President Trump issued two executive orders this week banning U.S. citizens and companies from interacting with Chinese tech products. The first order is related to TikTok, a well-known product in the U.S. that has been a prominent part of pandemic social media over the last six months featuring friends creating and replicating “TikTok dances.” The second app, WeChat, is an integral part of everyday life in China, and virtually unknown Stateside.
So popular is WeChat in China, it is referred to as the people’s ‘Swiss Army Knife.’ Chinese residents say much of what they need during the day can be accomplished with the WeChat app. Think of the ubiquity of Facebook integrated with Venmo, Slack, Doordash, Uber, instant message, and just about everything else you use your smartphone for. WeChat is a one-stop-shop for anything and everything, used by more than a billion active users around the globe every month.
WeChat’s numbers in the U.S. are tiny in comparison. The app is currently used by 19-million active daily users according to Apptopia. But once tech companies have saturated the local market — as WeChat has come close to in China — the next growth opportunity is adding users in international territories. That is why President Trump’s announcement had such an impact on Asian markets. Tencent, the owner of WeChat, lost $34.6-billion in market value in Friday trading, the day after the announcement. Investors are concerned that the vaguely worded executive order may also extend to Tencent’s other businesses, and that further U.S. restrictions on Chinese tech companies may be in the pipeline.
Tencent is also known for being the world’s largest gaming publisher. It has a 40% interest in Epic Games, the owner of the hugely popular game Fortnite that brought in revenue of $1.8-billion in 2019. Tencent also owns 100% of Riot Games, known for the most popular PC game across the globe — League of Legends, and has bought stakes in many other gaming companies, including U.S. based Activision Blizzard. Further acquisitions and investments in U.S. companies are anticipated in the coming years.
Tencent’s stock has slipped further this week taking the two-day cumulative loss to 9.6%, or $66-billion. In further bad news for the company, an analyst report suggested that iPhone sales in China may be impacted as a result of Trump’s ban on the app. “Since WeChat is very critical to Chinese users, integrating communications, payments, e-Commerce, social software, news reading, and productivity functions, we believe that the move will tank iPhone shipments in the Chinese market,” says Ming-Chi Kuo, an analyst with TF International Securities. “That could result in iPhone unit volumes getting decimated. We estimate that global iPhone shipments will decline by 25–30%.”
Tencent will report earnings on August 13, and while things are uncertain for WeChat, the gaming sector is expected to be a bright spot for the company. NPD data shows that U.S. video game sales are up 26% this quarter, as people in lockdown look for home-based entertainment. Year-over-year sales are up 73%, reaching $1.5-billion. This is good news for Tencent as the world’s largest video gaming company.
For now, it seems that the executive order extends only to WeChat. The White House confirmed to the LA Times that it will impact WeChat only and not Tencent’s gaming business. That is good news for U.S. companies too, as Tencent also has significant investments in Spotify and Snap, as well as the NBA in China. Hollywood is touched by Tencent too, through its stakes in the WonderWoman, Terminator, and upcoming Top Gun films undertaken through the Tencent Pictures division of the company.
Like so many other industries, COVID-19 is causing seismic shifts in the world of tech, media, and entertainment. I have written about the changing model of film distribution here, and Tencent is undoubtedly looking at the possibility of digital film release in countries that have lockdowns and closed theaters. Apps such as TikTok have become a respite for entertainment in an otherwise closed world. Its fate too has been decided by the Trump administration executive order, though it is issuing legal challenges to ensure its continued relevance to the American people.