U.S. News

Beijing's Crackdown on Text Messaging May Hurt Business

Kathrin Hille|Financial Times

Tencent , the world’s third-largest internet company by market capitalization, said China’s crackdown on mobile text messaging was starting to hurt its business.

Close up of someone typing on a laptop.

The warning by the company, which operates the world’s most popular instant messaging service and online games with titles such as Dungeon & Fighter, is an early indication that China’s strict censorship regime could start to damage the country’s internet boom.

Martin Lau, Tencent president said as the company reported a surge in 2009 profits and revenues: "We might feel a negative impact from the regulatory environment,” he said. "The operating environment is getting more challenging.”

Its mobile services business accounts for 17 percent of its revenues.

Over the past 15 months, the Chinese government has stepped up a crackdown on what it calls “harmful content” – a development Google cited as one reason for re-considering its presence in China.

The authorities argue that the measures are aimed at pornography and spam, but website closures and text messaging blockages have also hit politically sensitive content.

Tencent management said the government’s surprise decision in late November to halt WAP billing – a practice that allows consumers to buy online content and have it charged directly to their mobile phone bills – had also made a dent in the fourth quarter and would do more damage this year.

Mr. Lau added that attempts by China Mobile , the world’s largest mobile operator, to weed out “bad” content by blocking certain content providers from sending text messages had also produced collateral damage for the industry.

He said: “Finding a modus Vivendi for weeding out bad content is something the entire industry needs to achieve together. [We must] try and find a way that can avoid hitting good content by mistake”.

Tencent’s business is based on its QQ instant messaging service which boasts more than 500 million active accounts. Over the past few years, the company has built a broad offering of social networking applications, virtual goods and online games.

After a 215 percent rise in its share price over the last year, Tencent’s market capitalization now ranks behind only Google and Amazon among internet-related companies.

Its market cap of $40 billion is ahead of Yahoo , Ebay and its better-known Chinese peers Alibaba, the e-commerce market leader, and Baidu , China’s largest online search engine.

When Ma Huateng, a computer engineer in the southern Chinese city of Shenzhen, set up the company 11 years ago, an English name was chosen for it to mimic the sound of the name in Chinese: Tengxun became Tencent.

Net profits for the company jumped 85 percent last year to Rmb5.15 billion ($754 million) while revenues climbed 42.5 percent to Rmb12.4 billion. Shares in the company edged 0.1 percent higher HK$165 in Hong Kong.

Tencent said net profit jumped 73.5 percent to Rmb1.5 billion in the fourth quarter of 2009 compared to a year earlier while total revenues surged 75.9 percent to Rmb3.69 billion, driven by strong growth of social networking services and online gaming.

Tencent said advertising revenues were also set to underperform this year as it is rebuilt the business.

In late 2009 the company switched from partnering with Google to an internally developed search engine. Mr. Lau said he believed advertising would gain much more weight in the company’s revenue mix but this would take time.