deep Dive: Wechat— From Messaging App To Profitable · communication platforms in the world,...

May16,2017

1) Withnoapparentcompetitorsinsight,WeChat,the flagshipmobileinstant-messagingplatformandsocial networkofinternetservicesgiantTencent,holdscourt inChina.Coupledwithdifferentiablefeatures,WeChatis ontracktocontinueincreasinguserengagementand retention.

2) Withintheretailworld,WeChathasbeen,andcontinues tobe,amajorsourceofdisruption—bridgingsocial mediaande-commerce.

3) Inthisreport,wehighlightthreekeyproduct differentiatorsthathaveledtoWeChat’sdominancein China:i)insocialmedia—MomentsandOfficial Accounts;ii)inmobilepayments—WeChatPay;andiii) inminiapps—itsMiniPrograms.

4) Despiteitsdominance,WeChatcouldfacechallengesin expandingfurther:deceleratinggrowthofitsuserbase inChinaandthecapacitythresholdofitsapp.

Deep Dive: WeChat—

From Messaging App to Profitable

Ecosystem

Deborah Weinswig

Managing Director,

Fung Global Retail & Technology

deborahweinswig@fung1937.com

US: 917.655.6790

HK: 852.6119.1779

CN: 86.186.1420.3016

May16,2017

TableofContentsExecutiveSummary...............................................................................................................3

UnderstandingWeChat.........................................................................................................4DifferentiableFeaturesHaveLedtoDominanceinChina................................................................4WeChatanditsGlobalPeers...........................................................................................................6WeChatisaOne-StopApp..............................................................................................................7EngagementandRetentionareKey.................................................................................................7

DifferentiableFeaturesofWeChat’sAll-In-One-Platform.......................................................8

1.SocialMedia:MomentsandOfficialAccounts....................................................................8SharingStatus,NewsandInformationSubscriptions.......................................................................8MonetizationThroughArtificialIntelligence(AI)...........................................................................10OfficialAccountsthatUseAITechnology......................................................................................11

2.MobilePayment:WeChatPay..........................................................................................12WeChatPayisCatchingUpwithAlipay.........................................................................................12GrowingAdoptionofMobileTransactions....................................................................................14

3.ReplacingNativeApps:MiniPrograms.............................................................................15RestrictionsofMiniPrograms.......................................................................................................17NotAlone,butNottheFirstEither................................................................................................17

Challenges...........................................................................................................................18

ApplicationsinRetail...........................................................................................................19DepartmentStoresCanLeverageWeChatBothOnlineandOffline...............................................19WeChatisaChannelforMobileAdvertisements...........................................................................20WeChatEnablesaC2CE-CommerceEcosystem.............................................................................21LoyaltyProgramManagement......................................................................................................21

Conclusion...........................................................................................................................22

Appendix.............................................................................................................................23ARPUAnalysisofMessagingApps.................................................................................................23UserInterface...............................................................................................................................24

May16,2017

ExecutiveSummaryLaunchedin2011,WeChatistheflagshipmobileinstant-messagingplatformandsocialnetworkofChina’sinternetservicesgiantTencent.Withinjustsixyears,WeChathasgrowntobecomeoneofthelargestcommunicationplatformsintheworld,rivalingotherpopularappssuchasWhatsAppandFacebookMessenger.

DuringTencent’s2016annualresultannouncement,managementreiterated“Connection”asthestrategyfor2017,withsixinitiativestoexpandtheecosystemarounditscoresocialandcommunicationplatforms:1) addingmoreserviceswithinitssocialplatforms;2)increasingthe popularityofitsgames;3)expandingitsmarketshareofadvertisements;4) growingdigitalcontent;5)boostingtheusagefrequencyofitspayment system;and6)developingcloudandmachine-learningtechnology.As such,WeChatwillremainatthecoreofTencent’sbusinessdevelopment strategy.

ThreeKeyDifferentiatorsInthisreport,wehighlightthreekeydifferentiatorsthathaveledtoWeChat’sdominanceasaconnectivityplatform:

1. Socialmedia:MomentsandOfficialAccountsallowuserstoshare theirstoriesortofollowinfluencersandcompaniesthattheylike.

2. Mobilepayments:WeChatPayallowse-wallet,P2Ptransactionsas wellase-payment.

3. Miniapps:Dubbed“MiniPrograms,”miniappsallowusersto directlyaccessmobileservicesin-apponWeChat,withouttheneed todownloadanativeapp.

ChallengesAsitexpandsfurther,bothinChinaandoverseas,webelieveWeChatcouldfacethefollowingchallenges:

• Capacitythresholdofitsapp:Likea“Swissarmyknife”app,WeChat’snumerousfeaturescouldeventuallydragdowntheuserexperiencebecauseofthehugecomputingmemorydemand.

• Deceleratinggrowthoftheuserbaseofitscoreinstant-messagingproduct:AsWeChatnearsthesaturationpointinChina,itseekstogrowitsuserbasebytargetinglower-tiercitiesandoverseasmarkets.

WeChatforRetailWeChatactsnotonlyasasourceofnewsandpromotionalinformationforitsusers,butalsoallowscustomerstocheckoutitemsviamobilepaymentratherthanwaitinalongcheck-outqueue.ThankstoWeChat’sall-aroundfunctionality,itactsasachannelformobileadvertisements,aswellasloyaltyprogrammanagement.Inaddition,WeChatenablesaC2Ce-commerceecosystemthroughthesupportofthirdpartiessuchasWeidianandYouzan.SimilartoShopify,userscanopenanonlinestorethroughtheYouzanorWeidianplatforms,andthewebsitescanthenbeaccessedthroughWeChatbrowserandWeChatOfficialAccounts.

Inthisreport,wediscusshowWeChathasbeen,andcontinuestobe,asourceofdisruptioninretail,andidentifythreekeyproductdifferentiatorsthathaveledtoitsdominanceinChina.

May16,2017

• Games• MiniPrograms• QRCodeScanner

• WeChatPay• Cards&Offers

• Moments• OfficialAccounts

• Chats• Contacts• WeChatOut

Communica_on

SocialNetworkServices(SNS)

DigitalContent

Finance

UnderstandingWeChatAsaninstant-messagingplatform,WeChathasadominantpositioninChinawithnoapparentcompetitorsinsight.CoupledwithdifferentiablefeaturessuchasMomentsandWeChatPay,itspaymentplatform,WeChatshouldeasilybeabletoincreaseuserengagementandretention.

DifferentiableFeaturesHaveLedtoDominanceinChinaAlthoughWeChatstartedoffasacommunicationtoolinChina,ithassinceevolvedintoaplatformwithmultiplefeatures,includinggaming,socialnetworkingandbillpayment.ThosefeatureshelpdifferentiateWeChatfromitspeersintheglobalarenaandenrichtheusers’experiences.Forexample,WeChatallowsuserstoplayTencent’smobilegameswithouthavingtoinstallordownloadthegames.WeChatPay,WeChat’smobilepaymentfeature,offersP2Ptransactionsande-wallet.

Figure1.ListofWeChatFeatures

Source:Companydata/FungGlobalRetail&Technology

May16,2017

Figure2.ListofWeChatFeatures

Function Category Description

Chats Communication Includingtextmessages,voicemessages,voicecalls,videocalls,emojis,stickersandfilesharing

Contacts Communication Syncwiththephone’scontactlist

WeChatOut Communication AVoiceoverInternetProtocol(VOIP)featurethathelpsusersoutsideofmainlandChinatocallmobileandlandlinesaroundtheglobeatlowrates

Moments SNS Anewsfeed-stylesocialplatformsimilartoFacebook’sNewsFeed

OfficialAccounts

SNS Allowsuserstosetupapagefordistributionofnews,articles,customerservices,etc.

Shake SNS DiscoverandconnectwithotherWeChatuserswhoarealsoshakingtheirphonesatthesametimearoundtheworld

PeopleNearby SNS AllowsuserstoviewothernearbyWeChatusers’profilesonalimitedbasisandinitiatecommunication

Games DigitalContent In-appgamesareavailableforuserstoplaysolo,withWeChatfriendsorothernearbyusers

MiniPrograms DigitalContent MobilesappswithinWeChatthatprimarilyaimtoprovidesimplebutvalue-addedservicestousers,withouttheneedtodownloadanativeapp

QRCodeScanner

DigitalContent Informationsuchascontacts,promotionsandhyperlinks,etc.,canbeembeddedinaQRcode

WeChatPay Finance Allowsuserstoenjoyawiderangeofpaymentservices,includingtaxihailing,hotelbooking,shopping(JD.com),publicservices,utilitiespayment,ticketing(i.e.,movie,railandflights),moneytransfers,etc.

Cards&Offers Finance Storesandconnectusers’membershipcardsanddigitalcoupons

Intermsofmonthlyactiveusers(MAU),WeChatreached889millioninthefourthquarteroffiscal2016,anincreaseof28%yearoveryear.AccordingtodatafromTencentPenguinIntelligenceandtheChinaAcademyofInformationandCommunicationsTechnology(CAICT),over55%ofusersuseWeChatforatleast60minutesaday.

Figure3.WeChatMAU

0100200300400500600700800900

MAU(million) YOY(%)YoY%

WeChatreachedMAUof889millionin4Q16,anincreaseof28%yearoveryear.Over55%ofusersuseWeChatforatleast60minutesaday.

May16,2017

WeChathasabsolutedominanceinthedomesticChinesemarket,withnonotablecompetitorsinsight—over90%ofitsMAUcomesfromChina,accordingtoQuestMobile.Itisalsothemost-usedappinChina,withthehighestnumberofactiveusers,at93%,aspointedoutbyasurveybytheChinaInternetNetworkInformationCenter(CNNIC).

Figure4.Top10Most-UsedAppsAmongChineseInternetUsers

Source:CNNIC/FungGlobalRetail&Technology

WeChatanditsGlobalPeersWeChat’speersintheinternationalarenaincludeWhatsApp,FacebookMessenger,LineandKakao.AlthoughtheseforeignplayersposenosubstantialthreattoWeChat’sChinamarketshare,theycouldposeasignificantobstacletoTencent’sglobalexpansionplan.

Figure5.ComparisonofMessagingApps,byFeature

*AsofJanuary2017**AsofJuly2016Dataasof4Q16Source:Companydata/FungGlobalRetail&Technology

93.0%71.3%

42.5%34.8%33.8%32.2%30.4%30.4%

27.5%27.2%

0% 20% 40% 60% 80% 100%

WeChatQQ

AlipayTencentVideo

YoukuiQiyi

UCBrowserSogouMobileDidiChuxing

Meituan

%ofAc_veUsers

May16,2017

WeChatisaOne-StopAppComparedtootherpopularmessagingapps,WeChatoffersamoreintegratedsocialmediaplatformthananyotherapplicationglobally.Forexample,WeChatusershaveaccesstotransactionfunctionalitiessuchasbookingataxi,orderingfoodandevenmanagingapersonalwealthfund.NotablefeaturesincludeMomentsforSNS,OfficialAccountsfornewsandWeChatPayforpayment.Inthissense,thecompanyisaheadofitspeerswhenitcomestoitsabilitytomonetizeaboveandbeyonditsmessagingservice—astrategyhighlightedbyTencent’spushintopayments,advertisingandgaming.BecauseofWeChat’sall-in-oneDNA,itsusersaremorelikelytoadoptnewtransactionfeaturesthanusersofanyoftheothermessagingserviceglobally.

EngagementandRetentionareKeyUserengagementandretentionarecriticalsuccessfactorsofanyonlineplatform.TheybecomeincreasinglyimportantasthegrowthinMAUcontinuestoslowdown.Dailyaverageusers(DAU)onaveragespend82minutesperdayonWeChat,whilethetotalnumberofmessagessentperdayhasgrownby67%yearoveryear.WeChatisbyfarthemostattention-grabbingappinChina,andthatcreatesanenviableenvironmentforfuturemonetizationthroughmoresophisticatedadvertising.

Figure6.MinutesSpentperDAUperDay,asofOctober2016

Source:QuestMobile/FungGlobalRetail&Technology

WeChatalsohasarelativelystrongretentionratewhencomparedtoothermajoronlineapplications/platformsinChina.

Figure7.30-DayNewInstallationRetentionRate,asofSeptember2016

Source:QuestMobile/FungGlobalRetail&Technology

Functionslikemobilepayment,SNS,newsandtaxihailingareintegratedinWeChat.

44 4333 29 22

WeChat YouKu Momo Weibo YY

23% 19% 16%9% 7%

Inke WeChat Momo Weibo YY

May16,2017

WebelieveWeChathasthecapabilityandinfrastructuretodominatetheChineseinstant-messaging(IM)marketinthefuture.Itshighplatformstickinesscreatedbymanyadd-insanddifferentiablefunctionalitieshaveallhelpedtoretainusersandincreasetheirtimespentonWeChat’srelatedecosystem.

DifferentiableFeaturesofWeChat’sAll-In-One-PlatformInthesecondpartofourreport,weanalyzethreekeyfeaturesthatWeChatincorporatestobuilditsall-in-oneplatform.

1. Socialmedia:MomentsandOfficialAccounts

2. Mobilepayment:WeChatPay

3. Replacingnativeapps:MiniPrograms

1. SocialMedia:MomentsandOfficialAccountsMomentsandOfficialAccountstoWeChatarelikenewsfeedsandpagesaretoFacebook.ThemajordifferenceisthatWeChathasno“follow”function.Userscancommentorreacttootherusers’storiesonlyiftheyareconnectedasfriends.Webelievethisclosedecosystemleadstoasmallersocialcircle,buthigherstickiness,giventhecontentismorerelatabletotheuser.

SharingStatus,NewsandInformationSubscriptionsAccordingtodatafromTencentPenguinIntelligenceandtheChinaAcademyofInformationandCommunicationsTechnology(CAICT),morethan60%ofuserssaidtheychecktheirMomentsfeedeverytimetheyopenWeChat,whiletheother23%saidtheyoftenbrowseit.

MomentsMomentsallowsuserstosharetheirphotos,videos,articlesandevenwebsitesonareal-timebasis.Theirfriendscan“like”orcommentontheposttointeractwithotherusers.

AccordingtoWeChatdata,76.4%ofaccountsuseMomentstoshareexperiencesandcatchupwiththeirfriends’storiesonadailybasis.Thisfiguredoesnotincludetexting,whichWeChatwasoriginallydesignedfor.

Figure8.WeChatUsagebyFunction,March2016

Source:WeChat/FungGlobalRetail&Technology

MomentsandOfficialAccountsarelikenewsfeedandpagesinFacebook.Bothfeaturesallownewsandinformationsharing.

Momentsallowsuserstosharephotos,videosandarticlesonareal-timebasis.

0% 20% 40% 60% 80% 100%

Moments

Texnng

VoiceCalls

PublicAccounts

E-mail

%ofUsagebyFunc_on

OfficialAccount

May16,2017

OfficialAccountsOfficialAccountsallowuserstosetupapagefordistributionofnews,articles,customerservices,etc.Alluserscanfollowanypublicaccounttheywanttostayontopofissues.TherearethreetypesofOfficialAccounts:

1. Subscription:Usedtodistributeinformation,newsorarticlestogeneratepublicity,forexample,newspapersandmagazines.Theaccountisonlyallowedtosendonemessageperdaytoallusers.

2. Service:Usedforcustomerservicesandserviceinquiries,forexample,banks.Theaccountisonlyallowedtosendfourmessagespermonthtoallusers.

3. Enterprise:Usedforinternalcommunicationsandmanagement.

ShanghaicitygovernmenthasapublicaccountonWeChat.Itspurposeistoprovidereal-timeinfoontraffic,publictransportation,weather,airquality,etc.

Figure9.PublicAccountofShanghaiCityGovernment,asofMarch2016

AccordingtodatafromtheCAICT,newsandpromotionsarethetwomainreasonspeoplefollowWeChataccounts.

Figure10.OfficialAccountsUsagebyFunction,asofMarch2016

OfficialAccountsallowuserstosetupapagefordistributionofnews,articles,customerservices,etc.

74.2%41.9%

30.9%24.6%

19.3%11.9%

0% 20% 40% 60% 80%

NewsBusinessandPromonon

AccessServicesPolincalArncles

BusinessConsulnngGovernmentandPublicServices

Others

%ofRespondents

May16,2017

MonetizationThroughArtificialIntelligence(AI)AlloftheaforementionedfunctionsembeddedinWeChatmakeitessentiallyaone-stopsolutionthatenablesaseamlessexperienceforday-to-dayupdates,andhencestrengthenstheuserretentionratecomparedtoothersocialmediaandmessagingtools.

AsthenumberofWeChatfriends,contentonMomentsandinformationpostedbyOfficialAccountscontinuestogrow,WeChatfacesthebigger-than-everchallengetofilterandpersonalizetheinformationtosuitusers’needs.

Tencenthasbegunresearchonartificialintelligence(AI)—includingsentimentanalysis,trackingthespreadingofrumorsorscamsandsoftwaretoconvertvoicemessagestotext—soadvertisementscanbepersonalized,andhencecreatemorevaluetobothendusersandenterprises.WeChatIndex,isoneoftheapplicationsthattrackssentimentanalysis.SimilartoGoogleTrends,itcanshowthepopularityofdifferentkeywordsthataresearchedonWeChat.

ThecorevalueofWeChatisintheconversationdatageneratedbytheenormoususerbase,whichTencentcanmonetizethroughadvertisements.Byleveragingtechnologysuchasnaturallanguageprocessing(NLP)andmachinelearning,advertisementscanbepersonalized,andhencecreatemorevaluetobothendusersandenterprises.

Figure11.WeChatIndex

Source:Chuansong

Advertisementisthemajormethodofmonetization.ByleveragingAI,WeChatcanpersonalizemobileadstofitendusers’needs.

May16,2017

CASESTU

OfficialAccountsthatUseAITechnologyNotonlydoesTencentleverageAItechnologyinWeChat,butsomecompaniesalsointegrateAIintotheirWeChatOfficialAccounts.Below,weincludetwoexamplesofhowAIcanaddvaluetothemessagingtool:ChumenWenwenandXiaoBing.

出门问问 (ChumenWenwen):FoundedbyformerGoogleengineers,ChumenWenwenhasraised$20millioninfundingsofarthroughinvestorssuchasSequoiaCapital.Theconceptissimple:itcombines“Siri-style”voicerecognition,AIsoftwareandWeChat.TheusertellsChumenWenwenwhattheywant,forexample,anearbyItalianrestaurant,amovieticketoramassage,anditwillsendtheuseralistofallthematchesaroundthemviaathird-partyapplikeDianping.

Figure12.ChumenWenwenUserInterface

Source:Walkthechat

XiaoBing:PoweredanddevelopedbyMicrosoft,XiaoBingcananalyzeusermessagingthroughNLP.

Figure13.XiaoBingUserInterface

Source:Walkthechat

May16,2017

2. MobilePayment:WeChatPayWeChatPaywaslaunchedin2013.BasedondatafromtheCAICT,morethan300millionusershavetiedtheirbankcardstotheirWeChataccount.ThecombinationofWeChatPayandQQWalletisthe#2paymentplatforminChina.

WeChatPayprovidesaneasyandconvenientsolutiontoB2C(business-to-consumer)andC2C(consumer-to-consumer)payment.Consumerscanpaywiththeirphone,socangocashless,withnoneedtocarrychange.WeChatoccasionallyhaspromotionaldiscountcampaigns,whichalsocreateincentivesforuserstoadoptWeChatPay.

AccordingtoGlobalWebIndex,33%ofChineseusershaveusedWeChattopayforanitem,whichiscomparabletoAlipay—the#1paymentplatforminChina—whichisownedbyAntFinancialServicesGroup.ThatWeChatPayhasmanagedtocatchupwithAlipayinonlythreeyearsisremarkable.Tencentdoesnothaveane-commerceecosystematitsdisposallikeAlibabadoes.ForamoredetailedanalysisonmobilepaymentsinChina,pleaserefertoourpreviouspublicationpublishedinNovember2016:MobilePaymentsinChina.

Figure14.MobilePaymentServicesinChina,asofFebruary2017

Note:PercentageofinternetuserswhohaveusedmobilepaymentSource:GlobalWebIndex/FungGlobalRetail&Technology

WeChatPayisCatchingUpwithAlipayAlipayisthelargestcompetitivethreattoWeChatPayintheChinamobilepaymentspace.Asoneofthelargeste-commerceplatformsintheworld,TaobaodrivestherapidadoptionofAlipayamongconsumers.

AlthoughWeChatPaywaslatetoenterthemobilepaymentmarket,itofferssimilarfunctionstoAlipayandenteredintoastrategiccooperationwithJD.cominordercomplementthecompany’se-commercepaymentfunctionalities.

Thekeyfunctionsofthetwocompanies—AlipayandWeChatPay—aresimilar:theybothoffermoneytransfer,billpayments,e-commercepayments,etc.

Alipay WeChatPay ApplePay XiaomiPay HuaweiPay

WeChatPayprovidesaneasyandconvenientsolutiontoB2CandC2Cpayment.

Inonlysixquarters,WeChatPay’ssharebytransactionvolumeincreasedto38%inthethirdquarterof2016,comparedtoAlipaywhichhada50%marketshare.

1%2%5%33%39%

May16,2017

Figure15.AComparisonofWeChatPayandAlipay

WeChatPay Alipay

NumberofUsers(asofFeb2017)

~300millionusersconnectedbybankaccount ~400millionregisteredusers

KeyFunctions Moneytransfer,billpayments,e-commercepayments,mobilebalancetop-up,hotelbooking,ticketpurchasing

DifferentiableFeatures

Investmentinwealthmanagementfunds,taxiordering Billsharing,bankaccountbalancechecking

CurrenciesSupported >9 18

TransactionCharges 0.1%pertransactionoverRMB1,000 0.1%pertransactiononceRMB20,000limitpassed

FocusMarketsOver20countries,includingChina,Japan,Australia,India,Indonesia,Malaysia,Singapore,theUK,Italyandothers

Over110countries,includingChina,theUS,Brazil,Russia,Germany,Spain,Italy,Israelandothers

Source:AllChinaTech/ASEANToday/Alipay/FungGlobalRetail&Technology

WeChatPayaccountedforonly11.4%oftotalmobilepaymenttransactionvolumecomparedtoAlipay,whichhada74.9%marketshareinthefirstquarterof2015.Inonlysixquarters,WeChatPay’sshareincreasedto38%inthethirdquarterof2016,accordingtoAnalysys.TheincreaseinadoptionwasmainlyduetoitsintegrationwithJD.cominMay2016andtheintroductionofP2P(person-to-person)moneytransfers.

Figure16.MarketSharebyTransactionVolume

Source:Analysys/FungGlobalRetail&Technology

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

MarketS

harebyTran

sac_on

Alipay WeChatPay

May16,2017

AccordingtoWeChatdata,thesendingandreceivingofdigitalhongbao(theredpacketenvelopesstuffedwithmoneythatfamilymembersgivetoyoungerrelativesandfriendsduringChineseNewYear)isthemost-usedfeatureofWeChat.Thesecond-andthird-mostusedfeaturesarepaymentsandmoneytransfers,respectively.Theredenvelopepackets,coupledwiththediscountcouponsmerchantsgiveoutaroundtheholidayperiod,providesalesopportunities,asconsumerscanusethemoneyandcouponsthataregiventospendwithintheWeChatsystem.

Source:Shutterstock

Figure17.WeChatPayFunctionsUsedbyWeChatUsersinChina,asofMarch2016

Source:TencentPenguinIntelligenceandChinaAcademyofInformationandCommunicationsTechnology(CAICT)

GrowingAdoptionofMobileTransactionsWeChat’sonline-to-offline(O2O)opportunitiesarebeingrecognizedbymerchants.AccordingtoaTencentpressreleaseinFebruary2016,morethan300,000offlinestoresworldwideacceptedWeChatPay.WeChathasalsobeguntochargeusersafeewhentheytransfermoneyfromtheirWeChatPayaccounttotheirbankaccount,andasaresult,userswillbemorelikelytokeeptheirmoneywithintheWeChatecosystem.

Sendingredpackets,makingpaymentsandmoneytransferringarethemost-usedfunctionsbyWeChatusers.

0% 20% 40% 60% 80% 100%

DigitalRedPacketEnvelopes

MakingPayments

MoneyTransfertoContacts

Receivables

WeChatCreditCard

PayingOffCreditCard

SplivngPaymentswithFriends

Others

%ofRespondents

May16,2017

E-commerce:E-commerceislikelytoplayabiggerroleindrivingWeChatPay’smonetizationefforts.InMay2016,TencentandJD.comsaidtheywouldofferaWeChatmarketingandbrandingdataanalyticstooltomarketersworldwide.Withthetool,TencentwillprovidedatatomarketersaboutwhichpublicWeChataccountsusersfollowandwhichbrandsandcelebritiestheylike.JD.comwilloffersalesdataaboutusers’productpurchases.Thedatacouldhelpmarketerstargetspecificdemographicsmostlikelytobuycertainproducts.

Cross-borderpayments:WeChatPayallowsusertopayinrenminbiwithoutworryingabouttheexchangeratewhentheybuyproductsoverseasviatheapp.WeChatautomaticallysettlesthepaymentwithretailersinthelocalcurrency.

AccordingtodatafromtheCAICT,67%ofusersspentover¥100permonthinMarch2016,morethandoublelastyear’sfigure;and34%spentover¥500permonth,sixtimesmorethanlastyear’s5%.WebelievethisisanearlysignthatusersarestartingtouseWeChatpaymentforlargertransactions,beyondsmall-paymenttransferssuchasdigitalredpackets.

Figure18.WeChatPayFunctionsUsedbyWeChatUsersinChina,asofMarch2016

Source:TencentPenguinIntelligenceandChinaAcademyofInformationandCommunicationsTechnology(CAICT)

3. ReplacingNativeApps:MiniPrograms“Noinstallationrequired,”“atyourfingertips”and“easycome,easygo”arethreecharacteristicsofWeChatminiprograms.Byofferingnativeapp-likeexperienceswithinWeChat,miniprogramsshouldempowersmall-andmedium-sizedenterprises(SME)tohavemoreflexibilityinprovidingengagingcontent.Usersshouldalsobenefit,astheywillnothavetoleaveWeChattoenjoyaseamlessexperience.ForamoredetailedanalysisonWeChatminiprograms,pleaserefertoourpreviouspublicationinJanuary2017:APreviewofWeChatMiniPrograms.

Thegrowingpopularityofe-commerceandcross-borderpaymentshelpstoincreasetheadoptionofWeChatPay

MiniProgramsoffernativeapp-likeexperienceswithinWeChat.ExamplesofexistingminiprogramsincludeO2O,e-commerce,taxiordering,OTAandutilitytools.

0% 5% 10% 15% 20% 25% 30% 35%

<RMB100

RMB100–300

RMB300–500

RMB500–1,000

RMB1,000–2,000

RMB2,000–5,000

>RMB5,000

%ofRespondents

May16,2017

Examplesofexistingminiprogramsinclude:

1. Online-to-offline(O2O):MeituanWaimai,afoodorderingplatformwithdeliveryservice.

2. E-commerce:JD.com,ane-commerceplatformforconsumerelectronics,apparel,jewelryandmore.

3. Taxiordering:DidiChuxing,ataxi-hailingandride-sharingonlineplatform,providingtransportationservicesforover400citiesinChina.

4. OTA:Ctrip,atravelagentprovidingaccommodation,transportationticketing,packagedtoursandtravelmanagement.

5. Utilitytools:XCurrency,whichprovidesreal-timeforeignexchangerateinformation.

Figure19.ExampleofMiniApps

Source:WeChat

WeChatmanagementhasstressedthatthefunctionofitsminiprogramsistohelpofflinemerchantsestablishapresenceonline,andthatminiprogramsasawholewillgrowatameasuredpacetoensuretheuserexperienceisnotcompromised.Ratherthanfocusingonmonetization,miniprogramsaremoresimilartoanecosystemwithinfrastructuresupporttoenhanceoveralluserstickinessandserviceusageonWeChat.Miniprogramsarepositionedasasustainablego-toappforbusinesspartnersandusers.

MiniProgramscannotentirelyreplacenativeapps,as:1)itisaclosedsystemthatisoverseenstrictlybyTencent;2)thefunctionsarestrippeddown;and3)itisdifficultforcompaniestopromote.

May16,2017

RestrictionsofMiniProgramsEventhoughminiprogramscanprovideaseeminglyone-stopsolution,theycannotentirelyreplacenativeapps.Thedownsideincludes:

• Closedsystem:AsafeaturewithinWeChat,thedevelopmentofminiprogramsisoverseenstrictlybyTencent.AppssuchasTaobao,UberandXiamiMusicwillnotbeallowedonminiprograms.

• Stripped-downfunctions:MostbigcompaniessuchasJD.comusetheirnativeapps,whichhavehighdatatariffs,togeneratevaluableoperationaldataforfuturedevelopment.Thus,miniprogramsarelikelytoserveonlyasasupplementtotheoriginalapplications,giventhatonlylimitedfunctionsareavailable.

• Decentralized:Miniprogramsadvocate“noinstallationrequired,atyourfingertipsandeasycome,easygo,”whichcanbeadouble-edgedsword.Currently,miniprogramsdonothaveanappstore,donotsupportsharingonMomentsanddonothaveafuzzysearchfunctioneither.Asaresult,itmaybedifficultforcompaniestopromoteandmarkettheirproprietaryminiprograms.

NotAlone,butNottheFirstEitherAlthoughminiprogramscanhelptoconnectSMEswithinternetusers,theyarenottheonlyappthatofferthis.

• Baidu’s“LightApp”wasunveiledin2013.Itenablessearchresultstoshowapp-powereddisplayswithrichinformation.AlthoughBaiduhasn’tofficiallydiscarded“LightApp,”thetechnicalsupportincludingsoftwareandcustomerservicesfromBaiduwasstoppedlastyear,duetolackofasufficientnumberofdevelopers.

• Alibaba’sUCwebbrowserandQihoo’s360webbrowserallowuserstoaddHTM5-basedwebapplicationswithouthavingtoinstallanyprogram.Althoughbothappsarestillupandrunning,theyactasanalternativebrowsertoChrome,SafariandFirefox,ratherthanasadirectcompetitortominiprograms.

• Google’sInstantAppsallowsAndroidappstoruninstantlywithoutinstallationviasocialmedia,search,messagingandotherlinks.GooglelaunchedInstantAppsinJanuary2017,andthefirstcoupleofInstantAppsarereadyforlimitedtesting.GiventhatGoogle’sappstoreisnotyetavailableinChina,InstantAppsisunlikelytoposeanyimmediatethreattominiprograms.

Withover889millionMAU,WeChathasanunprecedentedlargeplatformforminiprogramstogrowcomparedtoitsChinesepeers.ThelowdevelopmentcostofminiprogramsrelativetothatofnativeappscouldeventuallybeanincentiveforSMEs.

CompetitorslikeBaidu,AlibabaandGooglehavelaunchedapplicationssimilartoMiniPrograms.

May16,2017

ChallengesAsitseeksfurthergrowth,bothinChinaandoverseas,WeChatcouldfacethefollowingchallenges:1)thecapacitythresholdoftheapps;and2)deceleratinggrowthofitsuserbase.

1.Capacitythresholdoftheapps:AsTencentcontinuestoaddmorefeaturestoWeChat,suchasmobilepaymentandvideoads,thecapacityoftheappcouldpotentiallyreachathreshold.Competitors,likeKakaoTalkandLINE,havealreadydevelopedsomeout-linkedappstosupporttheirecosystem.Forexample,KakaoTaxifortaxihailing,KakaoTopicfornews,LINEMapsfornavigation,LINESHOPfore-commerce,etc.Byspinningoffcomputing-powerdemandingfunctions,themessagingappscouldfocusonincreasingtheuserexperienceonsocialnetworks.Miniprogramscouldmitigatethisdownsidetosomedegree,butitwillbedifficultforMomentstoperformexactlylikeFacebookdoes.AccordingtoAppQuest,WeChatmemoryusageisalreadythehighestamongthedifferentmessagingapps,soperformance,especiallyonlow-endsmartphones,couldbeaconcernifTencentfailstostrikeabalancebetweenfunctionalityandvalue-addedcontent.

Figure20.DailyMemoryUsage(inMB)

Source:AppQuest

2.Deceleratinggrowthoftheuserbase:Duetothestrongpresenceofcompetitorsinothermarkets,suchasLINE,Kakaotalk,WhatsAppandFacebookMessenger,Tencentisstrugglingwithitsglobalexpansionplans.Backin2015,TencentPresident,MartinLau,saidthatoverseasuseracquisitionwouldsooncometoanend.Yet,WeChatisalreadyseeingdeceleratinggrowthofitsuserbase(28%year-over-yeargrowthinthefourthquarterof2016comparedto30%yearoveryearinthethirdquarterof2016),with93%usageintier-1cities,accordingtoTencentdata.Furthergrowthwilllikelycomefromtier-3orlowercitieswheretheinternetandsmartphonepenetrationhasroomtogrow.

ThecapacitythresholdofanappanddeceleratinggrowthofitsuserbasecouldpotentiallylimitthegrowthofWeChat

48.6 48.3 46.8 45.2

WeChat Facebook WhatsApp Line Kaokao Messenger

May16,2017

Figure21.WeChatUsagebyCityTier,asofOctober2015

Source:Tencent/FungGlobalRetail&Technology

ApplicationsinRetailWeChathasbecomeacorepartofthedisruptiveforceinretail.Whileithelpsbridgethegapbetweensocialmediaande-commerce,throughactualengagementwithcustomers,italsocreatesanewwayofshoppinginphysicalstores.

WeChatprovidesseveralfunctionsthatincreasetheefficiencyofbusinessoperationsandenhanceconsumers’shoppingexperiences,suchas:

• Barcodescanner:ListstheChinesee-commercesitesthatstocktheproductinsearch.

• Mobilepayment:Allowsconsumerstopayeitheronlineoratthephysicalstore.

• OfficialAccounts:Allowcorporatestoengagewithcustomersthroughcustomerservice,newsandpromotions.

• Membershipcards:Enablemanagementofloyaltyprograms.

DepartmentStoresCanLeverageWeChatBothOnlineandOfflineThepublicaccountsofChinesedepartmentstoresnotonlyprovidenewsandpromotionalinformation,theyalsoallowcustomerstocheckoutitemstheywanttopurchasebysimplyusingWeChattoscanthebarcodeprovidedatthecashier.

IntimeRetail,oneoftheleadingdepartmentstoreandmalloperatorsinChina,doesexactlythat.ItallowsusertopayforpurchasesthroughWeChatPay—aprocessthattakeslessthantwominutes.LeveragingonthefunctionsofWeChat,Intimecaneffectivelyshortenthelongqueuesforthecashierinthestoreand,inturn,improvethecustomershoppingexperienceandconversionrate.CustomerscanalsoorderspecificproductsontheIntimeRetailPublicAccount,withtheguaranteethattheonlineandin-storepricearethesame,andchooseanynearbystoreforpickup.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

UsageRate

WeChatcreatesnewshoppingexperiences,astheappsprovidefunctionsthatincreasetheefficiencyofbusinessoperationsandenhancetheshoppingexperience.

DepartmentstorescanuseWeChattocheckoutitemsaswellasformobilepayment.

May16,2017

Figure22.IntimeRetailPublicAccount

Source:WeChat/FungGlobalRetail&Technology

WeChatisaChannelforMobileAdvertisementsDuringChineseNewYearthisyear,WeChatlaunchedanativevideoadvertisementcampaign,selectingagroupofadvertisersforthetrial.AccordingtodatafromWeChatAdAssistant,theresultswereverypositive.

Forexample,ChineseelectronicscompanyXiaomisawa27%increaseinpurchaseintention;luxuryFrenchperfumesandcosmeticsgiantLancômesawa352%jumpinthenumberofsearchesforthebrandanda114%increaseinthebrowserateforthewebpage;andYili,aleadingChinesemilkproducer,sawa305%leapinordersone-commercesites.

ForeignluxurybrandshavebeguntoadvertiseonWeChattodrivesalesinChina.AccordingtoJingDaily,thedigitalpublicationonluxuryconsumertrendsinChina,outof25luxurybrands—includingChanel,Coach,Dolce&GabbanaandLouisVuitton,amongothers—92%haveaWeChatofficialaccountand64%haveaWeChatserviceaccount.Aserviceaccountisanupgradeofanofficialaccountthatcanbettercomplementacompany’sbasiccontentbroadcastingactivities.Below,aresomeexamplesforbrandsthatuseWeChattoengagewithcustomers.

• Coach:InSeptember2016,CoachdecidedtoexitTmall,althoughitstillusesWeChattoreachconsumersinChina.Incontrasttothemass-marketimageofTmall,WeChatallowsbrandstoreachconsumersonamorepersonallevel.

• KateSpadecreatedaflyinglanterngamefortheMid-AutumnFestivalwherebycustomerscouldcustomizealanternandsendit

RetailbrandsareusingWeChatasachannelformobileadvertisements.

WiththehelpofWeChat’sadvertisements,Xiaomisawa27%increaseinpurchaseintentionandLancômesawa352%jumpinthenumberofsearches.

May16,2017

intotheskywiththeirwishes.TheycouldevenscanQRcodestosharewithfriendsandwinprizes.

• Zara’ssiteusesthecustomer’scurrentlocationtoshownearbystores.Location-sharingallowsbrandstopushpromotionstocustomersatnearbystores.

• LouisVuitton’sadminaccountsallowforchat-based,pre-programmedcustomerservice.

• H&M’s“LittleShop”serviceaccountallowsforshoppingandone-clickpayment.

WeChatEnablesaC2CE-CommerceEcosystemYouzanandWeidianaretwooftheleadingSoftwareasaService(SaaS)providersforonlinestoresinChina.SimilartoShopify,userscanopenanonlinestorethroughtheYouzanorWeidianplatforms.ThewebsitescanthenbeaccessedthroughWeChatbrowserandWeChatOfficialAccounts.

ByconnectingtoWeChat,storeownerscanuseWeChatPayfortransactionsandOfficialAccountsforadvertisements.Consumerscanbrowsegoodsonlinebeforebuyingthem,forwardthemtofriendsorgroupsusingWeChat,orpublishtheminMoments.

Figure23.WeidianUserInterface

Source:TMO/FungGlobalRetail&Technology

LoyaltyProgramManagementByintegratingitsmobilepaymentsolution,WeChatcansynchronizewithmembers’shoppingcardstogive,forexample,extradiscountsforfuturecashlesspayments.Thereareseveralbenefitstotakingaphysicalmembershipcardandmakingita“virtualcard”onWeChat:

• Virtualcardscannotgetlost.

• Consumerscaneasilychecktheirpointsbalanceorpurchasehistoryatanytimeontheirmobilephone.

Third-partyapplicationsleverageWeChatasaplatformtopromoteC2Ce-commerce.

WeChatcansynchronizemembers’shoppingcardswiththeirWeChataccountformoreefficientloyaltyprogrammanagement.

Step1 Step2 Step3

May16,2017

• ConsumerscaneasilygetandsharediscountsandspecialofferswithfriendsthroughWeChat.

TheadvantageofWeChat’sloyaltyprogramoverstandalonemobileloyaltyprogramsisthehighstickinessofWeChatusers.Inotherwords,usersaremorewillingtoreceivenotificationsinWeChatcomparedtostandalonemobileloyaltyprograms.

Figure24.MembershipCardInterfaceinWeChat

Source:ChinaChannel6666

ConclusionThankstoitsdifferentiablefeatures,suchasMomentsanditspaymentplatformWeChatPay,WeChathasadominantpositioninChina,withnoapparentcompetitorsinsight.Althoughtherearechallengestoexpandingoverseas,TencentwilllikelyfocusonmonetizationofWeChatinChinathroughadvertisementsandonlinetransactionsinthenextfewyears.

Ontheretailside,WeChatisanenablerofdisruptivee-commerce,asitbridgesthegapbetweensocialmarketingandactualengagementwithcustomers.ThereisanincreasingtrendfortraditionalbrandstoadoptWeChataspartoftheirmarketingplatform.WeChatcanbethekeytoaccessChina,andpotentiallythefirststeptoestablishinganO2Ochannel.

May16,2017

AppendixARPUAnalysisofMessagingAppsBybreakingdownaveragerevenueperuser(ARPU),wecangetabetterunderstandingofthemonetizationofmessagingapps.

Wecategorizefourmajormonetizationmodels:1)advertising(promotedcontent,accountsorproducts);2)digitalcontent(games,stickers,emoji,musicandvideo);3)finance(P2Ppayment,e-walletandloans);and4)O2Oservices(fooddelivery,restaurantreservationsandtaxiservices).

Figure25.APRUbyMessagingApps(MAUbased,USD)

Source:Companyreports/FungGlobalRetail&Technology

Figure26.RevenuebyChannels

$4.60$0.10 $0.00

$25.60

WeChat WhatsApp Line Talk Messenger

Advernsing2%

DigitalContent86%

Finance6%

Others6%

WeChat

Advernsing100%

Advernsing15%

DigitalContent80%

Finance0%

Others5%

Advernsing DigitalContent Finance O2O Others

Advernsing9%

DigitalContent77%

Finance0%

Others14%

May16,2017

Astheabovedatashows,digitalcontentisthemostcommonwaytogeneraterevenue.Usercanbuystickerstochatwithfriends,orvirtualcoinstoboosttheirperformancewhenplayinggames.Yet,inthelongerterm,webelievefinanceandO2Oserviceswilltakeoverasbeingthecorecontributortorevenue.

Figure27.MonetizationWorkflowforWeChat

UserInterface

Figure28.FeaturesDemonstrationonWeChat

Source:WeChat

MobilePayment PublicAccountMobileGaming

May16,2017

Figure29.OfficialAccountsUserInterface

Source:WeChat

Figure30.WeChatPayUserInterface

Source:WeChat

May16,2017

Figure31.MiniPrograms

Source:WeChat

May16,2017

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016 deborahweinswig@fung1937.comSimicChanSeniorResearchAssociate

MatthewLeeResearchAssistant

HongKong:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406London:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

FungGlobalRetailTech.com

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