Tencent: March of the Penguins

The Chinese Internet colossus with the cuddly mascot is admired for its success, loathed as a predatory copycat, and full of big plans to break into the U.S.

By Bruce Einhorn and Brad Stone

It’s hot and crowded in the Shatang Internet Café in the southern coastal city of Shenzhen, where some 300 young factory workers sit amid flickering lights and discarded cigarette packs. At one computer, Zhou Qingqing chats with her boyfriend about 600 miles away in Zhejiang province using QQ, the popular instant messaging software.

She interrupts the conversation to play an online game called QQ Dancer, maneuvering a fashionably dressed avatar to the beat of a catchy Chinese pop song. “This is the only game I know how to play,” she says. “It’s easy.”

Across the smoky room, not far from one of the No Smoking signs, Yan Huan also has QQ open on two screens, mainly to accrue the loyalty points that come from spending time on the service. The more points, the higher the level. The higher the level, the better the icons on your home screen. Huan has attained two smiley faces. “It means nothing,” he says, then brags that his level is several times higher than his girlfriend’s. His favorite game is QQ Speed, in which he races a go-cart through a dense urban landscape, zipping past other characters controlled by players around the country.

Zhou and Yan are both in their own digital worlds, yet like almost everyone else in the cafe, they’re mostly engaged with the products of a single company: Tencent. Guo Zhenquan, deputy manager of China Internet Cafe Holdings, which has 55 outlets in Shenzhen, walks from row to row, pointing out all the customers using Tencent’s QQ service. They’re chatting, gaming, watching movies, and topping up their prepaid mobile phones. “Every computer has somebody on QQ,” he says.

Tencent is the Internet Goliath you’ve either never heard of or know little about. Yet 674 million Chinese actively use its QQ service, and hundreds of millions more are familiar with its cute cartoon mascot, a winking, scarf-wearing penguin that has helped make Tencent one of the most recognized brands in the country. With 11,400 employees and more than $3 billion in revenue in 2010, it’s become the largest—and, by its competitors, most criticized—Internet company in China. Now Tencent’s ambitions are expanding into the U.S. and elsewhere. Flush with cash, it’s making investments, acquiring startups, and forcing Western companies to consider whether it’s friend or foe. “If you are a Silicon Valley guy and you don’t have Tencent on your radar, you have to be deaf, dumb, and blind,” says Michael J. Moritz, the renowned venture capitalist who backed Google and PayPal. “I am full of admiration for the characters at the helm of that company. They are extraordinarily thirsty and aggressive.”

Tencent was founded in 1998 by four geeky college classmates and a friend from Shenzhen who devised a Chinese version of the pioneering instant messaging service ICQ. Led by the zoomorphically nicknamed “Pony” Ma Huateng (ma is Mandarin for “horse”), the founders adapted their chat software for mobile phones and watched as it became the primary communication tool for a generation of young Chinese. Along with chat and games, the company’s stable of products now includes a virtual currency called Q Coins, a search engine, an e-commerce marketplace, and two social networks, pengyou.com and the youth-oriented Qzone, which collectively have more than 500 million members. Tencent also recently hatched a Twitter-like service known as Tencent Weibo (pronounced way-baw), which is used by some 200 million people in China and is keeping pace with a competing service from rival portal Sina.com. The publicly traded company has a $48 billion market value. Last year it had $1.2 billion in profit, the bulk of that from selling free-to-make bits and bytes like virtual clothes and racing car decals that allow its young users to represent themselves online.