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Abu Dhabi, UAESaturday 15 December 2018

Line Corp backers will find Tencent is not their saviour

New service merely allows Japanese retailers to accept Tencent's WeChat Pay, attracting Chinese tourist spending, but that has been available to Alibaba's Alipay users for some time

Takeshi Idezawa CEO of Line Corp, speaks at the Line Conference near Tokyo. Investors are unlikely to find relief with Tencent. EPA
Takeshi Idezawa CEO of Line Corp, speaks at the Line Conference near Tokyo. Investors are unlikely to find relief with Tencent. EPA

Line Corp investors are so desperate for any shred of good news that reports of a tie-up with Tencent drove the stock’s biggest gain in two years.

Users of Tencent’s WeChat Pay will be able to buy goods through Line’s platform at Japanese retail outlets, the Nikkei reported Tuesday. Merchants will be able to capitalise on the flow of Chinese travellers to Japan using Line payments terminals that will be compatible with WeChat Pay, it said.

The share spike of as much as 17 per cent merely retraced a third of the ground lost since a peak in September.

Bloomberg Intelligence senior analyst Vey-Sern Ling quickly poured cold water on the notion that teaming up with Tencent would be any boon to the company’s bottom line: the service merely allows Japanese retailers to accept Tencent's WeChat Pay. This helps attract Chinese tourist spending, yet has been available to Alibaba's Alipay users for some time.

Ouch. Scathing, but true.

Even if the Tencent deal were to add something more than mere payments, that would be unlikely to change the near-term trajectory of the Japanese company.

Line’s “other business” – which includes Fintech, AI, Commerce and Mobile – accounted for less than 4 per cent of revenue in the most recent quarter at ¥2.03 billion (Dh65.7m). The “payments processing and licensing expenses” line item was three times that at ¥7.5bn.

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It’s always good to have more friends, so the Tencent cooperation isn’t a bad deal. But it’s not enough to change the fact that that Line’s core business, based on instant messaging, is looking weak and management appears to have no strategy in place to expand its user base. By the end of September the company had 3 million fewer users in its four key countries than a year earlier.

Tencent, by comparison, managed to add 102.5 million users to WeChat over the same period despite already being a Goliath. Of course, the company has the China sandpit all to itself and Line has zero chance of gaining entry thanks to government censorship and protectionism.

But Line has ready access to Asia’s third-largest country, Indonesia, and still managed to mess up: It shed 37 per cent of monthly active messaging users in just one year and now counts just 22 million there. The company tried to paper over that decline by explaining that consumers were more engaged with Line Today, its news-feed service, with 40 million users, than the chat app itself. It seems almost proud to have shifted consumers from active to passive engagement.

The best thing that Line could get out of Tencent is some lessons on product strategy. The Shenzhen-based company knows it’s the user base that underpins all the services you build on top. Witness Tencent’s reticence to open up its timeline feed to too many ads lest consumers get annoyed and disengage. By comparison, Line is getting a growing reputation for becoming spammy, which is ironically pushing many toward WeChat or WhatsApp.

Bruised Line investors are eager for a turnaround story. This Tencent Pay deal isn’t it.