Tencent Holdings Limited (TCEHY)

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Tencent Resurrects Another Old App to Counter ByteDance
By: Motley Fool | December 21, 2019

• The tech giant revives Pengyou, a social app that was discontinued in 2017, to reach younger users.

Tencent (OTC:TCEHY) still rules China's mobile messaging market with WeChat, which grew its monthly active users (MAUs) 6% annually to 1.15 billion last quarter. But in recent years, Beijing-based ByteDance has become a thorn in its side.

ByteDance owns the short video app TikTok, also known as Douyin in China; the news app Touitao; the enterprise collaboration platform Lark; the mobile messaging app Flipchat; the video chat service Duoshan; and the short video apps Huoshan and Vigo.

TikTok topped 500 million MAUs last year, and ByteDance claims that its entire family of apps now reaches over 1.5 billion MAUs. Research firm R3 recently reported that ByteDance's ad revenue more than doubled annually in the first half of the year, making it the second-largest advertising platform in China after Alibaba (NYSE:BABA). Tencent ranks a distant fourth.

ByteDance threatens Tencent's growth by pulling away lower-income internet users with its news apps, which aggregate "lighter" content based on a user's preferences and reading history. It's also pulling away China's Gen Z users with TikTok and other short video apps.

Tencent repeatedly tried to counter ByteDance by launching short video apps, investing in ByteDance's competitors, and even resurrecting old apps. None of those efforts curbed ByteDance's growth -- but Tencent recently announced that it would resurrect another discontinued app, Pengyou (or "Friends"), to challenge its growing rival.

WeChat faces a generational gap
Tencent faces the same problem as Facebook (NASDAQ:FB): Younger users are pivoting away from its core platforms. Earlier this year, research firm Jiguang found that just 15% of Chinese users born after 2000 post daily updates on WeChat. By comparison, 57% of users born in the 1960s did the same.

Many of those younger users shunned WeChat because their parents also used the app, according to the South China Morning Post. Some of those users also retreated to Tencent's older messaging platform, QQ, and Gen Z-friendly platforms like TikTok.

As a result, 13% of QQ's users are under the age of 21. However, QQ's total MAUs still fell 10% annually to 731 million last quarter as Tencent focused on the growth of WeChat's ecosystem on mobile devices. By comparison, users born after 1995 account for 51% of TikTok's audience.

WeChat is an all-in-one "super app" which lets users pay bills, order products, hail rides, and more -- but it's still considered a "work" app for adults. The hashtag #WeChatHasBecomeTheDefaultOfficeApp recently went viral on Weibo (NASDAQ:WB) in China, with users complaining that WeChat was too work-oriented and poorly designed for personal social connections.

Will "Friends" bridge that gap?
In response to those complaints, Tencent revived Pengyou, a social networking platform that was initially launched a decade ago but discontinued in 2017.

Pengyou was initially an extension of QQ called QQ Alum, which allowed students to connect to each other and organize activities like the original Facebook. It was renamed Pengyou and expanded to a wider audience in 2011, but it struggled to keep pace with Weibo in the social networking market. Tencent's launch of WeChat the same year also cannibalized Pengyou's messaging features.

The new version, which is being tested on an invite-only basis, resembles Facebook's Instagram but splits its feed into three categories: friends, colleagues, and people who live in the same city.

It also asks users to upload personal credentials to verify their real names, which will prevent companies from flooding the platform with ads and ensure that users are interacting with real people. Pengyou also allows verified users to opt-in to dating matches -- which complements its new dating app Qingliao and indicates that it might be gunning for Momo (NASDAQ:MOMO) in China's online dating market.

Another stab at ByteDance -- which will miss the mark
This isn't the first time Tencent has resurrected an old app. Last year it rebooted its short video app Weishi -- which was launched in 2013 and discontinued in 2017 -- as a TikTok competitor. Weishi didn't gain much ground against TikTok, and Pengyou could suffer a similar fate, for two reasons.

First, the Chinese market for social apps is heavily saturated. Tencent still operates its Qzone social network -- which had 517 milion MAUs last quarter -- as an extension of QQ. Weibo, which has nearly 500 million MAUs, launched a similar app called Oasis earlier this year. Other major players include the social commerce platform RED and Momo's dating apps.

Second, there's no real incentive for younger users who are already linked to their friends on TikTok or ByteDance's other apps to join Pengyou. As a result, the new Pengyou will likely flop, and Tencent will still struggle to gain ground in the Gen Z market against ByteDance.

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