Tencent plays catch-up in cloud computing services as video gaming business slows

Tencent Holdings, operator of China’s biggest social media and video gaming businesses, said it will step up investments in cloud computing for industries, heating up its rivalry with e-commerce giant Alibaba Group Holding in that growing online services market segment.

Shenzhen-based Tencent said its cloud computing operations will be the vehicle on which its data analytics, artificial intelligence and security systems can be customised for industries such as retail, financial services, transport, health care and education.

“We not only expect the cloud business to contribute to company revenue, but also serve as the platform connecting the consumer internet and industrial internet,” said Tencent founder, chairman and chief executive Pony Ma Huateng in a press conference on Thursday.

The company’s sharpened focus on cloud computing would intensify its rivalry with Alibaba Group Holding, whose subsidiary Alibaba Cloud is the largest public cloud services provider in China.

Alibaba Cloud had a 43 per cent share of China’s public cloud services market in the first half of last year, followed by Tencent with an 11.2 per cent share, China Telecom with 7.4 per cent and Amazon Web Services (AWS) with 6.9 per cent, according to data from research firm IDC.

Worldwide, Alibaba Cloud was the fourth biggest provider last year behind AWS, Microsoft’s Azure business and Google Cloud, according to research firm Canalys.

“Cloud is growing rapidly and we’re only at the stage of basic services,” said Tencent president Martin Lau Chi-ping. “In the future we’ll move into PaaS [platform-as-a-service] and SaaS [software-as-a-service] with higher gross margins. Cloud has also benefited our other businesses, such as payment, advertising and finance.”

The company’s Tencent Cloud unit was launched in 2013 after four years of internal development. By comparison, Alibaba Cloud was founded in 2009 and had revenue of 1.3 billion yuan in the December quarter. New York-listed Alibaba is the parent company of the South China Morning Post.

Cloud computing enables companies to buy, sell, lease or distribute over the internet a range of software and other digital resources as an on-demand service, just like electricity from a power grid. These resources are managed inside data centres. Cloud services also form part of a major national initiative.

China’s “Internet Plus” strategy, which was introduced in March 2015, seeks to integrate the mobile internet, cloud computing, big data and the so-called Internet of Things devices to modernise big, traditional industries like manufacturing.

“We proposed the idea of Internet Plus four years ago” after which Tencent initially pursued partnerships with the financial services and medical industries, said Ma. “Now, integration with the retail, transport and government sectors are also going strong.”

Tencent reported a net profit of 14.2 billion yuan (US$2.1 billion) in the December quarter that missed analysts’ estimates, after the company spent heavily on its cloud and mobile payment businesses to offset a slowdown in its core video games operations. Cost of revenue for its other businesses jumped 75 per cent compared to a year ago.

The company posted a 10 per cent increase in full-year net profit to 78.7 billion yuan, which also missed analysts’ estimates.

The results have come after a roller-coaster year for Tencent, whose shares rose to an all-time high in January 2018, powered by its money-minting video games business and ubiquitous WeChat super app before a much-chronicled government crackdown on content and gaming wiped out almost half the company’s value by October.

Although the stock has rebounded in the past few months, Tencent’s share price was down nearly 2 per cent to close at HK$363 on Thursday.

The company’s value-added services business, which is made up of its video gaming operations, contributed 65 per cent, or 176.6 billion yuan, to its total revenue last year. That was followed by online advertising, with a 17 per cent share, and other businesses, which covers its financial technology and cloud businesses, at 18 per cent.

Tencent was affected last year by a government reshuffle that led to a nine-month halt in video game licence approvals. The company has yet to monetise its hugely popular mobile games Fortnite and PlayerUnknown’s Battlegrounds (PUBG). This business also faced pressure from the government’s call to protect the nation’s youth from addiction and myopia caused by playing video games.

Facing regulatory risks and maturing consumer businesses, Tencent announced last year that its growth engine for the next decade would be the industrial internet, serving businesses in addition to the millions of consumers it now has on its platform.

The company said in its regulatory filing that the backlog of game licence applications will mean scheduled game releases will initially be slower than in previous years.

“We have eight games approved after the resumption of licensing and our partnership with Perfect World has done well,” Lau said. “More games will be granted licences and help improve our games segment gradually.”

He said the company expects some of its games in the pipeline to be quite popular and hopefully, become blockbusters. “The overseas market is doing better, with PUBG Mobile as the game with highest MAU [monthly active users] globally.”