Entering its third decade, the Chinese internet giant is shifting from consumers to corporations as it adjusts to slower growth and stiffer competition.
November 11 marked the 20th anniversary of Tencent, China’s biggest gaming and social media group. It also marked the near-end of a year of extremes for the company. In January Tencent was hailed as the first Asian company worth half a trillion dollars, with a $573 billion valuation. Then, over the ensuing months, it lost $218 billion. In August it posted its first quarterly profit decline in nearly 13 years. Now it could be on the upswing. On November 13, Tencent reported that its third-quarter profits rose 30%. Revenue was up 24%, but this was the company’s slowest quarterly growth in over three years.
While it is a far-reaching empire, Tencent still gets more than two-fifths of its revenue from gaming. It has been damaged by government regulations, enacted in March, suspending approvals for new games. Offering another perspective, Steve Chow, SVP Research at Agricultural Bank of China, suggests that consumers may simply be spending less time on Tencent’s online entertainment. The broader maturation of China’s internet sector could also be making it harder for big, older companies to compete, for both users and talent.
Tencent has released popular new games since the freeze, but is unable to charge for them. “Most agree that gaming will remain an important part of the company, but not its chief driver of revenue growth,” The Economist reports. The group has been investing in areas outside its core business, backing startups to find new users and sources of growth.
In September Tencent announced its first restructuring plan since 2012, in which it outlined a shift from consumer internet towards business services, marking “a new beginning for the company’s next 20 years.” It has a new unit for cloud computing and “smart” industries, combining its on-demand software and online services. CEO Ma Huateng, known as Pony Ma, said the “main battlefield” for mobile is moving from consumers to companies.
Tencent competes directly with Alibaba in cloud services, and the latter has had a big head-start. Last year 45% of China’s $10 billion cloud computing market went to Alibaba, with 10% going to Tencent, according to research firm IDC. But Tencent is growing quickly in cloud services. Chow believes Alibaba and Tencent can both fare well in this market, since there is a lot of room for growth. And Tencent has powerful assets: Its WeChat messaging app is on over four of every five smartphones in China, and last year it launched a cloud platform that allows companies to sell to WeChat users.
Tencent’s might in consumer internet should keep it steady as it builds up its business services, and WeChat seems likely to keep going strong, providing a powerful distribution channel. Nevertheless, its third decade is definitely not a time for Tencent to rest on its laurels. “We have to stay awake,” said President Martin Lau.
