Not Even Tencent Can Make Up for Line's Lost Friends

(Bloomberg Opinion) -- Line Corp. investors are so desperate for any shred of good news that reports of a tie-up with Tencent Holdings Ltd. 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 local retail outlets, the Japanese company said at a briefing in Tokyo on Tuesday. Nikkei had reported on the move earlier in the day. Line and Mizuho Financial Group Inc. also announced a venture to roll out financial services in 2020.

Not Even Tencent Can Make Up for Line's Lost Friends

The spike of as much as 17 percent in Line shares merely retraced a third of the ground lost since a peak in September. It closed 13 percent higher by the end of the day.

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. Its double-down on fintech isn’t going to help much either, especially given that it won’t get going until the year after next.

Line’s “other business” – which includes Fintech, AI, Commerce and Mobile – accounted for less than 4 percent of revenue in the most recent quarter at 2.03 billion yen ($17.9 million). The “payments processing and licensing expenses” line item was three times that at 7.5 billion yen. 

It’s always good to have more friends, so the Tencent and Mizuho deals are a good idea.

But they’re 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.

Not Even Tencent Can Make Up for Line's Lost Friends

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 percent 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. 

Not Even Tencent Can Make Up for Line's Lost Friends

The only reason a banking venture makes sense is because, as CEO Takeshi Idezawa asserted on Tuesday, Line has “an overwhelming advantage because of our unrivaled connection with users.” 

That may be true now, but the case of Indonesia shows that this connection is becoming unstuck. Management needs to be prepared for the possibility that this could happen at home, too. E-commerce retailer Rakuten Inc. is entering the telecoms business soon, Yahoo Japan Corp. has teamed up with India’s Paytm (with the backing of SoftBank Group Corp.), and marketplace startup Mercari also plans to join in. 

Evidence of the weakening connection with users comes from Line’s declining communications (in-chat stickers)  and content (games, music, video) divisions. Instead it’s had to prop up revenue by pushing more ads, and the company is going deeper into one market: Japan.

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, including payments and other financial services. 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. These Tencent and Mizuho deals aren’t it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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