Tencent will get rid of the tag as a “game company” by 2020

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Abstract: Though Tencent has never been more successful under the glamor of Honor of Kings’ stellar performance, its dependence on gaming industry dropped. The revenue from games to total revenue ratio decreased to 42% in this quarter, while the ratio of the same period last year was 47.9% and the ratio of last quarter 46%. If this trend remains unabated, Tencent’s growth curve will last longer.

Tencent’s main products are about social network, yet for a long time its revenue mainly comes from online games which have accounted for more than 50% of its total revenue for years. This is completely different from another world-famous social network Facebook whose revenue mainly comes from ads.

This difference has much to do with their strategies and markets. Facebook faces global market and has potential to attract enormous users (creating opportunities for traffic-sensitive ads model). However, due to the huge cultural gap, ads become a convenient business model when it’s hard to make headway in value chain/network.

Tencent, limited by the scale of users and unable to compete with Baidu (a search engine) in ads, has to focus on the value chain/network. Thus its vertical integration in gaming industry is necessary and wise because the value view of players is in line with people on the social network. This speaks much of Tencent’s tepid performance in another vertical area—e-commerce.

If the trend of changes in Tencent’s financial statement in the last several quarters continues, it is likely to get rid of the tag as a “game company” by 2020.

Though Tencent has never been more successful under the glamor of Honor of Kings’ stellar performance, its dependence on gaming industry dropped. The revenues from games to total revenues ratio decreased to 42% in this quarter, while the ratio of the same period last year was 47.9% and the ratio of last quarter 46%.

If this trend remains unabated, Tencent’s growth curve will last longer. The growth model that depends on the dividends brought by the number of users is hard to last. As a matter of fact, various indexes of QQ have shrunk sharply and the growth of Wechat users decreased to less than 20%, indicating the ceiling is at hand. Thus Tencent is about to enter user stock era. In order to minimize the damage to its users, the efficiency to cash in is as important as the model to do so.

The layout in content area and the breakthrough in mobile payment and cloud service make a smooth transition possible. In this quarter, the former contributed 50% to growth of social network revenue, and the latter grew by 177% year on year and 27.7% quarter on quarter, accounting for 17% of total revenue.

The former reflects Tencent’s major steps in content area, such as its outright purchase of music copyrights. The latter mirrors the success of Wechat payment and the expansion of Tencent’s business branch which provides the user base for cloud service development.

Both have huge potential. The former helps add to the proportion of Tencent’s service in users’ entertainment (especially for those who don’t play games, albeit possible squeeze on gaming time), while the latter denotes huge room for growth in financial domain—holding on to mobile payment means the establishment of the bond between enormous users and financial service. Combining financial service with cloud service, Tencent has chances to enter the large-scale market of providing services for enterprises.

On top of these, ads have a lot to offer. Mobile games just exceeded 50% of the total games, leaving enough potential in its gaming business. If the trend of changes continues uninterrupted by some unexpected factors, like policy regulations, the revenue from mobile payment and cloud service will probably overtake that from games. By then, Tencent will finally get rid of the tag as a “game company”, become a comprehensive internet service company, and joins the trillion-dollar club.

 

This article originally appeared in Jiazhixian and was translated by Pandaily.

Click here to read the original Chinese article.

 

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