Breaking WeChat’s Grip on China’s Social Networks

Oct 16, 2018 10:01 AM PDT · Comment by Tanay Jaeel

The Information — Imagine if Facebook’s key lieutenants quit to launch a rival product. In China, something like that just happened. Two of the people who helped develop WeChat, the nearly universal chat app run by Tencent, recently created new social networks called Pop and Echo.

It comes amid signs WeChat’s grip over social networking and media consumption in China may not be as total as it once was, leaving openings for newcomers and potentially a more fragmented market. While the new contenders are young, the amount of backing they are getting shows investors believe new social apps more narrowly focused on photo- and video-sharing, where WeChat is less dominant, could pay off.

THE TAKEAWAY

• Key former WeChat executives create social apps, Echo and Pop

• WeChat’s grip on China’s social media market could be loosening

• Investors are warming to WeChat challengers

Genie Lin and Huang Tianqing, the two former WeChat executives, both left Tencent within the past year. Ms. Lin recently launched Pop, a Snapchat-like app with personalized cartoon avatars. Pop is backed by Bertelsmann Asia Investments, an investor in bike-rental startup Mobike and Chinese Airbnb rival Xiaozhu. Mr. Huang—also known as TS—founded Echo, which resembles Snapchat Stories loaded with even more emojis and stickers, and raised money from Gaorong Capital, an early investor in ecommerce app Pinduoduo. Even though Echo is still operating in beta mode, it already secured a $40 million valuation in the fundraising, a person familiar with the matter said.

Investors were less eager to back new social apps a few years ago when Tencent was solidifying its monopoly. But now, as WeChat, which launched in 2011, has matured to a billion monthly active users, younger Chinese users’ habits appear to be changing, as more of them gravitate towards video-sharing apps, which isn’t a key part of WeChat. Some entrepreneurs and venture capitalists are betting that there is room for experimentation.

“WeChat is loaded with functionalities. But people emotionally need another place that’s more fun and edgy,” said Bertelsmann Asia Investments managing partner Annabelle Long.

Ms. Lin—once considered the second-in-command to Allen Zhang, WeChat’s iconic founder—declined to comment on Pop or her departure from WeChat. Mr. Huang didn’t respond to a request for comment, nor did a spokeswoman for Tencent.

The Chinese market could start to splinter, with a wave of new social networks, including Pop and Echo, that launched this year. Sequoia Capital China has invested in Flow, where users form communities based on their interests. DST Global is an investor in Soul, which helps users connect with other users who have similar characteristics. ZhenFund, one of China’s most influential early-stage VCs, is backing Soda, which combines a Facebook-like timeline with chat groups.

Bertelsmann, Pop’s investor, is also betting on location-based social app Spot, whose cartoon-like map shows users where their friends are, and Yiguan, where users communicate anonymously with strangers. Yiguan is also backed by Capital Today, an early investor in ecommerce giant JD.com.

Tastes in China’s social media market have shifted in the past. Although older incumbents like Weibo and QQ remain popular in China, they have fewer users than WeChat.

Many of the new apps are focusing heavily on photos and videos, a shift made possible by improvements in China’s telecom infrastructure that have made it much easier to watch and upload videos. Thanks to more powerful smartphones and fourth-generation mobile networks, new apps can fully embrace multimedia content and design user experiences entirely around it, Bertelsmann’s Ms. Long said.

'Every social platform has a cycle,' said ZhenFund vice president Justin Guan. 'And WeChat has been around for so many years.'

The new competition in the social network market is arriving at a time when Tencent—China's largest game publisher and an influential investor in other tech giants like JD.com and Meituan—looks weaker than in the past. Its stock has struggled this year amid concerns about the outlook for the company’s online game business, its biggest source of revenue. Tencent’s share price is now roughly 40% below its peak in January.

It’s unclear how much traction the new social apps can get and whether they can be sustainable. A new messaging app called Bullet Messenger, which briefly became one of the most downloaded apps in China after its August launch, saw its growth slow sharply in the past few weeks. Another factor that could throttle the startups is the government, which strictly censors online content. Even established players routinely run afoul of China’s powerful regulators.

Nobody expects WeChat to be overthrown. It is the preeminent social network in the vast Chinese internet market, combining the roles of Facebook, Twitter and WhatsApp in one service. And given how widespread the app’s WeChat Pay digital wallet is, WeChat is practically indispensable for daily living in China.

But entrepreneurs see opportunities as other types of WeChat challengers gain traction, especially Bytedance, the maker of the Toutiao newsfeed and the fast-growing Douyin short-video app, which is known as TikTok overseas. As of August, Toutiao had 248 million active users, while Douyin had 225 million, up more than fourfold from 52 million in December, according to research firm QuestMobile. Tencent’s Weishi short-video app had 49 million monthly active users in August, less than a quarter of Douyin.

An average Toutiao user spent an hour and a half in the app per day in August, about the same amount of time an average WeChat user spent, according to QuestMobile. An average Douyin user in the same month spent 63 minutes per day, up sharply from 39 minutes in December.

Apps like Douyin encourage Chinese users to watch and share short videos every day. Taking advantage of those habits, new social networks are building apps from the ground up to encourage users to interact with friends and strangers primarily through multimedia content, venture capitalists say.

“Short-video apps are shaping people’s habits. Young people are becoming more accustomed to using videos to communicate with each other,” said ZhenFund vice president Justin Guan.

Even inside WeChat, there’s some concern about Tencent’s ability to adapt to the changes. Half a dozen WeChat employees who work in product development and ad sales interviewed by The Information all described Bytedance as a threat, adding that they personally spend at least as much time in Douyin as they do in WeChat.

WeChat also is evolving, and its senior managers believe that there is still plenty of room for growth, especially when it comes to connecting users with merchants, brands and other online and offline businesses. To become a better gateway to other services and content, WeChat has expanded its use of “mini programs,” lightweight apps users can access without separately downloading larger, independent apps.

Investors betting on new social apps also are aware that the odds are against them. But they believe that WeChat’s dominance still leaves openings for alternatives.

“Every social platform has a cycle,” said ZhenFund’s Mr. Guan. “And WeChat has been around for so many years.”