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Tencent Wins Mobile, Loses on Ecommerce

Tencent wins on earnings loses on ecommerce

Tencent beat expectations this quarter, but beatings are open to interpretation. Just ask a Pacquiao fan.

China bulls can spin the news thusly: rumors of China’s imminent economic death are greatly exaggerated.

Pandas can spin it as a sign that the Chinese are more fixated on their phones than on shoring up their sagging GDP growth.

More telling, however, is what was not reported, namely Tencent’s exact revenues from ecommerce. We say “ecommerce” rather than “mcommerce”, because that’s what Tencent calls it in their report.

Most telling for ecommerce buffs, is Tencent’s folding it in as part of ‘other’ revenue, as shown below:

Tencent's revenues for Q1 2015

Translated to dollars and sense: out of a total $3.6b in revenue, VAS (Value Added Services) accounted for $3b, or 83% of revenue, while “Others” accounted for $169m, or 4.6%. Note the ‘1’, referring to this piece of fine print:

The fine print on Tencent's "other" earnings

For those without bifocals at hand, we’ll type it out (emphasis ours):

“In light of the reduction in size of our eCommerce transactions business, we include the eCommerce transactions in the “Others” business segment in our financial statements from the first quarter of 2015 onwards. Comparative figures have been reclassified to conform to the new presentation.”

Wow – it’s already been more than a year since the pundits were heralding Tencent & JD’s death punch to Alibaba via WeChat. Only you, gentle reader, are reminded of what we said when the news broke, and wrote about soon after:

WeChat is for socializing, content consumption, and O2O promotion, not for online shopping and interacting with brands.

Point proven by Tencent, hopefully, so that we can collectively move on in understanding Chinese consumers, how they use their phones, and the emerging mobile ecosystem.

1. The Phone is the Focal Point

Whatever you think is a long time to spend waiting for things – the bus, the elevator, your table at a restaurant – triple it for the China average.

Wherever you think phones are inappropriate – intimate dinners, serious meetings, taxpayer-funded trysts – calls, messages, and pictures always take priority.

So while more than 80% of Chinese are using mobile devices as their primary way of accessing the Internet – realize that searching for and buying things takes a back seat to watching videos, playing games, and otherwise eschewing the drabness of offline reality for personalized online experiences.

 2. mCommerce is eCommerce for Offline Services

Any viable restaurant, beauty salon, gym, movie theater, or language school in China has a QR code on its signage, and can be found both on WeChat and relevant O2O apps, such as the 250m-user-strong Dianping, which lists nearby restaurants and promotions.

“So we should invest in physical locations, then reel them in online!” Not so fast. China’s metastasizing O2O scene is a Darwinian struggle to see who can survive on margins thinned by mobility. Online promotions, freebies, deep-discounts, and cool content are essential bait to gain and keep Chinese mobile users who will otherwise find someone else dangling it.

In better news, for micro-entrepreneurs if not multinational brands, WeChat is enabling ultra-easy payment through Tenpay for services such as delivery of vegetables from the corner store, or that ‘extra’ LV bag a friend’s friend picked up in Hong Kong.

3. The Phony Economy

 Tencent’s online gaming revenue increased by 28% last quarter to reach $2.15b. Not from proprietary games, and not from selling them. Rather, they license western hits such as League of Legends, and cast a wide but thinly-skeined net that reaps millions daily in micro-payments, from 350m Chinese gamers who just have to have that new warrior on their League of Legends team.

And when the game’s over, the videos watched, and the messages read, there’s fiddling about with the phone itself, to forestall offline interaction. Which app launcher do you use – which speed booster app? Don’t know or care? Then odds are you’ve got no stake in the $116 million funding China’s APUS group, which has 150m users since starting-up last June.

 As forgotten prophet Marshall McLuhan put it, “The medium is the message.” Western companies with China focus must get the message that the mobile medium doesn’t just add a channel for selling goods, but rather changes the whole program.

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