China Social Games Analyzing Chinese Social Networks and Games

3 Reasons Why Tencent’s Qzone, the Largest Social Network in China, is a Failure

Qzone, “the largest social network in China,” and Tencent’s other SNS (QQ Campus and Xiaoyou), are failures for three reasons:

1. Squandered Opportunity: Chinese internet giant Tencent was enviously positioned to dominate social networking, but blew its chance. QQ Campus failed. Xiaoyou is far behind the competition. Qzone does not reach any new demographics.
2. The Site’s Design and Features are Lousy: The Qzone website is an unintuitive eyesore. Its applications are of poor quality and frequently inaccessible.
3. Is Qzone Really No. 1? Tencent’s claim of 305 million active users is highly suspect; even its classification as an SNS is questionable. Its competitors are encroaching upon its core user base of young teens.

Does this mean Tencent will soon collapse? Absolutely not.

Qzone is Tencent’s “Windows Vista”

Tencent with Qzone is like Microsoft with Windows Vista: a near-monopolist that thrives despite a terrible product and lack of vision.

Microsoft remains massively profitable despite releasing a terrible OS and missing out on all the new innovations (mobile, mp3 players, search, and social networking) that its competitors have seized upon (Apple, Google, and Facebook). Microsoft suffered from a stifling, dysfunctional corporate culture.

, Tencent expert and CEO of internet market research firm +8*, told China Social Games:

Tencent is definitely not the best in terms of products or innovation - similar to Zynga in that sense - but their ability to deliver a ‘good enough’ mass market service and integrating it within their ecosystem is impressive.

Tencent is certainly massively profitable: 2009 revenues, just announced, were 1.82 bn USD, though it's unclear what portion of the "internet value-added services" is attributable to Qzone.

Like Microsoft, Tencent will continue to profit in spite of the junk it produces. But Qzone does dampen Tencent’s star, opens the door for its SNS competitors (RenRen and Kaixin001), and questions its corporate culture.

#1 Squandered Opportunity

Tencent’s had awesome resources for building a social network:

1. Instant user base. QQ Messenger has 485 million active users, which Tencent uses to cross-promote new services, like Qzone, on young Chinese netizens.
2. High brand awareness. QQ is the first introduction to the internet for most Chinese.
3. Many complementary sites. QQ Games, for instance, could be beautifully integrated with Qzone, but is instead poorly slapped together.
4. Regulatory environment experience. As an early internet giant, Tencent knows how to reach the right government contacts and manage user-generated content.
5. Financial capital. Tencent has deep, deep pockets.

In addition, Tencent had long aimed to expand from its core demographic of young teens to include a more mature audience. Social networking was clearly the perfect chance to do so.

Despite all these advantages, Tencent squandered the opportunity. Qzone never gained an audience beyond young teens. Instead, RenRen, which completely copied Facebook (as Tencent also could have done), attracted the student demographic. Kaixin001 has snapped up the valuable white-collar demographic with a simple, user-friendly site.

Most damningly, even users who start on Qzone almost all “graduate” to the other networks. In September of 2008, Tencent finally tried to retain users with QQ Campus, which failed and is now shut down.

In June 2008, Tencent finally responded with the SNS Xiaoyou (classmates), but the site has virtually the same lousy interface as Qzone, except with a decent skin. The apps and games are even fewer and lesser than those on Qzone. The first five times I tried to join Xiaoyou, I was rejected because “The system is busy, please try again later.” Competent websites optimize splash pages to convert users; Tencent is clearly not concerned with such trivialities. It’s a fitting illustration of the embarrassingly poor quality of Tencent’s SNS properties.

In addition to Tencent’s failure to expand, anecdotal evidence suggests RenRen is encroaching upon young teens, Tencent’s traditional turf.

Tencent saw the social networking trend coming from across the Pacific Ocean, but still blew its chance. Tencent had all the advantages in the world, so resources were not the issue. The problem was Tencent’s poor execution and strategy.

Most Chinese internet experts likely disagree with my assessment of Qzone as a “failure” though, or at least with the degree of disappointment. Benjamin Joffe comments, “Considering Tencent is already reaching everybody with its IM service and Qzone started off as a blogging service, its revamping into a social network does not seem that bad… I am not sure what you would measure Qzone's success or failure against, but in terms of reach it seems fine to me.”

#2 The Site’s Design and Features are Lousy

Qzone is a lousy website: it’s ugly, unintuitive, and buggy. The site is simply unattractive to the Western and Chinese eyes in our office. Nor is the site truly customizable like MySpace, though the superficial skin can be changed for a fee. The site is very basic (for a social network), but not in a user-friendly way (like Kaixin001).

Instead, Qzone relies upon tons of small text for explanation. Finally, the pages and pop-up boxes are often jumbled after loading and the homepage is inconsistent. Qzone is a lousy, juvenile version of MySpace.

Qzone is a closed platform and its apps are of poor quality. Of China’s big three social networks, Qzone’s apps are by far the worst: it offers the fewest, the ugliest, and the least innovative. Bizarrely, even Treasure Hunter, Tencent’s first game on Facebook, has higher production values than any of its games on Qzone.

Benjamin Joffe comments,

Applications are all copies or licenses or bought from social gaming companies, generally with terrible revenue share or poor valuation. Why? Because Tencent is a closed network and because they can. Problem is: operating social games is not the same as IM or MMOs and there is a learning curve - even for Tencent.

Moreover, Qzone apps are frequently inaccessible to users. Upon installing, a Qzone user is often told, “This application is full as too many users have already entered today. Please try again tomorrow or become a yellow diamond member.” This pay-to-play model on social games is surely a loser.

The online game market has shown time and time again that freemium works far better: get users hooked first and then charge for virtual goods. In fact, that’s Tencent’s own model when it comes to virtually all of its other services: QQ Show, QQ Messenger, etc. Perhaps Qzone’s comparatively young and rural users are so extremely naïve that they pay Qzone when they can play the same—or better—games for free on the other networks. But is this a successful business strategy in the long run?

#3 Is Qzone Really No. 1?

Every SNS in China claims to be the largest: Qzone, RenRen, Kaixin001, and 51.com. There is simply no trustworthy data on users or revenues.

The short and sweet is this: Qzone has the most users, RenRen has the most active users, and Kaixin001 has the most highly active users. 51.com user’s are the most rural. This picture is supported by the Alexa and ChinaRank rankings, as well as a survey by the Chinese Internet Network Information Center.

Tencent’s official numbers are ludicrous. Qzone claims 305m active user accounts. China has 384m internet users, which makes this claim highly suspect. Qzone likely takes an extremely “liberal” approach to defining both “active” and “user.”

Benamin Joffe says,

Tencent's number are no more suspect than others - at least Tencent is a market-listed company and they'd better not throw out too much exaggerations. What I suspect however is that many users might not even know they have a Qzone page, that would come with their IM account - or that any abandoned page is counted. We're not talking about active users here since all SNS want to show off their highest number to claim to be #1.

The majority of Qzone users are extremely casual. Qzone attracts a comparatively young and rural demographic and requires only minimal sign-up: one account can be used across multiple QQ services.

Even the classification of Qzone as an SNS is questionable. It has tons of dormant, skeleton profiles that are pulled from QQ Messenger. In that regard, it’s similar to MSN Spaces, which also has a ton of “users,” but has low value and retention rates.

Another wildly-circulated sham is that “QQ Farm may reach 50m RMB in monthly revenues.” The source is a so-called “analysis” by MainFirst Securities HK, which also includes the patently false claim that Five Minute's Happy Game was "licensed to Kaixin001 with revenue shares." When China Social Games contacted the analyst whose name is on the report, he replied, “I don't confirm anything the writing in there.” Much of the Qzone story is coming from fiction writers and spin doctors.

Despite Tencent being a publicly listed company, no one knows how much revenue Qzone brings in. Benjamin Joffe comments:

The business side of things is a bit more tricky. As far as I understand, the revenue model with Qzone is avatar (QQ Show), social games and ads - they drive a huge number of pageviews in a way that advertisers are used to count (it's harder with IM) but their huge inventory also devaluates the potential in CPM.

The split of their SNS targeting different demographics is to focus the value and address market betters - similar to what RenRen does within its service at signup.

Second Chances: Can Qzone Still Conquer the Mass Market?

Qzone could still turn it around; China’s social network wars are far from over. Microsoft’s vast resources means that it often gets a second or third chance to make up for past mistakes: Vista became Windows 7. MSN Search became Windows Live Search which became Bing.

But barriers to entry are higher in social networks though; once your friends are all on Facebook (or RenRen or Kaixin001), why switch to a network with fewer users?

Nonetheless, Tencent should not be dismissed lightly. , a Chinese internet entrepreneur and CEO of Spil Games Asia, told China Social Games:

Tencent is the '800-pound gorilla' lurking in the shadows, they have so much traffic because of their QQ messenger that they can theoretically take over this whole market if they wanted to. Not sure if it's because of a lack of vision, or because they are comfortable with growing their current business.

They are making tons of money with virtual items, so there is no real need to go head-to-head with the competition in the SNS market. They can afford to wait and then either take over a competitor or enter with a fully-developed product.

Don't underestimate them. They are smart guys who know what they are doing.

Tencent’s smart guys may swoop in and turn Qzone around one day. But given Tencent’s tremendous resource advantage to start with, it’s been a failure thus far.

Kai Lukoff is an editor on China Social Games and analyst at BloggerInsight. Follow Kai on Twitter .