QQ: Quite Quality

Below is one of the case studies that our forthcoming Serving the Digital Generation report is founded on. QQ (a huge social network in China) is a key example of successfully understanding the participation needs of the digital generation, and one we should all be learning from.

QQ has claimed to be the world's third-largest IM network (after MSN and Yahoo), based on a figure of 355 million ''active users'' as at November, 2008. A further claim of 570 million ''users'' exists from earlier that year.

QQ has claimed to be the world's third-largest IM network, based on a figure of 355 million ''active users'' as at November, 2008. A further claim of 570 million ''users'' exists from earlier that year.

A lot more than Facebook
See: Facebook? What Facebook?

However, as always, IM userbase figures are to be taken with a high degree of scepticism; many are non-paying, low attachment users, the definitions of ''active'' and ''user'' vary widely between networks, and it is common for individuals to have multiple user names and possibly for user names to have multiple individuals. A more valid metric is peak concurrent users - i.e. the maximum number of users simultaneously logged in. Due to the engineering principle that you provision for the peak, it's this metric that defines the network's cost base. QQ gives their peak concurrent users for 2008 as 45.3 million.

So QQ has to serve at least 45.3 million concurrent users, plus growth, plus a margin of safety. How does the revenue side look? QQ claimed in 2007 to have 7.3 million paying users, which is both more likely to be a valid measurement and also a non-trivial achievement in the context of a business whose core product is free. The upshot was profits for the quarter to October 2008 of RMB737 million (£75m), on revenue of RMB2 billion, or a gross margin of 63.5%. For comparison, HP bases its investment decisions on so-called "fascinating margins", defined as 45%, and Iliad achieves a margin of 70-80% on its FTTH business.

At the time of the figure of 7.3 million payers, the peak concurrent user figure was 12 million; that is to say, 60% of the people who could be said with certainty to use QQ had spent real money there. If the same percentage holds now, that would imply 27 million paying users, or an annual ARPU converted into sterling of around £10. This is genuinely impressive for an IM community; although it is roughly one-sixth that of the most aggressive emerging market GSM operators, they employ much, much more capital.

We analyse QQ's success as being founded on strength in the following areas of the participation imperative:
  1. Creativity
  2. Feedback
  3. Directory
  4. Portability
  5. Peer Group
  6. Personalisation
  7. Payments

QQ caters to user creativity and the need for personalisation much more deeply than most social networks with the possible exception of Facebook; although officially proprietary, the system API is documented and QQ, the company, positively encourages a hacker ecosystem of interesting new applications. This goes some way beyond the skins and avatars most socnets offer. Similarly, you can't offer more effective feedback than the ability to tinker with the works.

Recently, in another Telco 2.0 project, we identified three key strategies for two-sided businesses. Strategy One involves giving away services before and after a transaction, and collecting a percentage of the transaction. Think Amazon - or a casino. Strategy Two involves giving something away to create a trading hub, then selling something to the crowd. Think of the original Lloyds' Coffee House - it didn't write marine insurance itself, it sold coffee to the insurance brokers, who came for the liquidity and rumours, and stayed for the coffee. Strategy Three involves selling access for third parties to the trading hub - like BAA plc renting shops at Heathrow Airport, or Google giving away a whole range of services in order to create inventory it can sell adverts next to.

QQ straddles Strategies Two (selling to the crowd) and Three (charging for access) in the two-sided business model; it derives revenue from selling applications, other in-game goods, and extra services such as a blog, games, and a streaming music service, in return for its internal digital currency. This market creates a sink for the digital currency, and therefore gives it value, which creates a further demand for it as a gift and reputation good. It shares revenue from the store with the creators of in-game goods, thus feeding user creativity.

In Telco 2.0 terms, it's collecting money from the downstream side and subsidising the upstream partners, in order to encourage the creation of saleable goods and the purchase of digital currency. At the same time, it is also pursuing Strategy Three (charging for access) by selling contextual advertising. In this case, it's earning on the upstream side and subsidising access for users (which is free) to create a market for the advertisers.

Users get, in return for their participation, the core functions of the directory (where are all my friends? And my enemies? And who are their friends?) and the messaging layer to service their peer group and burnish their on-line identity.

Interestingly, QQ is practicing intergenerational price discrimination; the business version of the service (i.e. LinkedIn to its Facebook) is a paid-for application, reflecting that its users presumably already have an identity, or aren't interested in impressing the QQ community, and are unlikely to spend extended periods of time browsing the community - which is what the advertisers want. Interestingly, the business version is branded ''Tencent Messenger'' and uses a theme cloned from the look-and-feel of Microsoft Live Messenger. Sometimes, it seems, it's necessary to be more boring.

Portability is simple enough - just look at the range of platforms, plus the catch-all browser and SMS versions. Privacy is something of a weakness - although it does have rich presence control, it's only to be expected that turning your presence off will become a noticeable act, and there have been several waves of concern about Public Security Bureau (PSB) interference.

QQ's internal currency and the app ecosystem is already dominating the business - 66% of revenue originates from VAS and only 11% from advertising, and VAS revenue is growing at 90+% a year, in line with total revenue, whereas ads are growing at ''only'' 70+%. This is only likely to continue; one of the downsides of being hackable is that several unofficial clients for QQ exist that strip all advertising content, and efforts to stop this are unlikely to be successful for long (filtering of content for references to the Diaoyu Islands was actually abandoned due to a user revolt, even though the Shanghai PSB wanted it). This obviously tends to increase the relative importance of Strategy Two.

An interesting point which arises in the participation imperative framework is hybridisation. This is where you try to monetise by extending the digital business into the physical world - say, by selling tickets to live performances through your music streaming service - or vice versa. Hybridisation exists in QQ up to a point; for example, there is a QQ dating service, and a streaming music channel. This would appear to be an important field of development for both Strategy Two activities and also Strategy Three contextual advertising.

[Ed - we'll be discussin the lessons of QQ and other new types of service providers at the Telco 2.0 exec brainstorm on 6-7 May, in Nice. Distance Participation packages available if you can't make the trip but want the input/output]