Text | Slightly Referenced, Author | Yin Kai, Yang Zhichao, Editors | Harano
Last May, ByteDance was renamed Douyin Group.
Tencent did not change its name to "WeChat Company", but in the financial report, WeChat has become the absolute protagonist. On August 16, Tencent released its second quarter financial report. Tencent achieved revenue of 149.208 billion yuan, an increase of 11% year-on-year, and net profit of 37.548 billion yuan, an increase of 33% year-on-year. In this beautiful transcript, WeChat’s contribution is quite huge.
Advertising, live streaming, mini-games, financial services, and many other sectors are all related to WeChat’s growth. The most eye-catching results came from the advertising business: Tencent’s advertising revenue grew by 34% year-on-year in the second quarter, driven by advertising businesses such as WeChat Channels and Moments.
In contrast, sectors without WeChat’s "help", such as Tencent videos and local games, are mostly reaping the rewards.
While gaming and social entertainment are still Tencent’s biggest sources of revenue, WeChat is the "hope of the whole village" from a growth perspective. This also brings subtle changes to Tencent’s development logic.
Tencent’s growth drivers can be summed up in two words: WeChat.
In the latest two-quarter earnings report, Tencent achieved revenue of 149.208 billion yuan, an increase of 11% year-on-year, and most of the growth was related to WeChat.
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In the second quarter, Tencent’s online advertising business revenue increased by 34% year-on-year to 25 billion yuan. The main growth driver is WeChat. WeChat Channels advertising revenue has exceeded 3 billion yuan.
In addition, WeChat Channels, Mini Program and Moments continued to grow in usage time, especially WeChat Channels, which nearly doubled in user usage time, and Mini Program’s MAU users exceeded 1.10 billion.
Revenue from the financial technology business and Enterprise Services business was 48.60 billion yuan, an increase of 15% year-on-year.
The main growth driver is WeChat. The financial report attributed the above growth to the increase in consumer spending, which led to an increase in online and offline payment activities. In short, WeChat Pay made more money. In addition, WeChat Channels’ live streaming also led to weak growth in Enterprise Services’ revenue.
Social entertainment revenues edged up 2 per cent year-on-year, linked to growth in mini-games within the Mini Program – also on WeChat.
The so-called mini-games, which are light games in the "WeChat games" based on the Mini Program framework, generated more than Rmb10 million in total quarterly revenue in the second quarter, according to the earnings call. These mini-games can provide Tencent with high gross platform fees and also provide advertising revenue.
The improvement in gross profit is still related to WeChat.
Due to the characteristics of WeChat’s platform, WeChat-derived businesses tend to have higher gross margins. In the second quarter, Tencent’s revenue-to-cost ratio fell from 57% to 53%, which ultimately led to a significant increase in gross profit. The main reason for the decrease in cost ratio is that new services such as WeChat Channels bring in new revenue with higher gross margins, according to the financial report.
Although gaming and social entertainment still provide the highest revenue, from a growth perspective, Tencent has gradually begun to focus on WeChat.
Since Tencent handed over a less than ideal financial report in Q2 last year, WeChat has become almost the only growth point for Tencent.
At that time, Tencent’s games, advertising and other TOB businesses all slowed down, revenue and net profit both declined, and only WeChat Channels stood out. Last year’s Q2 financial report data showed that the total user session length of WeChat Channels exceeded 80% of Moments, the total video views of WeChat Channels increased by 200% year-on-year, and the number of daily active creators and daily average video uploads increased by more than 100% year-on-year.
In terms of commercialization, WeChat Channels has moved frequently, not only launching creator sharing plans and paid subscription functions, but also launching Daren Square to help creators increase their profits.
After rapid commercialization, WeChat generated a large amount of advertising revenue, platform revenue, and financial revenue in the second quarter of this year. These revenues are scattered across the various businesses of the financial report, almost carrying the growth of the entire group.
In addition to WeChat, Tencent’s second-quarter earnings report highlights a stability.
First, take a look at Tencent’s cash cow game.
In the second quarter, Tencent’s value-added services achieved revenue of 74.20 billion yuan, an increase of 4% year-on-year, which is not bad, but compared with Tencent’s overall growth rate of 11%, it is not outstanding.
Among them, the most profitable local game revenue has not increased, and it is still 31.80 billion yuan. Tencent games have not had a phenomenon-level explosion problem for many years, and it is not easy to maintain revenue without recession. In the summer, Tencent may have the opportunity to bring some growth by relying on the launch of the global "Fearless Pioneer" national service.
Although the social entertainment business increased slightly year-on-year, the growth came from WeChat mini-games and music members. According to the financial report, the revenue of music live broadcast and Game LIVE has declined.
However, there are surprises in the international game market. In the second quarter, Tencent’s international market game revenue increased by 19% to 12.70 billion yuan, and it was 12% after excluding the impact of exchange rates. The growth was mainly due to the contribution of games such as "Victory Muse: Nikki", "VALORANT", and "Triple Match 3D".
In terms of content business, Tencent Video has still not stopped its decline.
The financial report shows that the number of Tencent video paid members decreased by 5% year-on-year, which is 115 million. In the last quarter, Tencent video paid members also declined, and Tencent attributed the reason to the impact of content scheduling. But after Tencent Video broadcast popular dramas such as "The Long Season" and "Love Only" in the second quarter, the decline in paid membership data can no longer be explained by simple content scheduling.
In addition, in the last quarter’s earnings conference, Tencent executives also revealed that the gross profit margin of Tencent Video is low in the group. Overall, the performance of Tencent Video is not ideal in the group.
Another Tencent-owned content platform, Tencent Music, has done well, with music paid members reaching 100 million and music subscription revenue growing.
At the moment, Tencent Music is in a period of transition, social entertainment revenue is declining, and revenue from selling green diamonds is rising – a healthy sign, after all, the business of green diamonds is much greener than rewarding beautiful women live streaming hosts.
Finally, look at Enterprise Services.
Since the second quarter of 2019, Tencent’s earnings report will no longer disclose Enterprise Services revenue separately, but combine financial services and Enterprise Services revenue represented by WeChat Pay. So this part of the situation will be a bit complicated.
According to the financial report, Enterprise Services revenue achieved "low double-digit year-on-year growth" in the second quarter, but the growth was mainly due to the revenue generated by WeChat Channels’ live streaming. I don’t know how Tencent calculates it, but in general, the revenue generated by live streaming will be a bit strange to count in Enterprise Services. And the "real" Enterprise Services – Cloud as a Service, the financial report only claimed that it achieved "slight growth".
Overall, in addition to WeChat, Tencent is stable as a whole. Except for Tencent Video, there is no obvious decline in the main business. With the support of the huge volume, this is enough for Tencent to live a stable life.
Although Internet Tech Giants’ business is complex, it mostly revolves around one or two keywords.
For example, Alibaba. Although Alibaba has six major groups and countless small businesses, whether it is e-commerce Taotian, wholesale Alibaba, local life Ele.me and Hema, its business revolves around the buying and selling of goods, which can be summed up in two words: transactions.
Falling on Tencent, the business keyword has become: charging.
Since the QQ era, value-added services have been the lifeblood of Tencent. Whether it is QQ’s various diamonds, members, QQ shows, or game points and skins, to music and video members, it all fits this logic. In 2016, when Tencent’s games were at their peak, service revenue from online games and social networks reached 107.81 billion yuan, accounting for 71% of total revenue. This means that about 70% of Tencent’s revenue at that time was earned by users "charging".
To put it bluntly, at that time, Tencent was a company that primarily earned revenue from selling virtual goods.
However, the era of charging has become history. After "Honor of Kings" and "Game for Peace", Tencent games no longer have national-level hits, the live broadcast industry continues to shrink, long-form video users peak, and Tencent videos enter a period of cost reduction and efficiency. For Tencent, there is less and less new news and good news about "charging".
At the same time, Tencent’s Enterprise Services market is growing rapidly, and the commercialization of WeChat is accelerating. As the trend continues, the proportion of revenue generated by "charging" in Tencent is getting smaller and smaller.
By the second quarter of this year, the share of revenue from value-added services had slipped to 50%, growing by only 4%. Although it is still the main force for making money, from the perspective of growth momentum, it is already showing signs of weakness.
WeChat is contributing more growth space, which also means that the business logic of Tencent has changed: from "charging" business to traffic business.
As a super APP, WeChat is difficult to define simply. It can socialize, pay, shop online, buy tickets, and order takeout. But in the end, it is not a transactional APP. Its most valuable value is more than 1 billion high-frequency users – but this also provides a broad enough imagination. Before tapping into new traffic and business models, Tencent only needs to find more ways to monetize traffic directly or indirectly, and it can live a good life.
Advertising, for example.
Advertising was Tencent’s biggest bright spot in the second quarter, growing by 34% year-on-year. In today’s Internet environment, an advertising growth rate of more than 15% can be considered excellent. A growth rate of more than 30% can only be achieved by very few platforms such as Pinduoduo.
The rapidly growing advertising revenue has also changed Tencent’s role: from advertiser to advertiser.
The key to distinguishing advertisers from advertisers is how much money a company can make from advertising and how much it spends on advertising.
Tencent’s advertising revenue has always been strong, but it also spends a lot of advertising money. In the early stage of mobile Internet, Tencent’s online advertising revenue in 2011 was 1.99 billion yuan, while sales and marketing activity expenses were 1.92 billion yuan, which is very close to the two figures. This means that Tencent earns almost all of its advertising money on its own sales.
It is not surprising that games have always been a major player in advertising, and one of the most important advertisers of Party B. Tencent has its own QQ, WeChat and other traffic portals, which has greatly saved marketing costs. However, at that time, Tencent was still doing video, e-commerce and other businesses, which required user acquisition through ads.
But as WeChat’s advertising revenue grew, that changed.
In 2015, Tencent’s sales expenses accounted for only about 45% of advertising expenses, which means that less than half of the money Tencent made through advertising revenue was spent on marketing and advertising its own products. By the second quarter of this year, as advertising revenue increased and the proportion of sales expenses decreased, this proportion became 33%.
That is to say, Tencent’s sales cost has far exceeded the cost of user acquisition through ads, advertising revenue has officially become the front line of Tencent’s growth, and Tencent has also completed the gorgeous turn of advertisers to advertisers.
However, although WeChat Channels’ advertising revenue in the second quarter of this year has exceeded 3 billion yuan, which can be regarded as living up to Pony Ma’s expectations, compared with Kuaishou’s 13.06 billion yuan advertising revenue in the first quarter of this year, the difference is obviously quite obvious. Not to mention the gap with Douyin, Douyin has not officially released advertising revenue data, but there is no doubt that it is the highest advertising revenue among all short videos.
In addition, the advertising traffic business also has its drawbacks: the monetization method is relatively simple, and the imagination space is relatively limited.
Looking at the content platform, we know that from Douyin to Zhihu, everyone is struggling everywhere to find ways to monetize beyond advertising to enhance their competitiveness. WeChat is the same, for example, WeChat Channels has launched live streaming and local life one after another, striving to open up more channels for making money.
Tencent has always been a company that makes money and can make money. For a long time, it has made relatively easy money, such as games and live broadcasts. These high-margin businesses that are naturally extended from products have made Tencent never worry about the money bag.
But for now, with WeChat the biggest source of growth, Tencent may have to try to make some harder money – whether in traffic or advertising, it is not yet qualified to sit back and relax.
