Tencent Cloud does not want to "compete on price"

Author | Huang Yu

Editor | Zhou Zhiyu

ToB is a marathon. After nearly two to three years of transformation, Tencent Cloud, as one of China's three major cloud service providers, is finally getting closer to reaching the shore.

Recently, Tencent Cloud had a moment of pride at the group's annual meeting, where Tencent Group Chairman and CEO Ma Huateng candidly stated that Tencent Cloud's performance last year exceeded his original expectations, and by 2025, Tencent Cloud is expected to "emerge from the water and form a continent."

On January 16, at the Tencent Industry Partner Conference, Tencent Cloud detailed its achievements over the past year. It is reported that in 2024, the public cloud revenue of key partners valued by Tencent Cloud is expected to achieve double-digit growth year-on-year, surpassing the market average growth rate. Meanwhile, thanks to the increase in self-developed products and subscription revenue, Tencent Cloud's integrated revenue grew by 60% year-on-year.

Li Qiang, Vice President of Tencent Group and President of Enterprise Business, stated that partners are a crucial part of Tencent Cloud's business development, and "entrusting half of our life to partners" is in Tencent's DNA for doing ToB business. Currently, the revenue contribution from partners accounts for more than one-third of Tencent Cloud's overall revenue, and this proportion is expected to continue to rise in the future.

Tencent Cloud's continuous focus on self-development and promoting integration reforms has finally achieved phased success over the years. In the face of an increasingly competitive cloud market, Tencent Cloud also clearly proposed AI, going global, and integrated innovation as the main channels for seeking growth last year.

Standing at a new starting point, Tencent Cloud still has a long way to go.

Breaking the Deadlock

Cloud services are known for their high investment, large infrastructure, and long return cycles, which is a particularly challenging business according to Ma Huateng.

In the face of internal and external challenges, in 2022, Tencent Cloud halted its all-encompassing development model and clarified its strategic route of focusing on self-developed products and integration.

Li Qiang stated that over the years, Tencent Cloud has been one of the most resolute among leading vendors in achieving high-quality growth in revenue structure and business types, being one of the earliest to decisively focus on self-developed products and entrust all delivery and integration to partners for operation.

"Looking back, this goal has been achieved, so today we can confidently say that the growth and quality of revenue are based on high-quality growth primarily driven by self-developed products," Li Qiang said. Through one or two years, Tencent Cloud has completed the transformation of its revenue structure and quality, and although it has paid some price, it has been very worthwhile.

During Tencent Cloud's transformation process, partners have been an important support. Currently, Tencent Cloud's partners mainly include DaoTongLu-type partners (agent partners, SaaS partners) and ecological capability partners (ISV/SI partners, service partners, consulting partners).

Tang Daosheng, Senior Executive Vice President of Tencent Group and CEO of the Cloud and Smart Industry Group, pointed out that as the "integration" strategy is deeply advanced, Tencent Cloud has co-built over 450 industry solutions with partners, and the number of service partners grew by over 40% year-on-year last year, while also opening up 50% of direct sales customers to partners It is reported that in 2024, Tencent Cloud will expand its partners by 1,000, bringing the total number of global partners to 11,000, achieving deep cooperation with 70% of industry-leading partners. Last year, it helped partners acquire over 60,000 new customers, continuously promoting joint solutions deep into the industry and enhancing quality and efficiency across the entire chain of research and development, production, marketing, management, and services.

To further promote the construction of the partner ecosystem, Tencent Nanshan Academy will officially open classes in 2024. Specifically, Tencent provides a platform for partners to communicate, and through systematic learning and co-creation, 37 partners have formed a very close circle of friends, facilitating over 700 million in business among partners directly through Nanshan Academy in 2024.

Li Qiang stated, "We give half our life to our partners," which is deeply ingrained in Tencent Cloud's culture. Tencent Cloud's policies are also the most stable. Based on this, it fully considers the difficulties of different regions and industries, continuously optimizing policies to ensure that partners can sustainably benefit from their cooperation with Tencent.

While Tencent Cloud continuously eliminates unhealthy businesses, it also supports partners in making such transitions.

Against this backdrop, in 2024, Tencent Cloud's ecosystem partners achieved double-digit year-on-year growth in public cloud revenue, with SaaS revenue growth exceeding the market average by three times, reaching 40%. Over three years, the performance of Tencent Meeting partners has increased by more than nine times; the overall subscription revenue share has increased by 27 percentage points; and the number of mid-tier partners has increased by 50%.

At the same time, Tencent Cloud, which proposed to achieve breakeven last year, is now getting closer to this goal. In September last year, Tang Daosheng revealed to Wall Street that Tencent Cloud would significantly reduce losses in 2024 compared to the previous year, and the profitability target is not far off.

Now, everything is moving towards a healthy path.

New Life

Over the past year, the cloud service market has been filled with both opportunities and challenges, with price wars raging from the beginning to the end of the year. Achieving counter-cyclical growth for Tencent Cloud is not easy.

Regarding price competition, Li Qiang stated that Tencent does not fully agree with low-efficiency, purely price-based competition. He firmly believes that if price changes are not based on technological innovation, they are difficult to sustain in the long term and can even harm the healthy development of the entire industry.

At the same time, Li Qiang pointed out that those most affected by price are typically services like SMS and internet traffic. However, if a user's core applications and core businesses run on your cloud, very few users will migrate just because of slightly lower costs. First, migration incurs costs, and they are not low. Second, core applications prioritize stability and security.

Therefore, in the fierce market competition, Tencent Cloud's choice is to adhere to a healthy and sustainable business model, avoiding a shift to pure price competition while also supporting partners through the economic downturn, such as continuously releasing customers from direct sales to partners.

Additionally, regarding the trend of the industry price war this year, Li Qiang told Wall Street that traditional cloud computing will gradually slow down. However, applications related to large models may still see some price competition. In fact, while this competition appears intense, the overall market scale is still quite small Looking to the future, Tang Daosheng believes that the market is entering a new stage of meticulous cultivation. The past strategies of burning money to expand teams and using low prices to grab customers have seen diminishing marginal returns. Tencent Cloud's ecological policies will also become more precise and focused.

First, it will avoid "flood irrigation" and guide partners to focus on high-quality customers, provide high-quality services, and enhance investment returns. This year, Tencent Cloud will further increase support for training, marketing activities, and more, helping partners deeply understand product technology, improve customer acquisition and service capabilities, attract more quality customers, and build their own brands.

Secondly, it will not engage in "barbaric harvesting," but return to the essence of business, creating value for customers with solid products and services, rather than simply competing on "price" or "personal connections."

"We will create a healthy rule mechanism, combining market conditions, regional resource endowments, and differences between new and old customers, to establish reasonable commission thresholds, commission structures, and ratios, allowing partners to share in the development dividends, enhance income and sense of gain, and ultimately establish a healthy and sustainable partner ecosystem," Tang Daosheng stated.

With a clear ecological development strategy, Tencent Cloud aims to achieve breakeven as soon as possible while also finding new growth momentum. Tang Daosheng pointed out that future growth opportunities in the cloud market mainly come from four aspects: public cloud, AI, going global, and integrated innovation.

The enormous market space brought by AI large models is evident, with various industries participating in this wave. According to Ma Huateng, AI large models represent a once-in-a-hundred-years opportunity, akin to the industrial revolution that invented electricity.

Li Qiang stated that over the past two years, large model training has created a massive demand for GPU computing power. Although the growth in demand from large model training slowed last year, the increasing number of enterprise users and startups turning to large model applications has also generated significant demand on the inference side.

There are substantial opportunities from the underlying training to the upper-level applications of large models. Although the revenue from AI large models for Tencent Cloud is not yet substantial, it is expected to become an important growth engine in the long run.

Tencent Cloud is highly regarded by Tencent Group, not only as the soil for Tencent's external "connecting everything" strategy but also as a crucial support for the development of the entire company group. In particular, the cloud business provides significant support for many businesses within the Tencent ecosystem, serving as a solid foundation beneath the surface.

After more than a decade of openness, Tencent Cloud, which has successfully entered the first tier of the industry, has found its own rhythm and is expected to achieve a new leap