Talks between Tencent, China's leading instant messaging operator, and China Mobile, the country's biggest mobile phone operator, are reaching the crucial stages as the December 31 expiry of their mobile chat contract draws near. Tencent president Martin Lau Chi-ping said his company could lose up to 10 per cent of its revenue if the contract is not renewed. The deadline seems less pressing for the phone company. Mobile chat, which allows users to send or receive instant messages over the phone, accounts for less than 0.1 per cent of China Mobile's revenue, Morgan Stanley analyst Richard Ji Weidong said. Tencent, the country's largest internet company by market capitalisation, more than doubled revenue in the third quarter as subscribers to its free QQ service, the Chinese equivalent to Microsoft's MSN, bought more virtual pets and icons representing users' identities to display with their messages. Between 60 and 70 per cent of China's internet population uses the instant messaging service, according to Mr Ji. That base helps draw users to Tencent's other online businesses which include a portal, games, auctions and a search engine. Its online portal, QQ.com, is the mainland's most visited website, according to Alexa.com. Revenue at Tencent soared 103 per cent to 736.9 million yuan in the third quarter compared with a year earlier, driving net profit up 263 per cent to 282.6 million yuan. Even so, the company faces a competitive and challenging environment, said chairman Pony Ma Huateng. China Mobile and China Unicom, the country's second-largest mobile-phone operator, are introducing their own instant messaging services. Femoo, China Mobile's service, started six months ago and directly competes with QQ. Other competitors are also making inroads. Skype, the online telephony service owned by United States-based eBay and operated in China by a joint venture with Tom Online, appears to be outpacing QQ's growth. Skype added two million to three million new users each month in the third quarter compared with the one million to two million added by QQ, Mr Ji said. The growth of Skype was boosted by promotions such as free calling minutes to new sign-ups, Mr Lau said. He sees Skype as less of a threat than other rivals. Subscribers use Skype mainly for online telephony and turn to QQ for instant messaging, he said. Tencent also faces challenges in its online games business as rivals introduce new games that require users to pay for the items they use instead of the time they play, said the company. The popularity of the company's first massively multiplayer online role-playing game, QQ Fantasy, is dropping fast, with only 163,000 peak concurrent users in the third quarter. During its free testing period up to 500,000 people were playing. Revenue growth will also be hit in the next few months as Tencent upgrades its QQ system to combat spam and theft of user accounts, Mr Lau said. Meanwhile, Tencent's virtual currency, the QQ coin, is attracting the attention of government regulators concerned that it may become a competing form of money, according to Chinese press reports. Tencent, which celebrated its eighth birthday last month, is building a new headquarters in Shenzhen. With a preliminary budget of more than 550 million yuan it is scheduled for completion by 2009. In line with that positive outlook, analysts continue to be optimistic on the prospects for QQ. 'Mobile chat is only one feature,' said Dick Wei, a China internet analyst at JP Morgan. 'I don't think people will stop using QQ just because one feature is lost, [as a result of the China Mobile negotiations]. 'China Mobile's instant messaging might become popular among mobile users but I think QQ will still be dominant among personal computer users.' Investors continue to back the company as well. The shares, which have surged more than 100 per cent this year, closed yesterday at HK$21.40, slightly down from their November 21 high of HK$23.60. The stock was listed in June 2004 after an initial public offering that priced the shares at HK$3.70 each. Tencent is valued at about HK$37.54 billion, significantly larger than the US$3.74 billion value of Nasdaq listed Baidu.com, the second-largest mainland internet company. Mr Ji said Tencent was creating the largest virtual park in China, covering communication with instant messaging, entertainment with games and virtual pets, services through its auction and search engine, and social networking with blogging and online clubs. Its popularity has prompted Chinese car company Chery to name a model 'QQ', without Tencent's permission, according to the internet company. Other manufacturers cash in with goods ranging from stuffed toys to computer webcams that carry the company's penguin logo - some with permission, some without.
