the mobile messenger market.

[728] Again, they're still around, they're doing it, but they don't win because a lot of other people around the world see that, like, this is the future.

[729] Kick has shown us, you know, the blueprint of step one, and we're just going to go do the same thing for our local market.

[730] And this is, this is like the heyday of Chinese cloning era.

[731] The theme on Acquired this season is very much about sort of like how a lot of these companies innovate in their own way and how these Chinese companies are created sort of China native and have a different strategy.

[732] but famously, like, this was not yet the case.

[733] No, this was a straight -up clone.

[734] But as we'll see, as, you know, as the pony ma quote from earlier in the episode, like, it's cloning, but it's also like cloning in a way.

[735] Like, if Kik had just come to China, like, it would not have worked.

[736] So Tenson realizes they need to hop on the bandwagon that they're going to build a Kik clone as well.

[737] They have the perfect person to do it.

[738] So back in 2005, Tensen had acquired a product called Foxx.

[739] Mail.

[740] And Foxmail was this product in China created by this incredible engineer called Alan Jong is a super visionary, fantastic engineer.

[741] Like I said, in Fox Mail, it was a webmail client.

[742] And like one of the biggest in China.

[743] And at the time, even like Hotmail and Yahoo Mail and the U .S. Internet portals, they were copying a lot of their feature roadmap from what Foxmail was doing in China.

[744] Tencent acquires this thing.

[745] Late 2010, now as this, now as this you know, kind of like, uh, we're at war, we're shifting to mobile is going on.

[746] Alan is still working at Tencent and he emails Pony and he's like, let me, let me handle this.

[747] Like, this is like, you're like, you know, most like, your most trusted lieutenant is like volunteering to like go to battle here.

[748] I don't know where in the timeline this happened, but wasn't there a competing group within Tencent also looking at mobile messaging?

[749] Yes.

[750] I believe, I don't know all the details, but what I believe is that yes they're coming out of this like conference of the gods there was like a task force you know working on this and and I believe it could be wrong here listeners correct us if you know otherwise Alan is he just emails pony one night and he's like let me do this give me resources give me yes give me the power and apparently Ma likes to stay up really late at night and he sees the email he writes back right away and he's like do it and So supposedly, Allen takes a small team.

[751] They go lock themselves away in, I think Pony refers to it as like a black room.

[752] It's like a room with like blackboards and like no light.

[753] And like they work for two months straight.

[754] And they build an app.

[755] And then they take it out and they show it to Pony and to Martin Lough.

[756] And they say they're going to call it Wichin, which in English translates to WeChat.

[757] And they're not the only ones doing this.

[758] I mean, we mentioned the cloning.

[759] there's also debuting right around this time is Mitoch from Xiaomi, which is before Xiaomi made phones, which is the craziest thing.

[760] Remember when we were saying they were doing all this research by doing mobile software and an OS before they built Mitoch.

[761] So, WeChat has a billion users.

[762] That's a huge lock -in component for Tencent.

[763] That could also be Shoumys, but that's not how history played out.

[764] And M -Toc's adding a ton of users.

[765] Like, they've got a head start.

[766] They're off to a really good start in the market.

[767] They're like lots of people are going after the Chinese kick opportunity.

[768] Another company that's doing this is a Hong Kong based startup right across the bay called TalkBox.

[769] That's going to come back in a minute.

[770] So they release WeChat and it does well.

[771] They import the social graph from QQ.

[772] So that's like, you know, major leg cheating.

[773] It's like, oh, you know, me talk.

[774] That's nice.

[775] You have these like, you know, bulletin board internet forums with your early adopters.

[776] We have 900 million QQ users that we're just going to import here.

[777] But it does well.

[778] That's a huge advantage.

[779] But it doesn't do that well.

[780] Like the other apps are still in the mix here, including TalkBox.

[781] Allen and Team, they go back to the drawing board.

[782] They're like, okay, what's not working here?

[783] They realize that there's one thing that TalkBox is doing and that I think Meetalk has copied at this point too.

[784] That's pretty important.

[785] The reason it's called TalkBox is in addition to text messaging, they also have a walkie -talkie feature.

[786] So, like, you can record a short voice message.

[787] Like, Apple's been trying to add this to iMessage for years.

[788] Just like adding it in strange ways in the UI that nobody really wants to say.

[789] But again, to like localization for the, your market, you know, in Chinese, the characters are like really complicated.

[790] There are a lot of them.

[791] Sometimes it's harder to express yourself with typing quickly when you just want to send a short message.

[792] Much easier to just say something.

[793] that's why talking and this walkie -talkie feature becomes like really important for this class of apps and again you don't have a keyboard like you would have with instant messaging this is like the next telephones from the 90s that like had that first and I think even there was a product called Viber that did this for a while and Voxer I think too yeah yeah yeah I think maybe that's actually Viber I think was based in Israel I want to say I don't know I think it was based either in Israel or Asia This is before the great messaging wars were settled.

[794] Oh, the other thing we should point out, this is a key, becomes really key in the messaging wars everywhere.

[795] There's the mobile operating system wars are also going on at this point in time.

[796] There's iOS and Android.

[797] Everybody's duking it out.

[798] One of the really key things about a messaging platform that people start to realize is you have to be able to work seamlessly between iOS and Android.

[799] And this is a key thing that Meetalk falls down on.

[800] they don't have an iOS app for a long time.

[801] They only have the, because on the meOS, like, remember the whole thing is to be building the me phone and building Xiaomi.

[802] So this is part of what helps Tencent catch and WeChat catch up as well, as they come out with an iOS app first and then an Android app.

[803] So they add the walkie talkie feature.

[804] That helps a bunch.

[805] The other thing they add in this spring V2 update in 2011 is this innocuously named feature called Friends Nearby that also, you know, sounds like that thing that Apple's been trying to add to your phone to, you know, find my friends.

[806] It sounds like that, but...

[807] It sounds like that, but it's not that.

[808] It's not friends in the sense of, like, friends who are already in my contact book.

[809] It's more like friends in the sense of people that I might be interested in meeting for a variety of reasons.

[810] Yeah.

[811] Maybe people who you could, with certain characteristics that you could filter for like gender.

[812] Like gender.

[813] You might be interested in, yeah, like gender or, you know, other things that you might be interested in meeting, and they might be interested in meeting you in the right circumstance.

[814] So Tencent invents Tinder.

[815] Yes.

[816] Basically, that is the moral of the story.

[817] And this is 2011?

[818] 2011, yep.

[819] So do you know one other fact about Pony Ma that may or may not have inspired this?

[820] I don't.

[821] Go for it.

[822] Can you think of anything?

[823] So I don't know.

[824] I don't have any facts.

[825] that this inspired this.

[826] But Pony in 98, 99, somewhere in there, he met his wife on QQ.

[827] And they corresponded for three months on QQ before meeting in person.

[828] I did not know this.

[829] Yeah.

[830] Man, talk about like intimate, you know, solving your own problem with a product.

[831] So the spring 2011 update to WeChat has both of these features.

[832] it has walkie talkie and it has tinder it just is like pushes it above everyone else in the market they start like zooming past everyone by early 2012 we chat now has a hundred million active users um by the end of 2012 they have 300 million active users today they have just under a billion so like basically every single person in china uh well i can't say that for sure listeners may like correct us i'm sure they're parts of china that that don't use we chat yet but like Essentially, the entire population of China is on WeChat at this point.

[833] That's crazy in and of itself.

[834] This is even crazier.

[835] So the average time spent for the average user, this is average, averaged across the entire user base of WeChat, average time spent on WeChat is four hours a day.

[836] That is more than every single social app in the U .S. combined.

[837] Facebook, Instagram, Twitter, Snapchat, everything vastly more.

[838] Interestingly, it's more time than I spend on my phone per day.

[839] So I think that speaks to two things.

[840] One, it speaks to, of course, I'm not a zero -eth.

[841] It speaks to I'm not the average of the United States.

[842] But people in China, that's their computing device.

[843] And I think my laptop is my computing device primarily.

[844] And I think my phone time is somewhere between like two and three and a half hours, depending on whatever.

[845] You also start to get the foreshadowing here that messaging isn't just messaging.

[846] Messaging is more like the way we think of the operating system.

[847] The WeChat app is actually the platform upon which other things can be built.

[848] And you don't actually need to spend much time outside WeChat.

[849] This is sort of foreshadowing the launch of WeChat official accounts.

[850] Yeah, it is.

[851] Well, there's two things here.

[852] One is that, which we're going to get into right now.

[853] But before we do, the other important thing here, and again, this gets back to, like, the local, having the product right for your user base in your market.

[854] Email never really became a thing in China.

[855] Like, Fox Mail, like, was big and Tencent acquired it.

[856] And, like, Hotmail and Yahoo Mail ripped off a bunch of its features.

[857] But, like, people didn't have, like, they have email accounts, but they don't really use email.

[858] Even in work settings, that's very different than the U .S. What WeChat has become, like, it's the communication platform for, like, imagine your IMessage or, you know, whatever your messaging app at WhatsApp, whatever you use.

[859] That plus your email, plus your Slack for work.

[860] Like, it's all there.

[861] So like all of your communication is going through this platform.

[862] And again, because of that, all your communication is going through.

[863] And here's where Alan, Alan Zhang is like such a huge product visionary.

[864] And he starts to separate WeChat from all the other messengers around the world, not just in China.

[865] They launch this concept of official accounts.

[866] So what are official accounts?

[867] Official accounts are a lightweight way for a business or an entity, not a person, to interact with users who want to interact with them on the platform.

[868] platform sounds, you know, simple enough.

[869] But this becomes enormous.

[870] It's kind of like a souped -up Facebook page, right?

[871] That's exactly what it is.

[872] But it allows like the account that the the business or whatever entity controls to message and interact with with lots and lots of users.

[873] So people start buying stuff through this.

[874] Like it becomes a commerce platform.

[875] And of course, you know, Tencent is already very adept at e -commerce through all of the micro transactions that they had done through QQ.

[876] They build WeChat pay.

[877] We pay.

[878] And, into the platform, not just e -commerce, ride -sharing, like Didi basically gets built on WeChat, meal ordering and meal delivery, and Maitwan Dianping gets built on WeChat.

[879] They also introduce, in conjunction, I think shortly thereafter with official accounts, is the moment's news feed.

[880] And this is something that's really, you know, we know this in Facebook, it's really a publishing system for content, but it's also importantly, they do a really aggressive push to force users to use this in a way that is decentralized among smaller groups.

[881] And so you can easily sort of share things from your moment's news feed into groups.

[882] Publishers or individuals who are publishing can publish two smaller groups.

[883] It becomes the largest content ecosystem in China.

[884] And as you're alluding to, David, you can buy or book things on official accounts sort of through the moment's news feed.

[885] And another sort of important thing to know about the moment's news feed is, you know, we keep talking about Tencent as a business that makes money on micro transactions and gaming, but is a social network.

[886] And in the U .S. social network is synonymous with advertising company.

[887] Well, there's not actually a lot of ads in the moment's news feed, and they wait a very long time before introducing them.

[888] And even then, they do it in a very lightweight way.

[889] And so, you know, it's really all about sort of the facilitating the attention there, but the business model ends up being way different.

[890] You know, we talked about on the Alibaba episode that Alibaba is like Amazon plus Google together.

[891] You know, In this way, Tencent becomes like Facebook plus Amazon or Facebook plus Uber, you know, Facebook plus Uber plus Airbnb plus all of these commerce platforms, you know, all together.

[892] And this totally plays to the company strengths product wise, but also executive wise.

[893] Remember, Martin Lau, you know, he's been, he was the banker from Goldman.

[894] He brings on a few other folks, James Mitchell, notably from Goldman, also as a tech banker, I believe also in Hong Kong.

[895] I believe he doesn't even speak Mandarin.

[896] He comes and he joins as chief strategy officer.

[897] And what they do is they realize all these companies are getting built on the WeChat platform.

[898] Let's start investing in them and like helping them succeed on the platform.

[899] So they do.

[900] So Tencent is a major investor in Diti in Maitwan Dianping in Pinduoduo.

[901] All of these huge, you know, now current generation Chinese companies that are all built on the WeChat platform.

[902] They're not just built on the platform.

[903] Tencent owns a meaningful stake in these businesses.

[904] And so they're benefiting from that too.

[905] And then the other thing, and this has just happened, recently happened, but is now in the news.

[906] So the official accounts thing, it's very basic, like very, very, very basic, very lightweight.

[907] In early 2017, they essentially turn official accounts into this slightly more advanced thing called mini programs.

[908] Which were mini apps, but Apple didn't like that.

[909] there are many programs.

[910] Apple didn't like that.

[911] Exactly, exactly.

[912] And supposedly, I don't know what the Chinese words are, but mini programs sounds better in Chinese than it does in English, so it's not as weird.

[913] But this now unlocks actual, like, more functionality from, like, programmatic, like actually, you know, building a tech -enabled experience for companies.

[914] Think about it, like, if you were looking to book a flight through Expedia and you were previously trying to do it on Expedia's Facebook page, that would be super difficult.

[915] But if then Facebook launched the way to have native apps inside of Facebook, just like native apps exist on iOS, then it's like, oh, I see.

[916] There's full rich functionality in order for me to do whatever here.

[917] You know, this might sound like just basic product evolution, and it is, but it enables a whole new class of businesses to get built on the platform, and this is what enables PIN Duo Duo.

[918] So, you know, the company that just went public here in the U .S., it's like two years old is, you know, I forget what the market cap.

[919] We'll have to cover it next season.

[920] you know, 30 billion plus market cap, I believe.

[921] And David, what does Pinduo do do?

[922] It is a mini, it's a mini program.

[923] It's a shopping experience.

[924] I've seen videos.

[925] I haven't actually done it, but so I may be butchering this.

[926] Listeners, correct us if we are.

[927] But it's a sort of like gamified shopping experience that is all conducted through a mini program on on WeChat.

[928] And what's great about that is like the friction, the distribution friction to get this in front of people is zero.

[929] You know, And that's important because, like, this, the target market for Pinduoduo is people in third and fourth tier Chinese cities who are not already well served by Alibaba, by JD, by all the existing commerce players.

[930] But they have WeChat accounts and like they can interact.

[931] So they don't have, you know, JD accounts, but they can interact super seamlessly just through the moment's news feed and a mini program with Pinduodoo.

[932] Makes a lot of sense.

[933] All right, listeners.

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[952] There's a couple things I want to revisit in this sort of evolution of we chat that I think are interesting and important.

[953] Do you know about QQ pay and sort of what that was before we chat pay?

[954] Not in any depth.

[955] Apparently, and I didn't realize this, so early on, Tencent sort of thought about doing this transaction platform on QQ before they had done WeChat, which started to pick up Steam, but people started using QQ pay as a replacement for the RMB, and the Chinese government freaked out, this is like before Bitcoin and decided, no, no, no, no, and they shut it down.

[956] So it's interesting that when the time was finally right for WeChat pay, I mean, I'm sure they had sort of worked it out with the government where it made a lot of sense for them to do that and wouldn't get shut down like the previous time.

[957] But they were actually well ahead of the curve in sort of establishing that digital wallet, which makes a lot of sense as you sort of evolve from micro transactions as your roots to then thinking about peer -to -peer payments instead of just buying virtual goods on your platform.

[958] Another thing that came out of this, did you see anything about lucky money?

[959] Oh, yeah.

[960] Oh, man. This is a rabbit hole.

[961] I didn't go too far down, but...

[962] So I'm not going to go into the whole thing.

[963] It was kind of like a fun game where you could win money, which we won't dive too deep into, but you could win lucky money without ever connecting a bank account.

[964] And so what was happening is people were winning.

[965] And a seeded people's accounts, right?

[966] And so they ended up with just a little bits of money in their account, but not necessarily needing to ever send it out anywhere.

[967] And so the thing that bootstrapped their WeChat payment platform was that the that street fenders and other people started accepting your sort of winnings from lucky money as a way to pay for stuff in the real world.

[968] And then suddenly that was, once you get sort of merchants then on the network, then there's sort of this like, oh, I should connect it to my bank account so that I can use this thing to pay.

[969] It's a brilliant strategy.

[970] Well, of course, this is all tied into the Chinese custom and I believe around the new year of red envelopes and gift giving and giving money.

[971] And we've already talked about Deng Xiaoping and the Cultural Revolution.

[972] So we're not going to go to that much farther deep into history and Chinese history and culture.

[973] I don't think we should.

[974] But there is one other thing that I do want to talk about in WeChat Pay before going back to gaming, I think is where we're going to go next.

[975] So this one relates to the Venmo episode.

[976] One thing that we determined on the Venmo episode was the real business in what Venmo is doing and where peer -to -peer payments companies like PayPal end up going is in paying murder.

[977] Because peer -to -peer payments have no fees because people don't expect that when you and I are just giving each other digital cash, we should have to have fees associated with that.

[978] In the U .S., if you can win over Visa's business, like if you can get merchants to accept Venmo, then you get to play in that sort of 3 % interchange world where you get to make 3 % on every transaction.

[979] That's hugely profitable business.

[980] So, of course, Venmo's going there with pay with Venmo.

[981] Of course, you know, PayPal went there.

[982] China, WeChat pay is actually not very profitable because instead of a culturally accepted two to three percent interchange fee, it's like 0 .6 percent.

[983] And so we chat pay isn't really the golden goose that you would think it would be.

[984] That's really just about sort of additional lock -in and additional sort of loyalty to the platform so that they can make money in other ways.

[985] It's the glue that or the connective tissue that enables the whole ecosystem of businesses, Yeah, to get built on on WeChat.

[986] Interesting.

[987] Okay.

[988] So that's WeChat.

[989] A few kind of miscellaneous fun things along the way to catch us up to today that also happen at Tencent Corporate.

[990] In 2013, right around the time that Facebook was trying to buy Snapchat, Tencent desperately wants to either buy or make a strategic investment in Snapchat.

[991] Remember, like they've figured like this 2013, two years earlier they had they're already on the road they figured out like how messaging can build an amazing huge business around it they view snapchat as an opportunity to do that in the US they think they have the right playbook they can bring it to snap and and do it do it here they're in talks to do a big strategic investment in the company instead evans feagle rejects it decides to pursue his own kind of you know vision for the company as a camera company, not a commerce and business empire, platform empire.

[992] And the deal does not happen.

[993] We covered that on our SNAP IPO episode.

[994] But what has happened since then is after the SNAP IPO, Tencent has started buying up shares on the open market.

[995] So they now own 12 % of SNAP.

[996] Very interesting.

[997] Apparently they, according to all parties involved, there's a good, good relationship.

[998] mutually beneficial relationship.

[999] What's interesting about that, though, if you remember from our long ago Snap IPO episode, Snap IPOed with a very interesting governance structure.

[1000] By interesting, you mean multiple classes.

[1001] No governance structure.

[1002] You know, there's multiple share classes in public U .S. tech companies is not new.

[1003] Facebook has it with, you know, super voting shares that the founders control.

[1004] I think...

[1005] Did Google Pioneer it or did...

[1006] Google Pioneer, did I believe?

[1007] It was a media company thing, actually, from back in the day.

[1008] Yeah, the New York Times has it because the family votes differently than...

[1009] Yeah, the argument was that media companies needed independence from the political and economic, you know, landscape because they needed to cover these companies.

[1010] And so thus, if there were a mechanism that somebody could buy up voting control of a media company, then it would be like, you know, bad for democracy.

[1011] Anyway, tech has kind of perverted this.

[1012] Well, as we know, since Facebook is not a media company, I mean, They don't.

[1013] Right, right.

[1014] Anyway, Evan Spiegel takes this to a whole new level of not only just getting super voting shares that he and his co -founder is going to keep the shares they sell to the public get no votes.

[1015] Zero.

[1016] So if you own Snap shares, you have zero voting control.

[1017] So, you know, Tencent can buy as much of Snap as it wants.

[1018] There's no actual teeth that it has in doing anything with that.

[1019] which is interesting.

[1020] We should make up like a best of when David says things are interesting and he means terrible.

[1021] Well, it depends, you know, what side you're on terrible or great.

[1022] That's what makes it interesting.

[1023] Well, look, even if you have all the voting shares, you still want the stock price to be a lot higher than it is right now.

[1024] Right, right.

[1025] So interests are a line on that front.

[1026] Other very interesting acquired related trivia here.

[1027] in early 2014, Tencent starts talks to acquire WhatsApp.

[1028] And apparently they're in pretty deep talks.

[1029] And the price tag was kind of somewhere around $10 billion, I think less than $10 billion.

[1030] Which would have been crazy.

[1031] Like that would have been a crazy high price for that time.

[1032] Like the world went nuts with Instagram going for a billion.

[1033] Like this would have been a banana's number.

[1034] Totally.

[1035] And the Facebook, the rumored Facebook offer for Snapchat was three.

[1036] billion.

[1037] So this is great.

[1038] But again, you know, Tencent recognizes the power of what's happened.

[1039] They see like, man, this is our gateway to Europe of running the same playbook there.

[1040] Progress on the deal, though, apparently gets delayed because Pony Ma has to have back surgery.

[1041] And so he's kind of out of the game.

[1042] And like, there were supposed to be meetings that were going to happen in California.

[1043] He had to delay them.

[1044] In the interim, while he's having back surgery, Facebook swoops in, Zuckerberg swoops in, buys the company for $19 billion, you know, in a weekend.

[1045] And You cannot, I don't know, I wasn't there for the, we weren't there for the conversation, but I have to imagine that the prospect of Tencent owning WhatsApp had a lot to do with both the speed and price that that deal got down at.

[1046] Other couple of interesting things.

[1047] Shortly after that, in kind of late 2014, early 2015, Tencent asks Riot to make a mobile version of League of Legends.

[1048] And Riot, they're like purists.

[1049] They're like, no, we can't do that.

[1050] Like, you know, League only works, you know, on desktop.

[1051] We can't make a mobile version.

[1052] Tencent's like, all right, fine.

[1053] We'll just do it ourselves.

[1054] Tencent decides that we will do this in one of our internal studios.

[1055] And they agree on some kind of revenue share with League of Legends because they, if I remember right, they hadn't agreed on a rev share yet.

[1056] So they have their studio start going and building, what is effectively a clone of League of Legends, which they own, but don't have enough sort of power and coercion over riot to get them to do this thing.

[1057] They own like 93%, I think, of the company and the Riot founders have retained a small stake.

[1058] But they have control of the company, operating control.

[1059] Interesting.

[1060] So they start working on Honor of Kings internally, and they end up releasing it, and it's all Riot IP.

[1061] Like, Riot goes to them, and they're like, you have all of our champions in here.

[1062] I believe I read that Honor of Kings does $2 billion annual revenue in China.

[1063] It's crazy.

[1064] I mean, it's the most popular mobile game in China, maybe the most popular mobile game in the world.

[1065] I think it is the most popular mobile game in the world, has 200 million monthly active users, almost all of which are in China.

[1066] So basically one fifth of the country plays honor of kings.

[1067] Think about that.

[1068] Like, that's crazy.

[1069] Totally nuts.

[1070] And as you can sort of read between the lines here, the relationship between Tencent and Riot is a little strained.

[1071] Well, especially because, It's like, oh, they'll never work on mobile.

[1072] The other thing, they do a couple other things in the gaming world.

[1073] In 2016, they buy Supercell, the Finnish maker of Clash of Clans.

[1074] So for $8 .6 billion, they now have the largest mobile game in China.

[1075] They have the largest mobile game in Europe.

[1076] And of course, is also huge in North America too.

[1077] they don't yet have like the crown jewel in North America yet.

[1078] I mean, they have riot, but Lee is not on mobile.

[1079] Well, fast forward to recent times.

[1080] When did PubG come out?

[1081] 2017 or 16?

[1082] I'm not sure, but last few years.

[1083] Last few years, PubG is this Korean game maker, Blue Hole.

[1084] Player Unknown Battlegrounds.

[1085] Player Unknown Battlegrounds releases a beta version of a game called PubG Player Unknown Battlegrounds with this concept of Battle Royale and it takes the world by storm, particularly North America, but the whole world.

[1086] Tencent, of course, negotiates for the rights to publish PubG in China, which they do and they get a small equity stake in the company.

[1087] Now, meantime, remember, an hour ago, we talked about Tencent acquiring a 40 % stake in a, you know, well known in the gaming industry, but not well -known.

[1088] outside the gaming industry, a little company in North Carolina called Epic Games.

[1089] And Epic, of course, the maker of Fortnite, had Fortnite out at this time when PubG is taking the world by storm, but did not have the Battle Royale mode.

[1090] So it was just a sort of regular sort of spacey fantasy first person shooter.

[1091] They did have all of the Battle Royale stuff in development.

[1092] So it's not like they just saw PubG and we're like, build that.

[1093] This is going to merit its own episode at some point for some excuse to do an episode.

[1094] we all know what happens.

[1095] Fortnite pivots and becomes all about Battle Royale and is now, I believe, by far, the largest game and mobile game in North America.

[1096] And so now Tencent controls the largest mobile games in basically every major mobile internet using continent in the world.

[1097] Yeah.

[1098] It's the biggest company, the most important company that's not a household name.

[1099] On the non -gaming side of the house, they're up to plenty of interesting things there, too.

[1100] In 2017, they acquire a 5 % stake in Tesla.

[1101] Now, I'm not exactly sure how this came about, but Tenson is, I believe, now the third or fourth largest shareholder in Tesla.

[1102] Super interesting, especially given Tensan, as we talked about at the top of the episode, located in Shenzhen, which now, thanks to Tensen, is really Silicon Valley in the modern Silicon Valley sense of all.

[1103] things tech, but of course has its roots in hardware and manufacturing.

[1104] And there are a number of electric vehicle startups and established companies in Shedgen.

[1105] And of course, rumors are out there that Tencent may be interested in getting into that game themselves.

[1106] And then, of course, there was yesterday's, this week's event of the Tencent Music IPO, which happens.

[1107] And they float Tencent Music publicly, has a $21 billion market cap.

[1108] I believe Tencent still owns like 95 % of the company.

[1109] As we were doing the research, like some people out there are starting to refer to Tencent and its management team as like the Berkshire Hathaway of tech, not just like Asian tech, but like tech, period.

[1110] Like these guys are so prescient.

[1111] Yep.

[1112] And before we drift too close into tech themes here, it is worth pointing out the very recent things that have happened with the company.

[1113] So last year, 2017 was an insane year for tech.

[1114] 10 cent from a finance perspective.

[1115] Their stock started the year at $25 USD and ended the year at $60 USD.

[1116] This is a company that went from, I think it was like a quarter trillion dollars to a half trillion dollars in market cap in one year.

[1117] In the last few episodes, we've really talked about sort of value creative companies.

[1118] Anormous company doubling in size, more than doubling in size, wild.

[1119] 2018, the exact opposite story.

[1120] They've wiped out almost their entire run -up from 2017.

[1121] and there's been a couple of interesting things that I think, are you ready to call it tech themes that mention them and go into tech themes a little bit?

[1122] Let's do it with the one I was thinking about what to do and what would have happened otherwise.

[1123] I think we basically covered it.

[1124] The most interesting thing to me is like what if Xiaomi had built if MeChat had succeeded.

[1125] But again, I don't think it could have because of like the iOS Android like the cross platform, you know, aspect.

[1126] And the network graft.

[1127] Yeah.

[1128] Yeah, and the network graft.

[1129] I like that.

[1130] I like that.

[1131] You can spell that however you want.

[1132] 2018, you know, the stock is sliding.

[1133] What's going on?

[1134] There's a couple of interesting things.

[1135] One is people are very worried about some gaming regulation that China has right now, where we're not going to get fully into it, but people are worried about right now China has an approval process for being allowed to release and distribute games.

[1136] And so there's a big hold up on popular titles that tend to.

[1137] can't release right now.

[1138] And then secondarily, on top of that, there's also a restriction on what you're allowed to monetize.

[1139] So people are worried, wow, Tencent may, may in fact get to have their games out there, but they won't be able to monetize them.

[1140] And before getting into sort of the second competitive thing here, I just want to point out, and other very smart people have pointed this out.

[1141] Ben Thompson has pointed this out, and Matt Brennan has pointed this out, that if this regulation is sort of here to stay, it tends to protect the incumbents.

[1142] And so there's a lot going on right now where people are really worried about, gosh, Tencent's business is really going to be hurt by this.

[1143] Probably not.

[1144] Like, Tencent's probably the one that's going to be able to sort of have their moat solidified by all this regulation that comes in and prevents due to sort of distribution and pure expense of going through the regulatory process, future startups from succeeding in gaming.

[1145] And so not just future startups, but again, think about how global this business has become.

[1146] Who else but Tencent could bring non -Chinese development?

[1147] properties to China now if like there's a ton of rate like you think you think Epic is going to like do that directly with the Chinese government like no way yeah yeah you don't you don't get to enter China without a partner like Tencent the other company that I think we should talk about is is bite dance and David what is bite dance oh man what is bite dance well okay so bite dance is probably the, we've painted a picture, I think, very justifiably so, of a very rosy picture for Tencent.

[1148] They've accomplished incredible things.

[1149] They look like they are unassailable in China or really anywhere else.

[1150] And they own entertainment, right?

[1151] They own entertainment in China on the game side and on the social networking side.

[1152] Yep.

[1153] Byte dance is the biggest threat to Tencent out there right now.

[1154] And it is a very, very real threat.

[1155] It's so interesting.

[1156] Like the tech theme we've talked about a number of times about things.

[1157] I think this is originally a Paul Graham idea of like things looking like toys when they start and then becoming much more than toys.

[1158] So ByteDance started a couple of years ago.

[1159] I believe it was a news aggregator app, Totia to start, of aggregating content and news into a reader on mobile devices, has morphed and changed into the, that plus video aggregation and micro video production, they acquired musically, which was folks in the U .S. probably remember, was a big kind of music video lip syncing sing -along app co -developed here and in China.

[1160] That became part of bite dance.

[1161] With that, all that has gotten merged into TikTok.

[1162] Which is crazy if you haven't tried it.

[1163] Like you guys all need to download TikTok and be prepared to be confused and have your mind blown.

[1164] And, you know, has kind of become like, I don't know what the, what's the best way to describe it?

[1165] Like kind of like YouTube, right?

[1166] Like all types of video algorithmically surfaced for you based on what you love, both from your friends and official accounts.

[1167] It's very like synchronized to music.

[1168] I don't know, I don't know why the content is so different, but they're really wacky videos and they're short form and they're all sort of synchronized to music.

[1169] I don't think we've ever sounded like older, you know.

[1170] then at this moment on the podcast.

[1171] But take our word for it from a business model perspective.

[1172] This is a huge threat to Tencent, which the key to making all of this work is the four hours a day that people are spending on WeChat and Tencent properties.

[1173] If that starts getting eaten away by something else, then the opportunity for building the ecosystem and serving them goes to where those eyeballs are.

[1174] And that is why ByteDance, a company founded David, I think you said a couple of years ago, just raised capital at a valuation of $75 billion.

[1175] Yes, and I believe that makes it officially the world's most valuable private startup, because I believe Uber still held at 70 or slightly below.

[1176] Yeah, and their last share tender was in the 50s or 60s, so what?

[1177] Like, okay.

[1178] Incredible.

[1179] So count that as the sort of major credible threat.

[1180] if ByteDance is able to sort of turn into a platform company the way that Tencent had.

[1181] Yeah.

[1182] What I think for me, I mean, I guess I already said it, but what that highlights for me in tech themes is the power of the business model that Tencent pioneered of this freemium microtransaction business model.

[1183] Like this is a huge like development for business period and tech enabled business globally.

[1184] Like think about things like Kimberlite, like, you know, our LP program.

[1185] it's a direct result of this.

[1186] Like, you know, in the old world, like podcasting is a perfect example.

[1187] People have been trying to make advertising and the traditional, you know, US -centric way of, you know, add -supported content work.

[1188] And it hasn't worked and it hasn't worked and it hasn't worked.

[1189] This other approach has built like so much, has worked at least equally well for Tencent.

[1190] And we're starting to see it elsewhere.

[1191] And it'll be very interesting to see how ByteDance starts to build their monetization and business model around what they're doing.

[1192] So 10 cents core products do well in China.

[1193] And to the extent that they aren't doing well in China, or they're doing well outside of China, it's with either sort of expats or people that do business with Chinese, but like I don't use WeChat.

[1194] You mean like the core?

[1195] Not their investments, the things that they've actually, yeah.

[1196] Like those things do well in China.

[1197] The way that they've gone to the rest of the world is through investments.

[1198] And I'm sort of wondering like, Do you think their future is really more as an investment company than, I mean, you alluded to the Berkshire Hathaway thing.

[1199] I'll go out on a limb and say, 10 cents core products or copies of things that were doing well elsewhere, sort of fitted to make sense in China and nail the timing and the distribution in China.

[1200] And then they were able to grow tremendously by investing in companies elsewhere.

[1201] Are they an innovative company?

[1202] Or are they sort of a very good sort of ruthless cutthroat investment and and copying company.

[1203] Both, of course.

[1204] So, okay, this was my other tech team too.

[1205] This is such a great question.

[1206] I'm so glad you asked it and that it's come out in this episode.

[1207] This is a core question that people have asked for years about 10 cents.

[1208] Like, don't they just copy everything?

[1209] And I think we've tried to paint the picture throughout this episode of, you know, going back to that pony muck, one of his few, you know, public quotes of like, yes, you know, like he starts it with like we we stood with the Isaac Newton quote of like we stand on this we see so far because we stand on the shoulders of giants i .e. we copy things but like it's not just the copying like you have to adapt it in the right way for the right local market and I think that's the nuance here and that's why we chat is so powerful in China has never worked anywhere else that's why WhatsApp is so powerful in Europe and as doesn't really work you know in the US and and you know all the things that work here like they're just these element, like take the U .S., for example, IMessage is, the market is so fragmented because IMessage is so baked so deeply into iOS, and iOS was the first smartphone, you know, available here in the U .S. and has a toehold, an unassailable toehold on at least the high end part of the market.

[1210] Thus, something always needs to be, like, there's enough of a network there among IMessage that it's viable, you know?

[1211] Those dynamics are not the same in other markets.

[1212] What's interesting is as you think about network effects and, you know, monopolies, like everybody's always asking, when is Tencent going global?

[1213] Why aren't Tencent's products working, you know, elsewhere around the world?

[1214] And this is it is that, like, they can't, you know?

[1215] There are elements of these markets that you can have a monopoly in the local market.

[1216] And the local markets can be enormous.

[1217] They can be the size of China or the size of Europe or the size of North America.

[1218] But like, what is the right thing to unlock that market?

[1219] is not necessarily the right thing to unlock another market, you see this in ride sharing, too.

[1220] Like, the way Didi works is super different than the way Uber works in the U .S. is different than the way the Indian ride sharing companies work.

[1221] Like, you need to accept cash in India.

[1222] Like, you would never use cash with Uber in the U .S. Sometimes a company can, like, see around corners enough to or be visionary enough to create different versions of the product to serve those different markets.

[1223] But it's really hard.

[1224] And that's why I think more often than not, you get these local monotonies.

[1225] So you're asserting that for many of these products, it's actually not a global market that's addressable to them.

[1226] That it's a conglomeration of local markets, some of which you're going to be very dominant, others you're going to be fighting for scraps, and in others, you're going to have nothing.

[1227] Yeah.

[1228] I mean, I think that the one example I can think of that is very, very clearly an exception to this is Airbnb.

[1229] Because there's such significant cross -market network effects.

[1230] like you travel to another place and need to have that platform there.

[1231] Like I don't really care that Europe is based on WhatsApp if we're messaging and that China's based on Wii chat.

[1232] And when I need to interact with people that are in those networks, I just download that app.

[1233] Like that's fine, but I'm not going to use it day to day.

[1234] Whereas like the whole value prop of Airbnb is like I'm traveling there.

[1235] You know, so I want one global network that like everything.

[1236] And I think this is why Airbnb is, I believe, is succeeding to a greater extent than other Western companies in China because of this pressure to make it all one network.

[1237] Well, speaking of networks, my last, I think we touched on this a lot, but my last real theme to think about here is when you are already a power having the hundreds of millions of users that they had on QQ, if you have the product right, or even if you have the product within spitting range of the market leader, you really can just kind of go win in that category too, the way that they encouraged aggressively all the QQ users to become we chat users.

[1238] And you just see it time and time again with Facebook today.

[1239] I mean, they could have bought any number of the Instagram like services and probably promoted it to the point where it became the winner.

[1240] Instagram was definitely the best product and definitely had, you know, the most users and the most growth at that time.

[1241] But there's a pretty interesting thing going on now with these like social networks where you really can sort of promote something to the point of being successful.

[1242] if you're able to successfully move users over.

[1243] And I think shy of the platforms changing that in a big way, like making it so that you could imagine like a way that Apple or Google could make it impossible for Facebook to so aggressively leverage your use of the Facebook app to get you to download Messenger and become the dominant messaging app in the U .S. I don't exactly know how that would work, but shy of something big in the product at the platform level changing like that.

[1244] We're going to continue to see this.

[1245] where since the, when the platform wars were sort of settled in a market by market basis, that's who gets to decide what the next product on that platform is.

[1246] Part of the core of what Ben Thompson has talked about for years now, that Facebook should never been allowed to buy Instagram, because that's like, now in retrospect, such a clear example of basically anti -competitive warping of a market that is clear that that is what happened from a business stance, but legally, like, you know, the laws aren't, you know, set up yet to address such a situation.

[1247] All right.

[1248] Well, we're setting records here on the episode length.

[1249] Do we want to go to grading?

[1250] Yeah, let's do it.

[1251] All right.

[1252] So the way that we decided to grade this one is to do the big reveal on what NASPR's investment in Tencent turned into and then talk about it in the context of other potential candidates for the best investment of all time.

[1253] So here it is by the numbers.

[1254] 2001, NASPRs invests $32 million.

[1255] In March of 2018, when they still owned 33 % of the company that was worth $175 billion, they sold 2 % to get liquid on that 2%.

[1256] And also March of 2018, pretty good time to sell some 10 cent stock.

[1257] At that time, it represents a 5 ,500 from the $32 million to their $175 billion of shares in Tencent.

[1258] I'll take it.

[1259] Was it $32 million they invested initially, or was it $20 million?

[1260] They owned a 32 .8 % stake, but I think they initially purchased it for $20 million.

[1261] Maybe they did another round or something, because at some point here I have a $32 million investment for roughly 47 % of the company, and then they got diluted down to owning about a third of the company.

[1262] So I think they may have done another.

[1263] Maybe they bought more ahead of the IPO to avoid dilution in the IPO.

[1264] Well, anyway, whatever.

[1265] At this point, talk about rounding errors.

[1266] Yeah.

[1267] And one other note on that, which is just interesting and very reminiscent of the Yahoo episode with Altaba, that investment makes NASPR's the most valuable company in Africa.

[1268] But so remember I just said that in March, it represented $175 billion.

[1269] of market cap.

[1270] NASPERS itself is actually valued at $122 billion, significantly less than their share in 10 cent, which not only does two things, basically assigns no value to anything else that NASPERS does, but also, of course, it has that discount because there's uncertainty and the ability to get liquid on that.

[1271] While NASPERS still owns 31 .2 % of 10 cent, their investors do not look at anything they do other than that ownership as valuable.

[1272] Sort of like Altaba, like, and we talked about in the Alibaba episode, there are two ways that you can invest in Tencent.

[1273] Like, you can go buy Tencent stock on the Hong Kong Stock Exchange, or you could go by Naspers stock.

[1274] Like, they still own 32 % of the company.

[1275] So, David, what else is a candidate here?

[1276] Well, I think the most direct candidate, and this is, you know, perfect for acquired and closing out season three here is the soft bank investment in Alibaba of 20 million for 20 % of Alibaba.

[1277] There certainly there are, you know, other candidates are Excel's investment in Facebook, which was, gosh, what was it?

[1278] It was like 10 million for just under 10 % of the company or even Peter Thiel's angel investment before that.

[1279] Of course, great investments.

[1280] What I think is interesting here, and my grading criteria is going to be heavily influenced by holding times and exiting the investment because SoftBank, I believe, I'm thinking back to the Alibaba episode, they start exiting some of the Alibaba stock, right, along the way.

[1281] And certainly Yahoo, when they had come in and invested a billion dollars for 40 % of the company, they exited along the way.

[1282] What's interesting is like Naspers, you know, still owns 32 % of the company.

[1283] And Excel, of course, because, you know, they had to.

[1284] this is the way VC funds work.

[1285] When Facebook went public, of course, they distributed the shares.

[1286] The fact that this may be the greatest deal of all time is also an artifact of the fact that, you know, Naspers is not set up as a fund.

[1287] So they don't have to distribute the shares.

[1288] It's an A. It's an A plus.

[1289] The question is whether it is the single greatest investment of all time.

[1290] I don't know.

[1291] I think there's a very strong argument here.

[1292] I'm probably biased because we've just finished two hours of talking about Tencent.

[1293] But this is incredible.

[1294] I think I'm going to go with this as number one.

[1295] Please drop it in the slack or hit us up Acquiredfm at gmail .com if you have other opinions.

[1296] But it's hard to imagine.

[1297] Hard to imagine a better investment.

[1298] I don't know what NASPR's governance structure is, but like that they've held it for so long and still do.

[1299] Like what, like, that's amazing.

[1300] like any other you know type of governance structure organizational dynamics along the way of course people would be like we got to like at least take some money off the table here you know a plus but weird criteria i think it's the best of all time i do think so yeah yeah yeah i think so all right carve outs yeah so mine is president barack obama as one of the first podcasters ever so there was an amazing uh i can't even remember where i found this maybe red it on Barack Obama's U .S. Senator for Illinois page that was hosted on, I think it's Senate .gov, Obama .com, which of course doesn't exist anymore, he produced an RSS feed that had a bunch of MP3 files in it starting in September of 2005, which is three months after podcasting launched on iTunes, and submitted it.

[1301] The amazing thing is that the Wayback machine preserved it.

[1302] So we'll put the link in the show notes here to click through and look at it.

[1303] But there is a, there's a page that has, I don't know, 20 or so episodes of Obama just kind of checking in with the good people of Illinois.

[1304] And he's, you know, hey, I want to talk to you today about Hurricane Katrina relief efforts.

[1305] Hey, you know, I talked to some people recently about avian flu preparedness.

[1306] I want to spread that information to you.

[1307] It is so interesting to get sort of a look at, number one, what he was sort of thinking in 2005, you know, three years before he became president.

[1308] And also sort of him honing his voice a little bit.

[1309] He wasn't quite as presidential.

[1310] And also, like, what he was doing is just very innovative.

[1311] I mean, there were so few podcasters then.

[1312] If you look at the growth over time, of course, there's 600 ,000 podcasts now, the growth has been exponential.

[1313] And so if there's the first few years, it was just a dribble of people here and there.

[1314] It was a clugie thing to do.

[1315] You know, you make this weird RSS feed thing.

[1316] I guess it's still a clouty thing to do.

[1317] Still, you make a weird RSS thing.

[1318] And nothing has changed.

[1319] And if you look over on the right sidebar, it says subscribe for free.

[1320] You can click this button that says podcast RSS, which I think just literally takes you to an XML file.

[1321] And then there's a third button called Odeo.

[1322] Oh, no way.

[1323] Oh, my God.

[1324] I hadn't seen that.

[1325] That's incredible.

[1326] That's incredible.

[1327] Well, you know what company we still haven't covered on this show?

[1328] Audio.

[1329] indeed that's what we should do that we should we should we should title the episode audio be a little in joke all right um my carve outs uh i have two which i know is against the rules but a we skipped carve outs a couple times this season uh but b because this is the last episode of the season i i have good reason here the first is is timely so it has to be now it may already be a little past but but let's revive it go listen to keroswisher's interview with the Google walkout organizers.

[1330] Friend of the show, Kara Swisher.

[1331] Yes, friend of the show, Kara Swisher.

[1332] Incredible.

[1333] Everything that is great about Kara is on display there.

[1334] So important, you know, as in the moment we are in here at the end of 2018 and tech and everything going on, just really, really great.

[1335] In true style, you know, she is, of course, opinionated, but she brings out, like, from six people all at once.

[1336] I can't imagine interviewing six people, remote, some in person, some, you know, remote.

[1337] brings out their stories and the purpose of the Google walkout and everything behind it in a way that is just masterful.

[1338] So everyone should go listen to that.

[1339] On a later note, since this is the end of the year and the season finale, and people have holiday travel coming up, an incredible, one of the best long read articles I have read in the past few years that came to me as I was just browsing Twitter.

[1340] Sometimes every now and then I'm like, Twitter, like, this is just like a cesspool.

[1341] to give it up.

[1342] And then, like, they, they hit you with the gem.

[1343] Alan Iverson, I wrote a really amazing, this is my gem.

[1344] Alan Iverson.

[1345] It's a, it's a gem.

[1346] I'm not, I'm not kidding.

[1347] This is like an incredible gem.

[1348] Alan Iverson writing for the Players Tribune writes an incredibly long piece just about him and his story.

[1349] And like, it's so cool.

[1350] I grew up in Philadelphia, like watching Alan Iverson, you know, play.

[1351] And like everything, of course, the basketball player, Alan Iverson, he changed so many things like there would be no you know everything about what the NBA is today comes from Alan Iverson and like in some way it's so different from what he was but like he he makes the point in this in this piece which is so good on so many levels that like everybody called him a thug everybody called him like whatever you know all the stuff but it was like he was being him you know and like that was the thing that like he wanted to be an amazing athlete and like he was so intense and such a so dedicated to the game despite the whole practice thing He didn't want to, like, not be him.

[1352] You know, now all these NBA players are empowered.

[1353] Like, LeBron is being LeBron, you know, and Steph is being staff.

[1354] Like, it's so good.

[1355] Can't recommend it enough.

[1356] Even if you're not, like, a huge basketball fan, like, it's just so cool to see somebody who, like, was so important to their industry in a way that, like, was misunderstood in so many ways at the time.

[1357] Then 10, 20 years later, come back and, like, be able to write about it and hear it from his perspective.

[1358] Awesome.

[1359] Well, adding to my InstaPaper.

[1360] All right.

[1361] Our sponsor for this episode is a brand new one for us.

[1362] Statsig.

[1363] So many of you reached out to them after hearing their CEO, Vijay, on ACQ2, that we are partnering with them as a sponsor of Acquired.

[1364] Yeah.

[1365] For those of you who haven't listened, Vijay's story is amazing.

[1366] Before founding Statsig, Vijay spent 10 years at Facebook where he led the development of their their mobile app ad product, which, as you all know, went on to become a huge part of their business.

[1367] He also had a front row seat to all of the incredible product engineering tools that let Facebook continuously experiment and roll out product features to billions of users around the world.

[1368] Yep.

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[1372] So what does that actually mean?

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[1374] It's super cool.

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[1376] Customers include Notion, Brex, OpenAI, FlipCart, Figma, Microsoft, and Cruise Automation.

[1377] There are, like, so many more that we could name.

[1378] I mean, I'm looking at the list, Plex and Versel, friends of the show at Rec Room, Vanta.

[1379] They, like, literally have hundreds of customers now.

[1380] Also, Statsig is a great platform for rolling out and testing AI product.

[1381] features.

[1382] So for anyone who's used Notion's awesome generative AI features and watched how fast that product has evolved, all of that was managed with Statsig.

[1383] Yep.

[1384] If you're experimenting with new AI features for your product and you want to know if it's really making a difference for your KPI's stat sig is awesome for that.

[1385] They can now ingest data from data warehouses.

[1386] So it works with your company's data wherever it's stored so you can quickly get started no matter how your feature flagging is set up today.

[1387] You don't even have to migrate from any current.

[1388] solution you might have.

[1389] We're pumped to be working with them.

[1390] You can click the link in the show notes or go on over to stat sig .com to get started.

[1391] And when you do, just tell them that you heard about them from Ben and David here on Acquired.

[1392] All right.

[1393] Well, listeners, if we don't talk to you again, have an excellent, excellent holiday season.

[1394] Thank you for being with us on this journey in season three.

[1395] If you weren't subscribed and want to hear more, you can subscribe from probably wherever you're listening to this.

[1396] If you like the show and you want more, you should totally become a limited partner.

[1397] We would love your support.

[1398] We're stoked that the program's going well and that it's making sort of a meaningful impact on acquired and what we're able to do as far as like travel to guests and being able to promote the show more, bring on, you know, more listeners.

[1399] And really, it's kind of funny, like we cover all these companies, capital can sort of equal quality.

[1400] And so it sort of justifies us being able to go above and beyond and make the show better and in a bunch of different ways.

[1401] So click the link in the show notes, join and become a limited partner.

[1402] We seriously appreciate it.

[1403] And we hope you get a ton of value out of the bonus shows that we're doing.

[1404] I know we have a bunch of fun doing it.

[1405] So.

[1406] Indeed.

[1407] Indeed.

[1408] Well, thank you all as always.

[1409] Happy holidays.

[1410] We'll see you in season four.

[1411] Yeah.