A new book finds out how Tencent overtook Facebook to become the world’s fifth-largest company

In 2004, Jeff Xiong Minghua, a nine-year veteran at Microsoft, was dispatched from headquarters to Shanghai. The news triggered a sense of unease for Pony and his team. For years, Microsoft had flirted with the idea of expanding its services in China. To the first generation of tech companies, the idea of locking horns with the company founded by Bill Gates seemed an insurmountable challenge. Pony was about to meet his Goliath.

Microsoft was a formidable competitor, partly because its instant-messaging product MSN already enjoyed a significant user base in China, even without a local operation.

Its user numbers were three times that of NetEase, Tencent’s smaller competitor. MSN had another edge. Its chic and streamlined interface appealed to the urban population of office workers and students, who considered QQ too grassroots and unruly for their taste. With Chinese families in
cities gradually picking up in wealth, personal computers became more common in households.

I was introduced to MSN by my classmates, and before I knew it, the software became the first thing that popped up on my desktop. It was running in the background when I worked, when I played music, and even when I wasn’t using the computer. There was a strange sense of comfort in seeing who was logged on during the wee hours, the beeping sound of someone reaching out providing a dopamine rush.

Among the 20 million business and white-collar users in China at the time, MSN garnered a 53 per cent market share, six percentage points higher than QQ’s, according to Analysys International. It surprised Microsoft’s senior management and convinced them of the opportunities in China.

Jeff, a bespectacled and scholarly product manager, hailed from the land-locked province of Jiangxi, famous for being the base from which Mao conducted guerrilla warfare. He studied computer science
at the National University of Defense Technology, backed by the Chinese military. It was one of the few schools in the 1980s that provided courses on the subject.

He came across Windows when working for a Taiwanese company, helping localise the software for China. After studying at the Chinese Academy of Sciences, he joined a US joint venture financed by the research centre in 1993.

The managers dispatched him to Hartford, Connecticut, to help expand the business, focusing
on software systems. ‘It was a tough two years. All the English I learned in China wasn’t enough to help me get by,’ Jeff said, adding that he was a one-man band working in a startup looking after everything from code testing to customer support and sales.

When he felt it was time for a change, he sent out his resumé to only two companies: IBM and Microsoft. ‘For programmers like us back then, these two were it,’ Jeff said. Microsoft snatched him up in 1996 after his short stint at IBM. From there, he obtained a front-row seat to the company’s battle with Netscape, and helped improve the Internet Explorer browser and chat messaging service MSN.

By the time he planned to cash in his company options in 2001, Jeff had already made a name for himself among China’s fledgling tech circle, and was highly regarded by Tencent’s founding team. He’d written two books on software development and was a part-time lecturer at a top-tier university in China. Among people who attended his talks were two of Tencent’s co-founders, one of which was Tony Zhang, who reached out.

Over two bottles of red wine at a restaurant in the posh French concession in Shanghai, they exchanged thoughts on technology, coding and the future of China’s tech landscape. Jeff was impressed by the Tencent co-founder’s tech know-how, but dismissed the idea of joining the team. ‘At the time, MSN didn’t really take QQ seriously. Their UI really sucked,’ Jeff recalled. The industry joke at the time was that QQ had done all the hard work – educating users and cultivating their habits – and MSN was coming into the market at just the right time to reap customers ready for an upgrade.

QQ was viewed as a chat service for younger and lower-income people who used it to communicate while playing desktop games and seeking hook-ups in the virtual world; MSN would become the tool of choice for the white-collar community and a means for sharing information and documents for business operations.

Jeff officially relocated back to Shanghai in 2003 – bringing along his wife, elder boy and younger daughter who’d grown up in Seattle – to help Microsoft expand in China. It didn’t take long for him to assemble a thirty-strong team. With his influence, he corralled talent from top-tier universities across the country. To Tencent’s founding team, it was as if an aircraft carrier had moved into their waters, and they were fighting with a battleship.

In order to beef up the content provided via MSN, the company outsourced its portal business to local partners, carving out different verticals such as e-commerce, automobiles and news to companies including Alibaba. It was an astute move for Microsoft, helping it skirt the risks brought on by local regulations in content, but also monetising its messaging traffic instantly.

Overnight, the US company had assembled a team of partners, forming a potent alliance against QQ.
MSN also took a page from QQ’s own playbook. It acquired a local Chinese company so it could convert messages people received on their desktops to mobile text messages for a mere price of $1.20 per month. At the same time, it linked its services with Yahoo globally. Those measures posed a strong threat to Tencent.

In response, Pony’s team carried out its biggest overhaul of QQ since going public. In September 2004, QQ bolstered its capacity for file sharing and storage to increase its popularity among the white-collar population. It was the first step in a series of turnarounds for Tencent. Pony proved his company could win over users with more spending power.

Pony also decided to emerge from his usual silence, laying bare to the world his vision for QQ in a media conference. By June 2005, QQ had 440 million users, the population of the US and Japan combined.

He proposed that the definition of instant messaging be redefined, adding that products like QQ were no longer just tools of communication but a platform for information, entertainment, games, blogs and videos. Pony declared that chatting platforms were changing people’s lives and that ‘China was leading the world in instant messaging.’

Unaccustomed to making speeches in public, Pony was nervous during his debut and read from written notes. He would even blush in front of just a hundred people, colleagues recalled. Yet his predictions about how instant messaging would incorporate elements of entertainment and social media, and how users would demand better security and privacy protection, paved the way and strategy for the company over the next decade.

Pony was stubborn about one issue. He guarded QQ’s moat and walled garden jealously, opposing any suggestions to open up the platform on the grounds that it was the best way to serve user interests. He turned down MSN’s invitation to connect the two platforms. He was right to hold out. Internal management issues at Microsoft in China were causing the local teams to struggle after their preliminary triumph.

Due to bureaucratic structures that required information get passed up the chain back to headquarters, decision-making at MSN China became significantly slower than its competitors, who were racing against the clock. For instance, Chinese engineers proposed that MSN users be allowed to receive messages sent to them while they were offline, the moment they logged on. That suggestion, however, didn’t even qualify for discussion at headquarters. At Tencent, they managed to incorporate the feature within weeks.

‘Yes, Tencent was bad with UI at the time and their service had a lot of bugs, but they were fast, and being able to provide something is better than not having anything,’ said Jeff, who himself was restricted to only approving projects that required $500,000 or less, having little control over the overall business strategy.

Reacting fast, making small innovations and upgrades, is one of Tencent’s hallmarks even today. At any unit, one can expect the team to provide fixes or upgrades to its services at least once every two weeks. The concept became known as ‘xiao bu kuai pao, kuai su die dai’, meaning taking small steps to run fast for quick evolution – a practice now widely adopted by the Chinese tech industry.

Excerpted with permission from Influence Empire: The Story of Tencent & China’s Tech Ambition, Lulu Yilun Chen, Hodder & Stoughton.