Tencent's Revenue Grows Much Slower, And Game Business Gets In Trouble
Tencent’s revenue reached CNY 85.47 billion in 2019 Q1, with a growth rate of 16.2% year-on-year. However, Tencent has to face an undeniable fact that most of its businesses grow much slowly than ever.
On May 16, Tencent, China's second-largest internet company, released its first quarter financial report. In this quarter, Tencent’s revenue reached CNY 85.47 billion (USD 12.43 million), with a growth rate of 16.2% year-on-year. Its gross revenue was CNY 39.82 billion (USD 5.79 million), with a growth rate of 7.5% year-on-year.
Behind these spectacular numbers, Tencent has to face an undeniable fact that most of its businesses grow much slowly than ever. Especially, its core business, online game, has stayed in negative growth in the past three quarters. In this quarter, the growth rate of online game business was -0.9% year-on-year.
It is worthwhile to note that Tencent set “Fintech & Enterprise Service” as a new section in its revenue structure. This section is composed with payment, financial management, other fintech services, cloud computing and other services for corporate.
The revenue of fintech & enterprise service was CNY 21.80 billion (USD 3.17 billion) in the first quarter, with a growth rate of 43.5% year-on-year.
What are the factors driving these growth rates down? How will Tencent reverse this situation? Let’s try to find the answer from the financial reports and information published on the internet.
Full view of Tencent revenue and business structure
Tencent’s revenue has grown from CNY 49.55 billion (USD 7.20 billion) in 2017 Q2 to CNY 85.46 billion (USD 12.42 billion) in 2019 Q1, which seems optimistic at first glance. However, its growth rate year-on-year plunged from 61.5% in 2017 Q3 to 16.2% in 2019 Q1.
In the financial report, Tencent divides its business into four sections: value added service, Internet advertisements, fintech & enterprise service and others. Among them, value added service contains two parts: online game and social network.
In 2019 Q1, Tencent’s 55% of revenue comes from value added service business. Specifically, Online game is still the main contributor for revenue, which accounts for 33% of total revenue, while social network contributes for 24%.
Fintech & enterprise service, a new business section separated from “others”, is in such a high proportion of 25%. And internet ads accounts for 16%, and others accounts for 2%.
According to Tencent’s financial reports, the “others” business has consecutively increased from 15.2% in 2017 Q1 to 28.5% in 2018 Q4, while other businesses have decreased or remained in this period. After Tencent separated “fintech & enterprise service” from “others”, the proportion of “others” was only 1.6%. Thus the “fintech & enterprise service” business was obviously the core driver for revenue growth.
To assess the profitability of each business, we adopt “revenue cost ratio” model, whose calculation formula is “revenue divided by cost”. The high value shows the business is much profitable.
Based on this model, Tencent’s most profitable business is value added service, whose value is 2.4. The second profitable business is internet ads with a value of 1.7, while the third one is fintech & enterprise service.
Social network business: growth potential is disappearing
Tencent’s social network business section consists of two parts: QQ and WeChat.
In the first quarter, QQ’s monthly active users (MAU) was 0.82 billion with a growth rate of 2.2% year-on-year. WeChat’s MAU reached 1.11 billion with a growth rate of 6.9% year-on-year, which composed with both domestic users and overseas users.
According to App Annie, a market research company, WeChat and QQ ranked fourth and sixth by MAU among all the global applications in 2018, while the top three is Facebook, WhatsApp Messenger, Facebook Messenger, and the fifth is Instagram.
It seems like both these two applications develop optimistically, but their growth rates don’t.
QQ’s MAU amount was 8.78 billion in 2016 Q1, but it dropped to 7.84 billion in 2017 Q4. QQ’s MAU kept a negative growth from 2017 Q1 to 2018 Q3, and it started to increase in the last two quarters. According to the financial report, QQ launched some interesting functions supported by artificial intelligence algorithm, such as face changing and filters for video calls. These functions may attract more users to use QQ.
WeChat’s MAU amount has been rising from when WeChat was launched, but its growth rate was dropped from 23.0% in 2017 Q1 to 6.9% in 2019 Q1. Because WeChat’s MAU has reached 1.11 billion, which is around 80% of China’s population, as well as more than three times of American population.
In this stage, it’s difficult for WeChat to activate more its users to use, even WeChat provided some interesting or useful functions. WeChat needs to acquire more users from more overseas market, and that is what Tencent does it now.
WeChat gains more overseas users by WeChat Pay, which is benefited from Chinese tourists in fact. WeChat Pay has entered 25 countries by the middle of 2018.
Besides, there are another two products that contributed to WeChat’s users growing: mini program and weishi.
WeChat launched mini programs in Jan. 2017, which is like “sub-applications” within the WeChat ecosystem. They enable to provide advanced features to users such as e-commerce, task management, coupons and so on. Some small games were released in Dec. 2017, and became very popular rapidly, which contributed a lot for WeChat’s users MAU.
Tencent had launched 58 mini programs, and its daily active users (DAU) was over 1,700 million by 2018 Q1.
Weishi is a short video platform developed by Tencent in 2013. At beginning, users could only use weishi in its application. But there are already several famous short video platforms like, among others, Douyin, Kuaishou, Huoshan and Xigua.
To squeeze into this competitive market, Tencent built entrances in QQ and WeChat in last September, which means users can use weishi in QQ and WeChat, as well as its application. Based on large number of users in QQ and WeChat, the users amount of weishi increased fast.
Online game: productivity of new games declines
Online game revenue was CNY 28.51 billion (USD 4.12 billion) in 2019 Q1, with a growth rate of -0.9% year-on-year. In the financial report, Tencent stated that the running revenue of online game increased by 10% year-on-year.
Although online game business still contributes the most among others, its revenue in 2019 Q1was slightly declined, compared with 2018Q1. And its proportion in total revenue was dropped from 53.4% in 2016 Q1 to 33.36% in 2019 Q1.
This is a good signal to reflects that Tencent’s some other businesses grow fast. Actually, it is the fintech & enterprise service business develops rapidly. We will discuss this part at below.
Tencent’s online game business makes up with smartphone game and PC game. The revenue of smartphone game was CNY 21.2 billion (USD 3.06 billion), while PC game’s was CNY 13.8 billion (USD 1.99 billion). Both these two parts was with a negative growth of 2% year-on-year.
In this quarter, Tencent didn’t launch many new games as usual, which was a reason for the poor performance of revenue.
In the end of this quarter, Tencent launched a new game namely Perfect World Smartphone Game (完美世界手游), which is developed by Perfect World, one of China’s famous game company, and released by Tencent. Since this new game published, it has became one of high profitable smartphone games in China. It may contribute to the revenue in the next quarters.
Tencent’s online game business surged in 2016 and 2017, because of the game Honor of Kings (王者荣耀). It was released in 2015, and it became the most popular smartphone game in China in 2017, whose DAU ranked the first among other smartphone games.
But in 2018, the revenue of online game business fluctuated because of some policy measures. In March 2018, Chinese government stopped issuing the commercial license, which is qualification for every published game. And some games’ commercial license was withdrawn, including one of Tencent’s new game.
These policy measures caused great trouble for Tencent’s online game revenue. In 2018 Q2, the revenue of online game declined 12.43%, compared with 2018 Q1.
Internet advertisement: injured by slack season and poor economic environment
Tencent’s internet ads business revenue was CNY 13.38 billion (USD 1.93 billion) in 2019 Q1, with a growth rate of 25.1% year-on-year. However, compared with 2018 Q4, the growth rate of internet ads business revenue in 2019 Q1 was -21.46%.
Even the first quarter in every year is slack season for internet ads, the growth rate in 2019 Q1 is much negative. From 2018, China’s economic environment started to become tightened, and advertisers supposed to cut their budget.
Specifically, the internet ads revenue of social network and other content platform increased by 34% year-on-year, while the internet ads revenue of media raised by 5% year-on-year. QQ.COM (腾讯新闻), the Tencent’s media, contributed more than usual.
In addition to expand more advertising spaces in original or new products, Tencent leveraged artificial intelligence and data mining to improve the precision of advertisement recommendation. It is such a MUST DO to compete with Tencent’s great peer, ByteDance, which has grew really fast in the past five years because of its ads precise recommendation algorithm.
Fintech & enterprise service: an unexpectable contributor for revenue
Tencent is well known mainly by its QQ, WeChat and many online games. But this company has grown to be a giant in fintech and enterprise service today.
It was the first time Tencent divided this business section from “others” as mentioned above. The revenue of fintech & enterprise service was CNY 21.79 billion (USD 3.15 million), which surpassed the social network’s and ranked second in total revenue. The growth rate of this business revenue was as high as 43.52% year-on-year.
The main contributors include WeChat Pay, fintech services like micro-finance, and cloud. The volume of single user by WeChat Pay has been growing, as well as the total amount of volume. The cloud business gained more paying users, because the cloud service based on IaaS, PaaS and SaaS increased in variety.
Tencent started to develop its finance business from 2005, when the company launched Tenpay (财付通), a online payment function based on WeChat. Since that, Tencent has built an internet finance empire, where the business covers banks, loan, security, fund, money management, credit investigation and other fintech services.
Now, Tencent has acquired 12 financial licenses by subsidiaries and holding companies. According to Tencent, it has cooperated with over 200 financial institutions like banks, funds, insurances, securities and so on.
In cloud business, the revenue was CNY 9.1 billion (USD 1.32 billion) in 2018, with a growth rate of over 100%. Compared with Ali Cloud, Tencent’s cloud business still has long way to go. In the 2019 fiscal year, Ali Cloud’s revenue was CNY 24.7 billion (USD 3.59 billion), which is almost three times of Tencent’s.
Facing with this strong competitor, Tencent has to develop different and useful cloud services, as well as gain more clients in some sensible marketing strategy.
Where does Tencent go in next decade?
In the 2018 financial report, Tencent released its expectation in 2019. It is worth to note that Tencent will pay more attention to overseas market and provide more games globally.
The company also plan to explore more payment scenarios and develop more fintech solutions.
In terms of cloud business, Tencent is to integrate cloud computing, data analysis, artificial intelligence and other techs to develop various solutions for specific industries, such as, among others, retail, finance, transportation, healthcare and education.
In December 2018, Tencent declared that its strategy is embracing industrial internet and originating consumer internet. Alibaba also announced that it would help more China’s enterprises to grow up. We can feel the things changes nowadays.
For a long time, Tencent mainly focused on serving individual consumers by its social network products and online games. But the development bottleneck is available to see now, because this market has almost fully developed.
The new development opportunity for Tencent and Alibaba is to serve companies from various industries. They are destined to compete with each other in this new field.