China’s Tencent slows as new Internet models bloom

November 9, 2011

By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Bigger is generally deemed better in China’s billion-strong consumer market. Tencent, the nation’s second-biggest Web firm by market value, has been jumping into every new hot Internet sector. But the strategy is backfiring. The firm’s year-on-year profit growth slowed to a four-year low of 14 percent during the third quarter. Tencent needs to think beyond scale for the sake of it.

Users have been lured by the new online services such as video and Weibo, China’s Twitter-like service. The law of large numbers is now kicking in. Tencent’s user base of its instant messaging system QQ, which already counts more than 700 million users, rose by just 1.4 percent quarter-on-quarter.

Meanwhile, higher start-up costs in new areas have hurt margins. Overall expenses increased more by 59 percent year-on-year, while quarterly revenue rose by 44 percent. New models like Weibo are good at attracting traffic but not effective in directing them to e-commerce. In spite of hefty marketing spend, Tencent remains a distant second in micro-blogging, and its not clear that micro-blogging is much of a money spinner anyway. Pushing into video involves high licensing costs.

The acquisition strategy also appears to lack focus. Tencent has bought stakes in eight Internet companies during the third quarter alone for $422 million. The deals span online security, social networking and baby care. Most investments have been minority stakes that can be better replaced by partnerships or product sale agreements without capital commitment.

Tencent might be better off narrowing its gaze on its core business. It is China’s largest Internet gaming provider, yet has under-invested in fast-growing Web games. For example, it could license or acquire popular titles. Doing less, but more profitably, may yet help it regain the status of China’s biggest Internet stock.

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