Tencent has decided to stop spending all it takes to grow its cloud revenue.
“For both IaaS and PaaS, we are repositioning our objective of revenue growth at all costs towards creating customer value and quality of growth, which should benefit our customers and our margins in the longer term,” said the Chairman Martin Lau to investors during the company’s fourth quarter and fiscal year 2021. call for results yesterday.
Chief Strategy Officer James Mitchell said Tencent and other cloud companies have tried to grow and adapt to as many customers as possible.
“In some cases, you’ll have to undertake very large discounts in terms of price, or … develop very personalized solutions for customers,” he said. Some transactions involved the resale of hardware and offered either very low margins “or sometimes a negative margin”.
High marketing costs and the need to recruit – and pay for – a channel have also contributed to high costs in the cloud industry – and losses.
Tencent wants to get off this treadmill.
IaaS is a lousy business, says Chinese web giant Tencent: PaaS and SaaS are how we’ll make money in the cloud
“I think over time what we thought would happen is that we would be – once we get to the right scale and also the customer relationship – then we can really start to focus on healthy growth, which includes sourcing products, which are self-developed, and which are more standard products, and which we can reuse again and again for many different customers,” Mitchell said. “And so it is. that we can actually cover development costs out of a much larger pool of revenue and potential customers. And at the same time, we’re going to be selling our customers to PaaS and those PaaS would actually have a much higher margin. than IaaS and will be much more disciplined in terms of IaaS pricing and also in terms of not reselling hardware at a loss.”
Tencent defines PaaS a little differently than the originators of the term — groups like Cloud Foundry who used the acronym to describe platform-as-a-service and suggest an easily deployable cloud environment. Tencent uses this term to describe its cloud security, video-on-demand, security, and database offerings.
The company plans to improve these services, as well as expand the collaboration business it has built around Voov video conferencing products and cloud storage offerings.
While the earnings call looked at this cloud strategy, Tencent does not break down cloud revenue and counts it among “other business services” – a category that has grown 25% over the year. to generate $7.5 billion of the $22.6 billion in revenue Tencent made in the fourth quarter. , and $27 billion of the $87.9 billion in revenue for all of fiscal 2021 (representing 34% growth by category and 16% overall revenue growth). But that “other” category now exceeds the revenue generated by Tencent’s gaming division. Overall growth, however, has been slower than at any time in Tencent’s history. Executives said the company is preparing to live with lower growth as a fact of life as the markets it operates in mature.
New regulations imposed by the Chinese government have helped curb Tencent’s gaming, education and advertising businesses in particular, but management has welcomed the changes.
“For several years, industry players have overemphasized zero-sum competition, reckless aggressive marketing expansion, short-term growth and business benefits, overlooking the most important elements of successful growth. sustainable,” Lau said. “As a result, industry growth has become frothy and unhealthy,” he added, adding that the new regulations “correct this behavior of industry players across multiple sectors and promote fair competition, protection of users and data security”.
Tencent’s earnings presentation included the usual surprisingly high numbers, led by the average number of monthly users of 1.268 billion for its messaging services Weixin and WeChat.
One of Tencent’s top games, League of Legends, drew 74 million concurrent viewers to its live World Championship event, and an anime series featuring the game topped Netflix’s English-language viewing charts in the week of its release.
This makes Tencent one of the few Chinese companies with a large cultural footprint outside of the Middle Kingdom – an irony, given that in China miners are limited to three hours of play per week and computer games are frowned upon by the government. ®