Tencent's E-commerce Dream Sees Hope

Author | Huang Yu

TENCENT and Ma Huateng, who have been accustomed to being winners in the Internet battlefield and firmly occupying the top spot in domestic social media traffic, have always had two concerns - short videos and e-commerce.

Three years ago, WeChat Video Accounts appeared on friends' circles, carrying Ma Huateng's great expectations for these two areas. Three years later, Video Accounts have become a "gold mine," radiating the light of dreams about to come true, and embellishing the gloom brought to TENCENT's financial report by the sluggish growth of the gaming sector.

On August 16th, TENCENT Holdings released its performance for the second quarter of the 2023 fiscal year. After nearly a year of commercialization of Video Accounts, its quarterly contribution to advertising revenue has exceeded 3 billion yuan, driving overall advertising revenue to grow by 34% YoY to 25 billion yuan, exceeding market expectations.

At this point, Ma Huateng can finally breathe a sigh of relief and prepare to disrupt a new industry landscape.

Debuting in the Spotlight

In 2020, Video Accounts appeared below WeChat friends' circles, but they failed to take off.

Three years later, Video Accounts have taken the spotlight in TENCENT's financial report. According to TENCENT's financial report, while Video Accounts have driven a significant YoY increase in advertising revenue, gaming revenue, as the pillar business, has only grown by 4.8% YoY to 44.5 billion yuan, lower than the market's expected 8%. Another main business, financial enterprise services, has also grown by only about 15%.

Ma Huateng spared no effort in expressing his expectations for Video Accounts. At an internal conference last year, he stated that Video Accounts are basically the "hope of the entire company."

The reason is that short videos have brought a lot of impact to both the gaming and e-commerce businesses. Video Accounts have taken the first step in combining short videos with e-commerce. If they can successfully close the e-commerce loop, it will bring TENCENT a space for incremental growth full of imagination.

"I believe TENCENT has many long-term and short-term opportunities." During TENCENT's earnings conference call on the evening of August 16th, James Mitchell, TENCENT's Chief Strategy Officer, believed that the short-term opportunity lies in Video Accounts, whose ad loading rate is only a small fraction of the industry average. In the future, TENCENT will gradually increase the ad loading rate of Video Accounts and convert it into more revenue.

In addition, James Mitchell pointed out that about half of the industry's ad revenue comes from e-commerce-related clients' advertising in the short video field. Therefore, as TENCENT develops e-commerce in Video Accounts and utilizes existing infrastructure such as WeChat's mini-programs, TENCENT has the opportunity to double its advertising revenue.

On the other hand, an undeniable fact is that in the late stage of the Internet traffic dividend, TENCENT's two main business sectors, gaming and financial technology, have been subjected to regulatory constraints.

In this context, accelerating the commercialization of Video Accounts is the core driving force for TENCENT's short- to medium-term growth. A investor stated that the revenue performance of Video Account in the second quarter was undoubtedly beyond expectations. Previously, it was expected that the annual advertising revenue of Video Account would be around 10 billion yuan, and there is currently no pressure in sight. With the further improvement of the duration and monetization of Video Account, there is huge growth potential for video account advertising, which will be the main driver of TENCENT's performance in the coming years.

Guosheng Securities Research Institute predicts that the advertising revenue contribution of Video Account will reach approximately 23 billion yuan by 2025.

Why are more and more businesses willing to advertise on TENCENT's Video Account? TENCENT's answer is that businesses and creators can generate revenue within the WeChat ecosystem by focusing on Video Account and utilizing tools such as mini-programs, WeChat Work, and payments, thereby promoting the growth of TENCENT's advertising.

The commercialization of Video Account started with the easiest monetization method, which is native advertising, but it is obviously not the end point. In the medium to long term, with the prosperity of the commercial ecosystem, Video Account is also expected to monetize through various business models, with live-streaming e-commerce being the most promising.

TENCENT is building infrastructure for live-streaming e-commerce to promote the growth of GMV (Gross Merchandise Volume). In January 2023, TENCENT began charging commissions to e-commerce businesses that livestream on Video Account, in order to develop new sources of revenue.

This portion of Video Account's technical service fee income has been included in TENCENT's enterprise service revenue. According to TENCENT's financial report, in the second quarter of this year, thanks to the revenue from live-streaming sales on Video Account and the slight growth of cloud services, TENCENT's enterprise service revenue has improved, achieving low double-digit year-on-year growth.

Breaking the Curse

As one of the BAT giants, TENCENT has always been criticized for lacking an e-commerce gene and missing out on the short video trend, which was seized by Douyin and Kuaishou.

E-commerce is the most tempting piece of cake in the internet field. During the years when Jack Ma led Alibaba to earn a fortune, Ma Huateng was envious, but the platforms launched by TENCENT, such as Paipai.com, QQ Mall, and QQ Online Shopping, failed to establish a foothold in the market, earning a reputation of "fighting a losing battle".

In the short video battlefield, Ma Huateng also made an early start. TENCENT Weishi was launched three years earlier than Douyin, but it has always struggled to make progress and eventually became a marginal business of TENCENT.

However, when e-commerce is combined with short videos, new energy is unleashed. The rise of Douyin, Kuaishou, and other platforms has motivated Ma Huateng to vigorously pursue Video Account.

TENCENT also has the opportunity to overtake. As a latecomer in the short video field, the biggest advantage of Video Account undoubtedly lies in being born within the vast traffic pool of WeChat. According to TENCENT's financial report data, as of the end of the second quarter of this year, the combined monthly active users of WeChat and Weixin has exceeded 1.3 billion.

According to previous disclosures from WeChat Open Class, in 2022, the original content playback volume of Video Account increased by 350% compared to the previous year; the scale of video views on Video Account grew by 300%, and the viewing time increased by 156%. At the same time, in 2022, the scale of live-streaming sales on Video Account maintained rapid growth, with sales increasing more than 8 times year-on-year. In the second quarter of this year, TENCENT announced that the total user usage time of Video Account has nearly doubled compared to the same period last year.

With the support of WeChat, a major source of traffic, the capital market has high expectations for the revenue generation of Video Account and the future of TENCENT.

Of course, even though TENCENT's Video Account has surpassed Douyin and become the number one platform in terms of active users in 2022, and its commercialization has accelerated significantly, it still has a long way to go to truly surpass or compete with top platforms like Douyin and Kuaishou in the minds of the general public. From the perspective of e-commerce, it is still in its early stages.

Gao Dongxu, Chief Analyst of the China Entertainment Industry Think Tank, expressed to Wall Street News that TENCENT may be able to establish a presence in the short video and e-commerce market with Video Account, but it is difficult to join the ranks of top players. Currently, it seems that besides social media and social-based entertainment products (such as games, literature, long videos, and animations), TENCENT is not particularly skilled in other areas.

As the "hope of the entire village" for TENCENT, whether Video Account can take root and grow in the market is still unknown.

Perhaps only breakthrough innovations and unexpected growth can truly make TENCENT dominate the short video industry, break the spell of "not being able to do e-commerce," and challenge the deep-rooted perception that TENCENT "only understands games and social media."

Ma Huateng still has a long way to go.