Wednesday, June 7, 2023
Support Our Journalism
HomePageTurnerBook ExcerptsTencent rose when Microsoft joined the list of foreign tech titans felled...

Tencent rose when Microsoft joined the list of foreign tech titans felled by Chinese rivals

In ‘Influence Empire’, Lulu Yilun Chen tells the much-awaited story of Tencent, the Chinese tech giant behind WeChat.

Text Size:

In 2004, Jeff Xiong Minghua, a nine-year veteran at Microsoft, was dispatched from headquarters to Shanghai. The news triggered a sense of unease for Pony and his team. For years, Microsoft had flirted with the idea of expanding its services in China. To the first generation of tech companies, the idea of locking horns with the company founded by Bill Gates seemed an insurmountable challenge. Pony was about to meet his Goliath. Microsoft was a formidable competitor, partly because its instant messaging product MSN already enjoyed a significant user base in China, even without a local operation. Its user numbers were three times that of NetEase, Tencent’s smaller competitor. MSN had another edge. Its chic and streamlined interface appealed to the urban population of office workers and students, who considered QQ too grassroots and unruly for their taste.

With Chinese families in cities gradually picking up in wealth, personal computers became more common in households. I was introduced to MSN by my classmates, and before I knew it, the software became the first thing that popped up on my desktop. It was running in the background when I worked, when I played music, and even when I wasn’t using the computer. There was a strange sense of comfort in seeing who was logged on during the wee hours, the beeping sound of someone reaching out providing a dopamine rush. Among the 20 million business and white-collar users in China at the time, MSN garnered a 53 per cent market share, six percentage points higher than QQ’s, according to Analysys International. It surprised Microsoft’s senior management and convinced them of the opportunities in China.

Also read: Explained: How Elon Musk funded $44 billion Twitter deal to become the new boss

Jeff, a bespectacled and scholarly product manager, hailed from the land-locked province of Jiangxi, famous for being the base from which Mao conducted guerrilla warfare. He studied computer science at the National University of Defense Technology, backed by the Chinese military. It was one of the few schools in the 1980s that provided courses on the subject. He came across Windows when working for a Taiwanese company, helping localise the software for China. After studying at the Chinese Academy of Sciences, he joined a US joint venture financed by the research centre in 1993. The managers dispatched him to Hartford, Connecticut, to help expand the business, focusing on software systems. ‘It was a tough two years. All the English I learned in China wasn’t enough to help me get by,’ Jeff said, adding that he was a one-man band working in a startup looking after everything from code testing to customer support and sales. When he felt it was time for a change, he sent out his resumé to only two companies: IBM and Microsoft. ‘For programmers like us back then, these two were it,’ Jeff said. Microsoft snatched him up in 1996 after his short stint at IBM. From there, he obtained a front-row seat to the company’s battle with Netscape, and helped improve the Internet Explorer browser and chat messaging service MSN.

By the time he planned to cash in his company options in 2001, Jeff had already made a name for himself among China’s fledgling tech circle, and was highly regarded by Tencent’s founding team. He’d written two books on software development and was a part-time lecturer at a top-tier university in China. Among people who attended his talks were two of Tencent’s co-founders, one of which was Tony Zhang, who reached out. Over two bottles of red wine at a restaurant in the posh French concession in Shanghai, they exchanged thoughts on technology, coding and the future of China’s tech landscape. Jeff was impressed by the Tencent co-founder’s tech know-how, but dismissed the idea of joining the team. ‘At the time, MSN didn’t really take QQ seriously. Their UI really sucked,’ Jeff recalled. The industry joke at the time was that QQ had done all the hard work – educating users and cultivating their habits – and MSN was coming into the market at just the right time to reap customers ready for an upgrade. QQ was viewed as a chat service for younger and lower-income people who used it to communicate while playing desktop games and seeking hook-ups in the virtual world; MSN would become the tool of choice for the white-collar community and a means for sharing information and documents for business operations.

Also Read: Overhaul regulation of E-marketplaces. Small sellers have stake in platform economy growth too

Jeff officially relocated back to Shanghai in 2003 – bringing along his wife, elder boy and younger daughter who’d grown up in Seattle – to help Microsoft expand in China. It didn’t take long for him to assemble a thirty-strong team. With his influence, he corralled talent from top-tier universities across the country. To Tencent’s founding team, it was as if an aircraft carrier had moved into their waters, and they were fighting with a battleship. In order to beef up the content provided via MSN, the company outsourced its portal business to local partners, carving out different verticals such as e-commerce, automobiles and news to companies including Alibaba. It was an astute move for Microsoft, helping it skirt the risks brought on by local regulations in content, but also monetising its messaging traffic instantly. Overnight, the US company had assembled a team of partners, forming a potent alliance against QQ.

MSN also took a page from QQ’s own playbook. It acquired a local Chinese company so it could convert messages people received on their desktops to mobile text messages for a mere price of $1.20 per month. At the same time, it linked its services with Yahoo globally. Those measures posed a strong threat to Tencent. In response, Pony’s team carried out its biggest overhaul of QQ since going public. In September 2004, QQ bolstered its capacity for file sharing and storage to increase its popularity among the white-collar population. It was the first step in a series of turnarounds for Tencent. Pony proved his company could win over users with more spending power. Pony also decided to emerge from his usual silence, laying bare to the world his vision for QQ in a media conference. By June 2005, QQ had 440 million users, the population of the US and Japan combined. He proposed that the definition of instant messaging be redefined, adding that products like QQ were no longer just tools of communication but a platform for information, entertainment, games, blogs and videos.

Pony declared that chatting platforms were changing people’s lives and that ‘China was leading the world in instant messaging.’ Unaccustomed to making speeches in public, Pony was nervous during his debut and read from written notes. He would even blush in front of just a hundred people, colleagues recalled. Yet his predictions about how instant messaging would incorporate elements of entertainment and social media, and how users would demand better security and privacy protection, paved the way and strategy for the company over the next decade.

Also Read: India’s ed-tech is a predatory market. Modi govt can learn from UK, US

Pony was stubborn about one issue. He guarded QQ’s moat and walled garden jealously, opposing any suggestions to open up the platform on the grounds that it was the best way to serve user interests. He turned down MSN’s invitation to connect the two platforms. He was right to hold out. Internal management issues at Microsoft in China were causing the local teams to struggle after their preliminary triumph. Due to bureaucratic structures that required information get passed up the chain back to headquarters, decision-making at MSN China became significantly slower than its competitors, who were racing against the clock. For instance, Chinese engineers proposed that MSN users be allowed to receive messages sent to them while they were offline, the moment they logged on. That suggestion, however, didn’t even qualify for discussion at headquarters. At Tencent, they managed to incorporate the feature within weeks. ‘Yes, Tencent was bad with UI at the time and their service had a lot of bugs, but they were fast, and being able to provide something is better than not having anything,’ said Jeff, who himself was restricted to only approving projects that required $500,000 or less, having little control over the overall business strategy.

Reacting fast, making small innovations and upgrades, is one of Tencent’s hallmarks even today. At any unit, one can expect the team to provide fixes or upgrades to its services at least once every two weeks. The concept became known as ‘xiao bu kuai pao, kuai su die dai’, meaning taking small steps to run fast for quick evolution – a practice now widely adopted by the Chinese tech industry. Microsoft’s tradition of making software meant the company was prone to developing upgrades in a more prudent, albeit much slower fashion. Tencent being small, nimble and an internet operation from Day 1, could afford to update its services on a weekly basis and fix its bugs along the way. Its local partners in the portal business also lacked a coherent strategy to monetise MSN’s traffic. To win more advertisers, they often undercut each other, compressing ad prices. When China’s regulators began to crack down on the mobile text message space, it also curbed MSN’s revenue growth. Meanwhile, Tencent was sparing no effort, throwing all its weight behind QQ, which meant it could afford to look past a short-term revenue slowdown. Another challenge for MSN was that it kept all the key user data back on servers in the US, making the service slower. The reason Microsoft made such arrangements was because China banned foreign companies from operating their own data centres, and the company refused to put its data on those provided by local providers – a sensitive issue for the government. That meant it took as long as two minutes for users in China to log in to MSN, significantly hurting user experience. By the time it finally decided to set up a data centre in Hong Kong, which was closer to mainland China, MSN had already lost significant market share to QQ.

MSN’s fatal mistake came around the end of 2005, when it incorporated MSN’s chat service into a larger platform known as MSN Live. To many users, the upgrade looked like a web page instead, and it appeared that the company’s chat service had all but vanished overnight. When Pony’s team saw the new version of MSN Live, they knew the battle was over and they had won. And so it was that the software behemoth co-founded by the legendary Bill Gates joined a growing list of foreign tech titans felled by Chinese rivals – among them such household names as eBay and Amazon (both thwarted by Tencent’s arch-rival Alibaba) and Uber (defeated and ultimately bought out by Didi).

The victory gave Pony’s company immeasurable street cred domestically, while establishing its bona fides with those in the know in Silicon Valley. It also ultimately led to an invaluable staff hire. In hindsight, Microsoft never treated the war for instant messaging in China as a top priority. It was busy focusing on wrestling Google in the US. China only accounted for 2 per cent of its global business. For Tencent, though, Pony and his team were all-in. ‘I think Microsoft ultimately lost to itself,’ Jeff told me in retrospection. Defeated, he left Microsoft, but it wouldn’t be long before he emerged again. Jeff might have been Pony’s competitor, but the latter held no grudges. In fact, he was impressed by the Microsoft veteran through those years of fencing.

The two had first met in 2005, when Jeff went to Shenzhen to help acquire a company for Microsoft. Pony had reached out and the five co-founders at Tencent invited him for dinner. They talked about technology, products. Jeff felt that Tencent’s team was still stuck in the Stone Age when it came to concepts of tech team management – including the fact that they had no systemic approach to UI, or bug fixes. ‘It was like Microsoft was in the sky and Tencent was still on earth, there was a lot of catching up to do,’ Jeff said. ‘I really wanted to help them, and teach them the more advanced approach used by Microsoft.’

So when Pony implored him again to join upon his departure from Microsoft, he took the offer seriously. Jeff ’s original plan was that he’d stay at Tencent for two years tops and help introduce some professionalism to the scrappy team, so they would at least understand best practices for how to structure a corporation, conduct user interface research and fix bugs. He even agreed to take a pay cut of about 50 per cent.

Excerpted with permission from ‘Influence Empire: Inside the Story of Tencent and China’s Tech Ambition,’ Lulu Yilun Chen, Hodder & Stoughton/Hachette India.

Subscribe to our channels on YouTube & Telegram

Support Our Journalism

India needs fair, non-hyphenated and questioning journalism, packed with on-ground reporting. ThePrint – with exceptional reporters, columnists and editors – is doing just that.

Sustaining this needs support from wonderful readers like you.

Whether you live in India or overseas, you can take a paid subscription by clicking here.

Support Our Journalism

Most Popular