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Welcome to the new normal for big Chinese tech

sTerrorism is not a company It captures the ups and downs of big Chinese tech better than the biggest tech company of all–Tencent. Two years ago, the internet empire seemed unstoppable. More than a billion Chinese were using its services everywhere to pay, play and do much more. Its video games, such as ‘League of Legends’, have achieved worldwide success. Tencent’s market capitalization exceeded $900 billion, and the company was well on its way to becoming China’s first trillion-dollar company.

Then the Communist Party said, enough. Xi Jinping, China’s supreme leader, has decided that the side effects of big tech, from distracted teens to diverting capital from strategically important sectors like semiconductors, are unacceptable. Tencent, along with the rest of China’s once-booming digital industry, has been stuck in an all-out crackdown that lasted 18 months.

With regulators declaring video games “spiritual opium”, and banning those under 18 from enjoying them for more than three hours a week, Tencent’s new titles have been suspended by censors. Trustbusters has forced it to tear down the walls of its super app to let other payment processors in. Last year, it sold its shares and Meituan for a combined $36 billion, in part to shore up its balance sheet but perhaps also to assuage regulators’ concerns about its ubiquity. To make matters worse, President Xi’s strict anti-virus policy has hit Chinese consumers with a nasty bout of thrift. In the third quarter of 2022, Tencent’s revenue fell 2% year-on-year, its worst performance ever. By October, its market capitalization had collapsed to less than $250 billion.

These days, things are looking up for Internet companies in China. Shoppers are “revenge spending” their way out of the zero-sum gloom. The government’s crackdown on technology appears to be over: regulators are making old businesses easier for companies and giving them more room to play with potential new ones, from short-form video entertainment and cloud computing to artificial intelligence (AI).Amnesty InternationalChatbots. And Tencent, whose market capitalization has doubled to nearly $500 billion in the past three months (see chart), is once again the embodiment of the changing mood. If you want to understand the new normal of big tech, and what that means for the future of China’s digital economy, look no further than its humble hero.

Tencent has no equivalent in the West, or anywhere else outside of China. It’s part Meta, part PayPal, part Epic Games (in which, as it happens, Tencent has a big stake), with a little toss in Amazon and SoftBank (Tencent offers e-commerce and cloud services, like the American giant, and like Japan, it’s made hundreds of tech investments across the board). the world). Despite a disappointing third quarter, in March it is expected to report annual sales of more than $80 billion last year. Roughly a third of each comes from games, business services (which include payments, e-commerce, and cloud computing), social media, and advertising. Its pre-tax earnings are expected to easily exceed $30 billion. If you exclude banks and energy companies, which had a bumper 2022, only a handful of companies in the world did better.

The focus of Tencent’s fortunes is the WeChat super app. Companies around the world have tried for years to emulate their clever marriage of pay (the transaction economy) and play (the attention economy). Few have managed to do this as seamlessly as Tencent – and none on the same scale. Last month’s Lunar New Year celebrations are a case in point. During the week-long festivities, WeChat users sent their loved ones 4 billion digital numbers hongbao (red envelopes full of cash in the real world), and more people joined the annual New Year celebration on WeChat’s new channel video platform (190m) than Douyin, the popular Chinese video app TikTok (130m).

The explosion of the new year indicates the direction in which the company is heading. The rapid rise of Douyin, like that of TikTok in the West, has pushed digital life toward sharing short videos. Last year, the average Chinese spent more hours on such platforms than anywhere else on the Internet. Those platforms overtook instant messaging in 2020. Short video apps have become the center of attention in China — and the digital advertising business, which generated $35 billion in sales in the third quarter of 2022, according to Bernstein, the broker. And between July and September, short-form video platforms accounted for a quarter of those advertising dollars; Their ad sales grew 34% over the year before.

Tencent has an opportunity to pick up a piece of this growth. The company says its channel user ranks tripled last year. Although she refused to give a total number, the tally of the New Year’s festive influx indicates that they now number in the hundreds of millions. The company could bring in another 30 billion yuan ($4.4 billion) in advertising revenue within a few years, estimates Bernstein’s Robin Zhu, mainly at the expense of Kuaishou (which is partly owned by Tencent but may consider offloading) and Bilibili, another service. similar.

Although it sometimes enlists big names to attract new viewers like Douyin – for example the Backstreet Boys, a US pop group that welcomed 44 million fans at a Channels gala last June – Tencent has taken a more ecumenical approach to talent. Content creators with as few as ten followers can get a slice of the platform’s advertising revenue. In Douyin, they need 10,000 fans to start making money this way. Tencent hopes its strategy will attract more up-and-coming content creators and viewers — and more advertisers.

The company is rerouting other parts of the WeChat economy around channels, too. Notably, it is preparing the platform to enable “social commerce”. This exotic Chinese consumer format, which combines live entertainment and shopping, is expected to generate about $720 billion in transactions this year. Here too, short video apps are taking market share from established companies, such as and China’s largest online store, Alibaba.

Tencent used to shy away from this business, perhaps worried that its entry would destroy the value of its lucrative stake in With that stake no longer on its balance sheet, Tencent seemed more willing to try its luck in e-commerce. It will not disclose how much money is transferred on its e-commerce platform. But, she says, the number swelled ninefold, year-over-year, in 2022. WeChat Pay takes the usual 0.6% cut from every transaction. And despite the government’s decree on allowing competing payments systems, most transactions on WeChat involve WeChat Pay: both Tencent and Alibaba, which operate the other popular service, have made cross-platform payments possible but cumbersome.

The shift to channels is particularly crucial for Tencent. The government’s anti-gambling stance made it urgent to look elsewhere for growth. Pony Ma, founder of Tencent, recently described channels as “the company’s hope.” Its recent success suggests that this hope may not be so forlorn, and Tencent’s share of revenue from its non-gaming business has skyrocketed. But in order to thrive in the new normal, in which the government has placed restrictions on some digital activities, and stands ready for further regulation, Tencent will have to grapple with three challenges — as is already the case with other digital giants in China.

The first is about ensuring a company culture nimble enough to adapt to the new reality. As tech founders go, Mr. Ma is easygoing and laid-back. This empowered subordinates, such as WeChat creator Allen Zhang, and directly led to many successful Tencent businesses. But it also introduces friction when these subordinates have different ideas. For example, Mr. Zhang has long resisted the app’s fleeting commercialization, fearing it would spoil the user experience. As a result, the WeChat home screen has remained unchanged for a decade, and accessing videos on Channels requires two taps — not a chore, exactly, but a drag compared to Douyin, which starts streaming clips as soon as a user opens the app. That same resistance to change explains why e-commerce operations are also gradually launching, Clifford Kurtz points out s&s International research company.

Any slowing down could be an issue, considering tech companies will find themselves competing with each other more — the second challenge. The authorities’ crackdown on technology has demolished the playing field in swathes of the digital economy. This strong leveling creates new rivalries. Meituan is pushing from its original food delivery group to taxi and e-thrift shops, which until now has been the preserve of rivals like Pinduoduo. Douyin’s owner, ByteDance, will soon launch its own food delivery service and is experimenting with a messaging app that looks strikingly similar to WeChat. Alibaba, Tencent, and Baidu, China’s largest search engine, are developing Amnesty International Chatbots similar to chatgptwhose humanoid conversational power has excited Western netizens recently.

The last thing that can screw Tencent, or its competitors, is politics. Although organizers have declared the crackdown on the technology over, the party’s presence remains spectral. The country is taking small stakes in subsidiaries of the biggest tech giants, including Alibaba and, reportedly, Tencent. As tensions between China and the West escalate, rapprochement with the country could jeopardize foreign profits, such as Tencent’s lucrative international gaming business.

Meanwhile, cyberspace, the media and antitrust agencies have gained new powers at home — and are ready to exercise them, says Angela Zhang of the University of Hong Kong. Censorship, always a part of the Chinese online experience, is on the rise as President Xi’s strong rule takes hold, which could mean more delays in launching Tencent games. And the risk of the party paralyzing the company’s growth is always present. On February 9, Chinese stock prices Amnesty International The companies fell flat after state media warned that “some new concepts” (such as chatbots) were getting a lot of attention.

So far, short videos have escaped the party’s grip. Crucially for Tencent, they face fewer restrictions than games. But that might change if Mr. Xi concludes that sticking to Duyin or the channels instead, which is how the former players spend two-thirds of their time, is not conducive to forming good communists.

In his public remarks, Mr. Ma repeatedly stressed that Tencent’s app world “serves society” and “helps the real economy.” Such words should serve as catnip for Mr. Xi and his cadres. Investors, too, are purring again. But increasing competition and a fickle government are likely to constrain Tencent’s prospects for years to come. In today’s China, there is no room for winners in consumer technology—only survivors.


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