Why Tencent will focus more on mobile payments and cloud

Chinese social media and gaming giant Tencent has suffered in the past year as Beijing froze approvals for new online games amid a crackdown on “inappropriate” content. Facing regulatory hurdles in a major business segment, the company has been seeking new options to sustain its growth. Amid this effort, mobile payments and cloud services are seen as having the potential to emerge as key revenue growth engine, albeit at thinner profit margin.

Now, as Tencent’s largest investor, South Africa-based Naspers, is planning to spin off its portfolio of internet-related investments for a separate listing to unlock the value of its global holdings, Tencent is also coming under renewed spotlight in relation to its strategy to retool its business and adjust its priorities.

Going by the Chinese firm’s statements and media reports, there is at least one thing that is becoming increasingly clear: the company is aiming to transform itself into a key business-to-business internet player, hoping it will help offset a slowdown in its core consumer internet business such as instant messenger service QQ, and the crimped gaming operation.

Tencent is reducing its reliance on game business in the wake of regulatory uncertainties. The game business in China is no longer a simple entertainment business, but one that needs to factor in the interests of the government and the Chinese Communist Party. Taking note of the concerns of authorities, Tencent has developed the so-called Healthy Gameplay System to assist parents in managing the amount of time their children spend playing games.

The company also introduced measures to strengthen real-name verification, and put in place tools to alert parents in relation to the kids’ online gaming activities.

Tencent Game Guardian Platform enables parents and teachers to engage with their children and track their in-game activities online. In its statement accompanying its 2018 financial results, Tencent announced last week that the initiatives will build a pilot case for the China game industry and will help position the firm for sustainable and healthy growth in the long run.

But with such implementation, the online game business faces the risk of becoming a community service for users rather than being operated as a pure business run on commercial lines. With the government controlling the game title approval mechanism, Tencent doesn’t have much wiggle room anyway.

In the fourth quarter of 2018, Tencent’s revenue from online games was slightly below that of revenue from “other” businesses such as mobile payments and cloud computing services. That suggests the company has made a good beginning in transformation itself and reducing the dependence on the gaming operation.

While the online game business could yet surpass “other” businesses in near future if the company is able to monetize new game titles, the long-term trend, however, points to one direction: the growing importance of mobile payments and cloud segments.

As mobile payments will continue to add more users and generate more transactions, and enterprises seek more cloud services, the two sectors will certainly emerge as key revenue drivers.

Tencent noted that its WeChat Pay Payment has emerged as a key infrastructure platform that enables its merchant partners to complete transactions in online and offline services and connect users and merchants together.

WeChat Pay has extended its gains in China in the mobile payment space, both in terms of active users and number of transactions. Total daily payment transaction volume exceeded one billion for 2018, driven by rapid growth in commercial payments, which represented more than half of the number of transactions, according to the company.

Commercial payment revenue more than doubled from a year ago in 2018. Monthly active merchants were up over 80 percent in the fourth quarter compared to a year ago, Tencent claimed.

As more and more Chinese consumers shift to mobile payments, WeChat Pay will continue fuel Tencent’s growth in the future. Meanwhile, the company is expanding its payment network overseas, including in Hong Kong and Malaysia. Through aggressive marketing campaign, the transaction volume of WeChat Pay Hong Kong has seen a significant surge in recent months.

With the huge coverage of its mobile payment business, Tencent is in a good position to support merchants and help them transform their business operation digitally. This roadmap represents a key element of Tencent’s transformation.

While Tencent prompts merchants into using WeChat Pay wallets to accept payments, the company can at the same time try to sell cloud and other services, including business analytics, artificial intelligence, cloud storage and other vertical applications, to the merchants.

The market potential is certainly huge and the competition will also be fierce. Success, to a large extent, will depend on how Tencent will forge close partnerships with the merchants to tap all the opportunities.

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