The Good Problems WeChat is Causing TENCENT HOLDINGS ADR (TCEHY)

The Chinese internet giant TENCENT HOLDINGS ADR (OTCMKTS:TCEHY) introduced a blockbuster mobile chat application that is being perceived as a significant threat to the revenues of social networking firms such as SINA Corp (NASDAQ:SINA)‘s Weibo, as well as Chinese telcos like China Mobile and China Unicom. WeChat is doing now what Tencent’s QQ did about a year ago: eating massive amounts of the nation’s 2G bandwidth, but on much larger scale. The app is only about a year old but it has certainly created a lasting impression.

The Chinese Ministry of Industry and Information Technology (MIIT) held a closed meeting with representatives of both China Mobile and China Unicom about two months ago, to discuss telco subsidies amid the rise of several Over-the-Top (OTT) services. Although the meeting ended without any agreement, it was obvious that its focus was on WeChat.

Fear the ‘Dumb Wire’

Back in April, a comment from MIIT’s Miao Wei created uproar among the WeChat users when he said that Chinese telecom operators might force Tencent to start charging fees for WeChat, as the increasing usage of the app was creating pressure on data bandwidth. TENCENT HOLDINGS ADR (OTCMKTS:TCEHY) has recently quashed the rumors by announcing that the firm will keep its popular mobile chatting app free. Interestingly, users are already paying for the increased use of bandwidth. The reasons given by the state minister would have made sense if WeChat’s approximately 260 million Chinese users and 40 million international users were getting free internet from telecom operators. But they are not.

What the advanced features of these OTT services is doing is inducing customers to switch towards 3G, which is has higher margins for telcos, but consumers are slipping away from traditional telephone services. This is the same worry that is gripping carriers in the U.S. over VoLTE – Voice over LTE – and other VoIP applications like Skype, which is that their high-margin cellular voice minutes are rapidly becoming worthless to consumers and the carriers do not have the networks to handle the traffic.

The business models of the telcos are having to respond to rapidly changing consumer behavior. In 2012, the total number of SMS messages sent by an average Chinese user dropped by 9% from 2011 levels as a direct result of OTT services in general, and WeChat in particular. China Mobile, which is the world’s largest telecom operator, has a competing product, Fetion, that it would rather promote. But it is WeChat’s other features, including voice and video chat, that is putting pressure on the carriers, turning them against their will into a ‘dumb wire’ like network that simply passes data; their spare capacity is being filled up faster than they are comfortable with.

The Chinese micro-blogging leader, Sina, has also admitted that it is facing increasing competition from WeChat on mobile devices. Sina’s Weibo is China’s answer to Twitter, and dominates the country’s social networking scene. But WeChat’s success can be gauged with a comparison to Weibo’s empire of 424 million users, having grown to 60% of that in just under 2 years.