Tencent courts US advertisers in bid for China’s digital ad market

China’s online advertising market sits somewhere in the neighborhood of $50 billion and growing. The market is dominated by China’s top online firms, including online retailer Alibaba and web services giant Baidu. But the country’s large market size, coupled with a rise in consumer spending over the past decade, has attracted online giants like Facebook, Google, and Amazon to compete for advertising dollars.

Tencent, however, may be considered a sleeping giant of China’s digital ad market that’s just now getting out of bed. The company, which was founded in 2004, is comprised of seven business units under the umbrella of Tencent Holdings. It operates two social networks, WeChat and QQ, alongside a gaming division and a few online video services that span news, entertainment and sports.

In 2017, Tencent accounted for 13.6% of the digital ad market in China. But the company is gearing up to carve itself a bigger slice of the pie. It created a new advertising division earlier this year, which longtime media executive at Tencent, Lau Seng Yee, now heads; and for the last quarter, advertising revenues grew 48% compared to last year.

Tencent’s timing couldn’t be better. It just finished up one of its best quarters yet, beating expectations with a 61% jump year over year in profits for the quarter, and thrusting the company’s valuation to the $500 billion mark. Much of that growth stemmed from Tencent’s popular gaming division, which just released one of China’s most popular mobile games, Honor of Kings. Overall, gaming accounts for 40% of Tencent’s revenues.

At present, Alibaba controls about 40% of China’s online advertising market and Baidu – the third largest Internet firm in China – accounts for 17%. Alibaba, Tencent and Baidu all own online video platforms, which drive the lion’s share of digital advertising revenue for those companies. But Tencent’s portfolio of assets will give it an edge over both Chinese and global competitors. The company’s top leadership is now working to collate the troves of data generated by its millions of users across those silo’d businesses, nearly all of which exist on mobile devices.

One option the company has been exploring: native mobile gaming ads. As Tencent’s gaming business is one of the most popular in the country, it’s working on developing specialized native ad formats for gaming scenarios. For its most popular 2017 game, called Honor of Kings, Tencent created special branded “skins” for some of the game’s characters that sported the BMW logo. Those advertising skins were later part of eSports tournaments, live streamed to millions of viewers in China.

But the real ace up Tencent’s sleeve is WeChat (Weixin), China’s most popular social network and mobile messaging app. WeChat, nearing 1 billion users, has about half the installed base that Facebook has. Tencent is now looking for ways to leverage its WeChat app to deliver a powerful mobile advertising solution that’ll be able to tap into both social network advertising and location-based advertising for retailers.

Lau is now investing heavily to build up the company’s AI capabilities, with particular focus on natural language processing, behavior prediction, and image recognition, to glean more valuable insights from its datasets that it can then sell to brands and marketers as part of its advertising solutions.

Unlike Facebook’s advertising strategy, which saw a rapid increase in ads surfaced to users in just one year, Tencent is ramping up social advertising slowly – currently, the app only surfaces one to two ads daily to users.

Tencent is also pursuing a novel strategy for recruiting brands and marketers to its platform. It has rolled out a suite of advertising solutions aimed at global brands who are looking to reach Chinese consumers. And while Facebook and Google have opened up advertising offices in China to help grease the wheels of advertising buys over the past few years, Tencent has just opened up advertising offices in the US, looking for brands and marketers that want to expand their targeting to include Chinese consumers.

Tencent is betting that American marketers will be eager to target some of the 3.5 million Chinese tourists that visit the US and spend $35 million there annually, according to the US Travel Association. So far, brands Rebecca Minkoff, Zillow and FreePeople have used Tencent’s advertising services. And as part of its advertising strategy, the company is enabling its WeChat users to use its the mobile payment features in the US with select brand partners, bolstering the value its ads may offer to brands.

Doing so could help ensure Tencent’s advertising play will be able to win meaningful market share – assuming more global brands jump in on the idea. eMarketer estimates Tencent could double its advertising business to $11.4 billion by 2019, but the company will still have plenty of catching up to do. eMarketer estimates Alibaba will generate nearly $29 billion by 2019.