HONG KONG (Reuters Breakingviews) - Tencent and Snap have sent a short but effective message to Facebook. The owner of China's killer app WeChat now owns 12 percent of its struggling U.S. peer, whose Snapchat service is best known for the ability to make photos vanish. Even though the shares are non-voting, the two companies have excellent reasons to connect.
After a dismal quarter that wiped out another one-fifth of Snap's market value in after-hours trading on Tuesday, it's no wonder the company revealed Tencent's enlarged stake. It didn’t have to, as Snap made perfectly clear in documents submitted to regulators. Its multi-class share structure, which is so abysmal it has inspired stock-index creators to reject the company from inclusion, excuses it from having to notify investors of any changes.
Getting revenge on throngs of short-sellers can't have been the only reason. It’s also helpful for Snap to let rivals like Facebook know it has a new deep-pocketed backer. Worth some $469 billion, Tencent is a more formidable force than Snap, whose shares are trading below the price at which they debuted in March. Snap also said it "looks forward to sharing ideas and experiences" with the Shenzhen-based company, which has found creative ways with payments and games to keep nearly one billion users glued to WeChat.
Tencent has been slowly striking U.S. allegiances, including with Tesla, as it plots global expansion. It also has a vested interest in making sure that Facebook, which freely copies Snapchat features and rolls them out on its own apps, has some stiff competition on its home turf. And while there are no clear signs that Beijing intends to give Mark Zuckerberg's powerhouse an entry visa, if it happened it would pose a competitive threat.
Facebook is trying to crack China’s massive market, where it has been banned for years. It quietly released a photo-sharing app in the People’s Republic called Colorful Balloons, according to the New York Times, and has been scouting for office space in Shanghai. Zuckerberg, who has been studying Mandarin, was in the country just last month. And if Facebook isn't going away, Tencent has incentives to make sure Snap doesn't either.