Comparing Facebook to the Asian online dragons
“One time only: Legendary Scroll. Bonus: Mystical Scroll x 5, Mana Stone +50,000. £79.99”
Summoners War mobile game, 29 July 2016
When analysing domestically-focused stocks in emerging markets it is important to be sensitive to cultural differences across the world. Brazilian supermarkets need wide aisles because whole families tend to shop together; Russian savers will convert from roubles to US dollars at the slightest hint of economic trouble; wage negotiations in Korean heavy industries invariably involve strikes.
An area in which those differences very much apply is internet businesses, particularly in emerging Asia. Usage patterns are often very different to those in the US and Europe, and, we feel, underpin the great opportunity in this space.
Three of the world’s five largest listed internet businesses are Chinese: Tencent, Alibaba and Baidu. We have significant exposure to Tencent and Alibaba, and it is a comparison between Tencent and its global peer Facebook that we feel shows the scale of the opportunity. Both are huge social networking/ messaging platforms growing rapidly into other related businesses, both aspire to create a full ecosystem to meet user needs (and exclude competitors), both continue to grow rapidly despite their enormous size. Admittedly, Tencent still awaits its Hollywood biopic.
In the first quarter of 2016, Facebook had 1.65 billion monthly active users (MAUs) and generated US$5.4 billion in revenues, of which US$5.2 billion was advertising revenues. Income from operations came in at a highly impressive US$2.0 billion. By comparison, in the same quarter, Tencent had 0.9 billion MAUs, US$5.0 billion in revenues and US$2.0 billion in operating profit. Where the main difference comes in, though, is in the composition of revenues. Tencent achieved US$2.6 billion in revenue from online games, US$1.2 billion in social networking fees and revenues, and only US$720 million in advertising revenues. Tencent is only just beginning to grow advertising revenues and has huge growth opportunities that Facebook does not.
The great achievement of Tencent is in persuading users to pay the company directly for services (such as digital content subscription services, membership subscription services and virtual item sales), something that Facebook has yet to achieve. Virtual items, such as stickers to customise user experience, are not something widely purchased by American or European users, yet are major revenue streams for some Asian internet firms.
Similarly in gaming, American and European users generally expect games to either be single purchase or to be advertising-driven, limiting revenue streams. Activision Blizzard, one of the largest gaming companies in the world, managed US$1.5 billion revenues in the first quarter. Tencent’s gaming business alone is far larger, again because users are comfortable paying directly for in-game items, stickers or customisation.
The quote at the top is from a leading online game, Summoners War, published by the Korean game company Com2Us, which we have recently added to the portfolio. Com2Us similarly makes most of its revenue from sale of in-game items such as the aforementioned scrolls and stones. Spending over US$100 on items for a virtual game seems odd to many Americans and Europeans (although 40% of Com2Us revenues came from those regions), but Summoners War made over US$100 million in revenues alone in the first quarter and is growing quickly.
The assumption is often made that the most successful online businesses are American. We feel that overlooks the emerging Asian peers, whether giants like Tencent or niche players like Com2Us, which offer the powerful growth of emerging industries in emerging economies.