Tencent's Dreams, Part II: Investing In The Metaverse

Mirrorworld, according to Kelly, won’t take place in Virtual Reality (VR), but rather in Augmented Reality (AR). It will blend digital and physical, layering bits’ infinite possibilities on top of atoms’ realness.

Snap is employing the Amazon (AMZN) “First and Best Customer” strategy. It builds products for its own app first - like Lenses, its first AR hit - and then opens up the tools to both its community to create within Snapchat, and third-party developers to incorporate Snapchat’s features into third-party apps.

Snap is building a wide-ranging set of products that build off of each other and work together to lead to a future in which Snap powers the Mirrorworld.

Here’s a glimpse from Snap’s Partner Summit:

Like Epic, Snap isn’t building a closed ecosystem. It’s building the tools that others can use to build and profit from AR experiences, inside or outside of the Snapchat product, so that it becomes the platform on top of which developers build the Mirrorworld.

  • Camera Kit: Gives any developer the power of Snap’s Camera, the most widely used piece of AR technology in the world.

  • Bitmoji: Snap owns Bitmoji, which gives everyone their own personalized avatar to use within Snap Games and Minis, and across many external apps, platforms, and OS’s.

  • Snap Kit: Powers 20 of the top 100 apps in the iOS and Google app stores.

  • Local Lenses: Allow users and businesses to build digital worlds on top of the physical one.

Snap will be a leader in AR and continue to grow as its user base matures, which will put it among the tech giants in terms of valuation. Today, it’s valued at 1/70th of Apple (AAPL) and 1/30th of Google (GOOG). If it catches up to where the tech giants are today, Tencent’s stake will be worth over $100 billion. (Insert $100 billion in 10 years meme here)

Audio: Spotify

There’s a version of the Metaverse that looks less like Ready Player One and more like Her. That is to say, audio-based. We are decades or centuries away from being able to do everything we need to do in the virtual world, which means that we will still need to spend plenty of time in the physical world. During much of that time, we will plug in via audio. Today, Americans spend four hours per day listening to audio, including one hour of spoken word content. Tomorrow, we will listen to even more, as the lines between conversation and entertainment blur.

Spotify, of which Tencent owns 9%, is best positioned to capture that earshare. Spotify currently has 286 million monthly active users and is proving out its ability to deliver them different types of audio content beyond music, including podcasts, and soon, audiobooks. According to CEO Daniel Ek, Spotify has 10-15x growth ahead of it. As I wrote in Earshare, it is investing heavily today to ensure that it owns consumers’ ears as audio grows.

In the Metaverse, Spotify will fill the space between - when people are not fully immersed in the digital world, they will be able to continue the conversation with friends who are, interact lightly with AR through audio, or just relax and listen to some music.

At 10x where it is today, Tencent’s investment in Spotify would be worth $35 billion.

Internet: WeChat

Tencent’s core asset today is WeChat. As we discussed in Part I, Chinese consumers do everything on WeChat - message, read the news, shop digitally, interact with businesses, communicate for work, pay for things in the real world, and more. With the launch of its Mini Programs, companies are able to build richer experiences within the WeChat ecosystem. In some ways, WeChat is a mini, 2D Metaverse.

As Tencent quietly orchestrates the adoption of the Metaverse via its minority investments, it will be interesting to watch how much inspiration the Metaverse takes from the WeChat ecosystem. Snap has already started to look more like WeChat with the launch of its own Minis, and the super app’s influence will continue to shape the way that we build new digital economies.

Infrastructure and Smart Retail

Tencent already owns stakes in the platforms of the future, and it has more cash to spend. The company said that it will invest $70 billion in infrastructure including cloud, AI, cybersecurity, blockchain, 5G, and quantum computing over the next five years. It will also be investing heavily in Smart Retail, further bridging the gap between digital and physical retail through payments and other shopping tech. Together, its infrastructure and Smart Retail investments will help build more of the underlying technology and connective tissue the Metaverse will need.


Taken together, Tencent owns stakes in the leading companies building the Platforms on which the Metaverse will be built: VR, AR, Audio, and Internet. Epic, Snap, Spotify, and WeChat are all building true platforms -- on which the majority of the profit is made by creators. For the Metaverse to be interesting enough for people to adopt, creators are key. There need to be games to play, music to listen to, rich social experiences, ways to make money, and things to buy with that money. In other words, there needs to be Content.

Tencent’s Platform investments enable content creation, and it also invests in Content creators. Capital and Traffic for the next wave. When you lay Tencent’s investments on top of Geffen’s graphic, its Content play emerges.

Tencent owns stakes in four of the companies that Geffen included in his original graphic (circled in blue): Snap, Discord, Roblox, and Epic. I’ve added more of Tencent’s holdings to the chart to show that Tencent is already a leader in three of the Minimum Viable Metaverse categories, which are the early Content layer: Games, Premium Social Media, and Democratized Ecommerce.

Virtual Worlds and Spatial Software (i.e. Games)

Games are the first Metaverse Content that many people will engage with, and Tencent is the leading video game company in the world.

  • Its online games segment did $5.5 billion in Q2 revenue, more than any other company.

  • It owns Riot Games, which makes League of Legends, the most popular esports title in the world by over 4x as judged by Twitch streams and 40% of Epic Games, which makes Fortnite (350 million players). Unreal Engine is Platform, Fortnite is Content.

  • It owns 1.5% of Roblox, which has 164 million users and is played by half of people under age 16 in the United States.

Matthew Ball talks about games as the “on-ramp” experience for the Metaverse, the thing that will get early adopters to try it out. Tencent owns that on-ramp, and the titles that will keep people engaged and immersed in early versions of the Metaverse.

Democratization of Ecommerce

For the Metaverse to become more than just an immersive game environment, it will need to support a functioning economy. For that to happen, people will need to be able to sell things in the Metaverse, which is to say, in a seamless way across the digital and physical worlds. Try on a shirt with AR, buy a digital version for your avatar, and have the physical version shipped to your door.

Tencent owns stakes in some of the leading ecommerce companies in the world, many of which “arm the rebels” instead of vertically integrating, with publicly stated plans to add more:

  • WeChat allows companies to easily set up stores and experiences that reach over a billion customers, and WeChat Pay lets people buy things online or in the real world.

  • Paystack powers digital payments in Africa, Khatabook does the same in India, as do Gojek in Indonesia and SeaMoney in Singapore. Seamless payments will be crucial to power Metaverse stores.

  • Pinduoduo’s Customer-to-Merchant and social commerce models are reshaping ecommerce in ways that may work even better in the Metaverse than they do on mobile.

Tencent’s current portfolio and future investments in Smart Retail will continue to blur the lines between digital and physical shopping. They will be crucial in defining the shape of the Metaverse economy, and its assets stand to benefit from the Capital and Traffic Flywheel across its Metaverse Platforms.

Premium Social Media

The Metaverse will let friends, family, and colleagues from across the world gather in immersive environments even more easily than walking next door. It will also let strangers with shared interests find and engage with each other.

Tencent has an impressive portfolio of Premium Social companies:

  • Tencent owns 50.1% of Huya and and 38% of Douyu, China’s versions of Amazon’s game streaming product, Twitch. Game streaming mechanics may underpin broadcast activities beyond gaming.

  • Discord, of which Tencent owns ~2%, bills itself as a “place to talk and hang out.” It represents a proto-version of persistent hangouts in the Metaverse.

  • Snap is both a Platform and a Content play, and is a more intimate social network in which young users mainly interact with their closest friends instead of strangers.

  • Tencent owns ~5% of Indian education platform, Byju’s, the most valuable online learning company in the world.

Like a party or a new social network, people will only hang out in the Metaverse if their friends are there. As the Metaverse comes into focus, these Premium social communities will continue to merge with the other aspects like ecommerce and gaming, making many of the things we do more social. We’ll go to the mall, movies, or concerts with friends, just like the real world pre-Corona.

Through its Capital and Traffic approach, Tencent has built a portfolio of internal and external products, platforms, and services that perfectly position it to own the Platforms on which the Metaverse is built, and the Content with which Metaverse users will engage to play, build communities, learn, and shop. So what is it missing?

Where Tencent Might Invest Next

The one area from Geffen’s map in which Tencent is underweight is “decentralized, distributed, and remote productivity tech,” particularly compared to Metaverse competitors Microsoft (MSFT) and Google. Assuming that remote productivity will be an increasingly important component of the Metaverse, I expect that remote productivity tech will be a main area of focus for Tencent in addition to previously announced infrastructure and Smart Retail plays.

If I were doing corp dev at Tencent, here are a few companies I would be interested in:

  • Figma. The collaborative design tool that I use to make all of the beautiful graphics in Not Boring would be a strong addition to the portfolio because it is both a work collaboration tool and a potential on-ramp for people to design new worlds and experiences in the Metaverse. People use Figma to synchronously co-create shared environments, like WFH Town.

  • Agora. Tencent brazenly copied Zoom with VooV, which it launched in 100 countries on March 20th. Agora (API), which went public in June, allows anyone to embed video or voice in their applications. I think that the future of video will look more like use-case specific video environments versus everyone using Zoom, and Agora is both a good way to play that trend and a way for Tencent to spread into thousands of products as a Platform.

  • Zapier. When I wrote that Google should acquire Slack, Schlaf replied that Zapier is more strategic because “it’s plumbing and glue. It ties together a whole ecosystem of applications, services, and developers.” In a Metaverse defined by the connection among platforms, worlds, and content, its connective plumbing may be even more important.

  • Remix Machines. In The Generalist, Mario Gabriele cited a wave of products unbundling the Microsoft Office Suite with slicker UI and more collaboration. Many of the companies he discusses, like Notion, Coda, Roam, Airtable, Causal, Canva, Projector, Kapwing, and Webflow are well-suited for the Metaverse, which will be largely multiplayer as opposed to one-to-one or solo.

Many of these companies are too early in their lives and their trajectories are too steep for them to sell to one of the American tech giants that would swallow them whole. Tencent’s more passive investment approach is likely preferable to the companies. Within the Tencent portfolio, they can get access to capital, traffic, and a seat in the early Metaverse.

Obstacles to Tencent’s Dream

Tencent’s success in the Metaverse is not a foregone conclusion for three reasons:

  1. Government. Tencent is a Chinese company, and the Trump Administration recently issued an Executive Order to prevent people in the US from using WeChat, which the Administration views as a security threat. Were Tencent to take a leading position in the Metaverse the government would very likely intervene.

    This is one of the areas where Tencent’s structure is advantageous. It’s impossible to imagine the American government (or Indian government, or many other governments) allowing its citizens to spend the majority of their waking hours in the Metaverse by Tencent™️, but it will be harder to prevent people from spending time playing Fortnite or League of Legends, interacting with the world through Snap’s AR, or listening to music on Spotify. Even still, world governments could force Tencent to divest ownership in businesses operating in their countries. Even the Chinese government has been an impediment to Tencent’s dream when it imposed restrictions on in-game purchases in 2018, driving Tencent’s stock down 20%.

  2. Competition. Tencent will face opposition from bigger competitors and new entrants alike who have their own designs on controlling the next big platform shift. Facebook bought Oculus to own VR. Microsoft owns Minecraft and the Hololens, and may own TikTok, which is already stealing attention from Tencent’s properties. Google is gunning for cloud gaming with Stadia and won’t give up its place as the home page for the internet easily. Amazon is the world’s largest ecommerce business and its largest cloud provider, owns Twitch, and is the best of the bunch at developing new business lines. Apple is currently engaged in a battle with Epic over its 30% app store fee, and has shown that it is willing to play hardball to hold on to its hard-won place in the content ecosystem.

  3. The Metaverse is Uncertain and Likely Distributed. Ultimately, no one company will own the Metaverse, and it’s important for Tencent to work with competitors, as Epic has done, in order to maintain its advantage. It will have to convince the other major tech companies that accelerating the arrival of the Metaverse will be positive sum for all of them, and then work arm-in-arm with competitors to convince regulators across the world that what they’re building, and how they’re building it, is good for society.

Tencent’s Opportunity

Despite the obstacles, investing in Tencent is the best way to invest in the Metaverse. It is the only way for you and I to invest in Epic, which many believe to be the most important Metaverse builder. If it ends up being more AR than VR, Snap will do well. If audio plays a larger role, Spotify will do well. If it blends multiple media, all three will boom together. Even if another giant or startup builds the infrastructure, many of its Content plays stand to benefit from a richer digital / physical economy.

If Tencent can nudge its portfolio companies to work together, it will accelerate the Metaverse’s development and solidify its own leading role. Even if it can’t, many of its bets stand to perform well independently, and the likelihood of one or more massive winners is high.

And if the Metaverse doesn’t emerge at all? If we continue to use the internet in the way we do today for the next century? Tencent owns a portfolio of companies that stand to benefit from the simple straight line continuation of existing trends towards more gaming, ecommerce, audio, digital communication, and digital healthcare. The more we do online, the better Tencent does.

This feels like the kind of opportunity that most of us missed to buy a basket of Apple, Amazon, Google, and Microsoft in the early 2000s, buffeted by a massive, profitable, and growing core business. Ultimately, Tencent is an undervalued portfolio of many of today’s top internet assets and a free call option on a new world.

Thanks for reading,


See also U.S. IPO Week Ahead: McAfee Returns To The Public Market In A 3-IPO Week on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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