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Tencent’s rebound says what’s ahead for China’s big tech firms

Pmaybe no company The ups and downs of China’s tech giants are better represented than Tencent, the biggest tech company. Two years ago, this online empire seemed unstoppable. More than a billion Chinese are using its ubiquitous service to pay, play games, and do many other things. Its video games, such as “League of Legends,” are hugely popular around the world. Tencent’s market value has exceeded 900 billion U.S. dollars, and it is expected to become China’s first trillion-dollar company.

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Then the Communist Party said: Enough is enough. China’s top leader, Xi Jinping, sees the side effects of big tech companies, from inattentive teenagers to capital diversion from strategic areas such as semiconductors, as unacceptable. Tencent joins other players in China’s once-thriving digital industry in an 18-month sweeping crackdown. Regulators have declared video games “mental opiates” and banned those under 18 from playing for more than three hours a week. Tencent’s new game is held up by censors. Meanwhile, antitrust agencies have forced it to tear down the walls of its app to let other payment processors in.Last year, it sold its entire stake worth $36 billion Jingdong.com and Meituan, two e-commerce companies, pay out dividends to shareholders—perhaps in part to prop up their stock prices, but also to assuage official concerns about their ubiquity. To make matters worse, Xi Jinping’s draconian zero-coronavirus policy has infected Chinese consumers with frugality. In the third quarter of 2022, Tencent’s revenue fell by 2% year-on-year, the worst performance in history. By October, its market value had fallen to less than $250 billion.

Things are looking up for Chinese internet companies these days. Shoppers are ‘revenge spending’ to get away with zero coronavirus. Regulators are loosening up companies’ old businesses and giving them room to play with new ones. And Tencent, which doubled its market capitalization in the past three months (see chart 1), is again a reflection of the changing sentiment. If you want to see what all this says about the future of China’s digital economy, check out its humble champion.

Tencent has nothing like it in the West or anywhere else outside of China. It’s part Meta, part PayPal, part Epic Games (which owns a large stake), and a bit of Amazon and Softbank (Tencent provides e-commerce and cloud services, like the American giant, like the Japanese giant, one of them, globally made hundreds of technology investments within the Despite a disappointing third quarter, annual sales are expected to exceed $80 billion in March 2022. About a third came from games, business services (including payments, e-commerce and cloud computing), and social media and advertising. Its pre-tax profit is expected to easily exceed $30 billion. If you exclude the banks and energy companies, which had a bumper harvest in 2022, there are only a handful of companies in the world doing better.

The key to Tencent’s wealth is the WeChat super app. Companies around the world have been trying to imitate its clever combination of compensation (the transaction economy) and entertainment (the attention economy) for years. Few can do this as seamlessly as Tencent — and at no scale. Last month’s Lunar New Year celebrations were a good example.WeChat users send 4 billion numbers to loved ones in week-long celebration red treasure (Cash-stuffed red envelopes in the real world), more people watched the annual New Year’s Gala on WeChat’s new channel video platform (190 million) than TikTok’s popular Chinese sister video app Douyin (130 million).

The New Year’s blowout hints at Tencent’s direction. The rise of Douyin, like TikTok in the West, has pushed digital life to short video sharing. The average Chinese spent more time on such platforms than any other online platform in the past year (see Figure 2). Short-video apps are becoming the center of China’s attention economy and its digital advertising business, which generated $35 billion in sales in the third quarter of 2022, according to broker Bernstein. Short video platforms accounted for a quarter of these ad revenues between July and September; their ad sales grew 34% year-over-year.

Tencent is targeting a fraction of that growth. It said the number of Channels users had tripled in the last year. While it declined to give a total, its New Year’s Eve party streaming tally suggests they now number in the hundreds of millions. Tencent occasionally hires big names to attract new audiences; last June, the US pop group Backstreet Boys entertained 44 million fans at a concert on the channel. But it takes a more ecumenical approach to talent than Douyin. Content creators with as few as ten followers get a cut of the channel’s advertising revenue. On Douyin, they need 10,000 followers to start making money this way. Tencent hopes its strategy will attract more up-and-comers, more viewers and more advertisers. Robin Zhu of Bernstein estimates the company could bring in another 30 billion yuan ($4.4 billion) in ad sales within a few years.

Tencent is also repositioning the “transaction” part of the WeChat economy around channels. Notably, it is equipping the platform for “social commerce.” This uniquely Chinese form of consumerism, which combines live broadcasting with shopping, is expected to drive transactions worth $720 billion this year.In this regard, short video apps are also taking market share from incumbents such as Jingdong.com and Alibaba, China’s largest e-commerce mall.

Tencent has avoided the business in the past, possibly fearing its entry would hurt its presence in the Jingdong.com. Get rid of it, and Tencent seems more willing to try its luck in online shopping. It would not reveal the amount of money changing hands on its e-commerce platform. However, it said that by 2022, that number would surge nine-fold year-over-year. WeChat Pay typically takes a 0.6 percent cut of each transaction. Despite a government order allowing the use of rival payment systems, most transactions on WeChat involve WeChat Pay: both Tencent and Alibaba, which runs another popular service, make cross-platform payments possible but cumbersome.

The shift to channels is critical for Tencent. The authorities’ anti-gambling stance has made it urgent to look elsewhere for growth. Tencent founder Ma Huateng recently described channels as “the company’s hope”. Its recent success suggests that hope may not be so remote. Tencent’s non-gaming business revenue share has been rising. But to thrive in the new normal, where the government has imposed restrictions on some digital activities and stands ready to add more, Tencent must address three challenges — and so will China’s other digital giants.

The first of these has to do with ensuring an agile company culture that can adapt to new realities. As far as tech founders go, Ma is low-key and laid-back. This has empowered subordinates such as WeChat founder Allen Zhang and led to many successful ventures. But it also introduces friction when those subordinates think differently. Zhang, for example, has resisted the app’s erosive commercialization, fearing it would ruin the user experience. As a result, WeChat’s home screen has remained the same for a decade, and accessing videos on the channel requires two taps—not a chore, but a drag compared to TikTok, which as soon as you open the app, TikTok The audio will provide you with the clip.Clifford Kurz points out that this same resistance to change explains why e-commerce businesses are also only rolling out gradually small&P Global, a research company.

Given that tech companies will find themselves more competitive among themselves — a second challenge, any delays could become a problem. Xi Jinping’s tech onslaught has leveled the playing field in the digital economy. This is creating new competition. Meituan is moving beyond food delivery into ride-hailing and electronic thrift stores, areas that have been the domain of rivals such as Pinduoduo. TikTok owner ByteDance will soon launch its own food delivery service and is experimenting with a messaging app that is eerily similar to WeChat. China’s largest search engines Alibaba, Tencent and Baidu are all developing artificial intelligence (artificial intelligence) Chatbot similar to Chatcommon technologywhose human-friendly conversational capabilities have recently attracted Western Internet users.

The least likely thing to trip up Tencent or its rivals is politics. Even though it has declared an end to its tech crackdown, the state remains a ghostly presence. It holds small stakes in subsidiaries of the biggest tech giants, including Alibaba and, reportedly, Tencent. With tensions between China and the West, close ties to the government could hurt foreign revenues, such as Tencent’s international games business. At home, cyberspace, the media, and antitrust agencies have gained new powers — and are willing to exercise them. Censorship has long been a part of Chinese life as Xi Jinping consolidates his strongman rule, but it is intensifying, which could mean more delays in the release of Tencent games. There is always the danger that the party will paralyze the development of the company. China stock price on February 9 artificial intelligence The company’s share price fell after state media warned that “some new concepts” such as chatbots were getting too much attention.

So far, short videos have not been cracked down by the party. While they face fewer restrictions than gaming, if Xi Jinping concludes that being addicted to Douyin or channels (where young gamers used to spend two-thirds of their new free time) is not conducive to producing good communists , this situation may change.

Jack Ma has repeatedly emphasized how Tencent’s apps “serve society” and “help the real economy”. These words should be catnip for Mr Xi and his cadres. Investors are definitely complaining. However, more competition and a fickle government could limit Tencent’s prospects. In China, there is no room for digital winners anymore – only survivors.

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