Facebook’s preparations for its upcoming IPO may currently be hogging the headlines, with much debate and opinion on whether it can justify its estimated $95 billion valuation, and if its shares will be worth investing in. But the social networking company is not the only major internet player out there. The Wall Street Journal has posed an interesting question for potential investors: is China’s Tencent worth a punt instead?

The story considers why shares in Tencent Holdings Ltd have surged 48% to a record high this year. One reason for the recent activity, it suggests, is the “ebullience” surrounding the Facebook IPO rubbing off on similar companies. But although Tencent may not be that well-known outside of China, its appeal goes far beyond the current hype.

Describing Tencent as a “Chinese Facebook” is not quite accurate: it is a mix of online platforms including microblogging, games and social networks. Its bedrock, however, is its tremendously popular instant messaging service, which has over 700 million active users. Both companies can boast similarly impressive revenue figures, with Tencent’s $4.52 billion in 2011 comparing favourably to Facebook’s $3.7 billion.

Where the companies have diverged in the past has been in their approach to patents: it was the Chinese company that was the first of the two to make them a priority. More than five years ago, a blog reported a Tencent manager saying that: “Tencent has a very strong sense of patent in mind when they design new services”. The company’s actions have since demonstrated that these were more than just words, and it has built up a considerable patent portfolio over the years. Innovation is a focus at Tencent: it has its own research institute, and more than 50% of its employees are R&D staff. Facebook, by comparison, has only recently seen the IP light, and has been forced to go on a spending spree in order to fortify its patent holdings to protect itself from lawsuits from various companies, including Yahoo!

But patents are not the only form of IP that are a focus at Tencent. Charles Chen, the chief administration officer at the company was the founder of the Shenzhen Copyright Association, a group whose members include many of the major media and high-tech companies based in the city, and has since been its chairman. Tencent itself is publicly committed to only carrying non-infringing copyright works on its portals. In an exclusive interview for IAM, published in issue 51 of the magazine, Chen stated: “Using only copyrighted content does not come easy. We set up a budget for it. And you need to be smart in negotiating commercial deals. Each deal is different. You have to work on it and find your way in.”

Another interesting issue facing both businesses is the potential for growth – they each want to expand their markets, but are facing problems. Tencent has an English language version, but has had little impact in the wider world; meanwhile Facebook is currently banned in China, although it may be looking to partner with local operators. Defending its patents may not be an issue for Tencent at the moment, but that may change if it does succeed in internationalising.

The debate about Facebook’s value will no doubt rage for many months to come. Yet according to the WSJ report, Citigroup has suggested that Tencent could be worth $100 billion in the longer term, as opposed to the rough $50 billion valuation it has now. Investors would perhaps do well to pay attention to the lower-profile Chinese company that is just as much of an internet powerhouse as Facebook.

Sectors

Competition/antitrust, IP litigation, Patents, IP business, IP valuation