Source: Internet

Tencent finds its own rhythm

We previously wrote that Tencent's performance was becoming increasingly stable as early as the first quarter. In the second quarter, revenue increased by 8% year-on-year to RMB 161.1 billion. It's worth noting that Tencent already grew by 6% year-on-year in the first quarter, indicating a steady growth trend. Meanwhile, (Non-IFRS) net profit reached RMB 57.3 billion, up 53% year-on-year, maintaining a 50% growth rate for two consecutive quarters, which is quite remarkable given the current economic environment.

However, some argue that such results are primarily attributed to "cost reduction and efficiency enhancement" measures, and the sustainability of the inflated net profit figures is questionable. I believe that we should not lump "cost reduction and efficiency enhancement" into one basket. While it has become a standard practice, its effectiveness varies among different companies, and low-quality efforts are generally not sustainable. Tencent has shown a pronounced V-shaped recovery since the fourth quarter of 2022, with gross profit growing by over 20% year-on-year for four consecutive quarters. In the first quarter of 2024, net profit grew by 54%, the highest rate in the past decade.

Source: Internet

"Cost reduction and efficiency enhancement" is more of a static concept that fails to capture the dynamic trends of a company or assess the quality of its growth. Such a simplistic approach is unhelpful in understanding the real changes taking place within an enterprise, and it would be unfair to evaluate a company solely based on this criterion.

Overall, the second quarter continued the trend from the previous quarter. Breaking down the business segments, value-added services, online advertising, financial technology, and enterprise services generated revenues of RMB 78.82 billion, RMB 29.87 billion, and RMB 50.44 billion, respectively, with year-on-year changes of 6%, 19%, and 4%. Online advertising remains the primary driver of revenue growth, both in absolute terms and growth rates.

However, simply stating that Tencent is accelerating monetization of platform advertising would overlook some notable changes. A closer examination of the financial report reveals that this growth is primarily fueled by the dual engines of long-form video content and short-form videos on WeChat Video Accounts.

Tencent Video's paid subscriber base reached 117 million, up 13% year-on-year. This growth signifies user recognition, while the increase in advertising revenue reflects advertiser confidence. According to Jireng data, Tencent Video accounted for 50% of the top ten self-recruited dramas on the platform in the first quarter of 2024. This underscores Tencent's successful interaction between its brand and IP, fostering a virtuous cycle of growth. Such a trend, once established, is unlikely to reverse in the short term and can be regarded as a hallmark of Tencent's high growth.

In this financial report, Tencent mentioned that the total user engagement time on WeChat Video Accounts increased significantly year-on-year. The growth of WeChat Video Accounts has driven the expansion of advertising revenue and gross profit. Additionally, enterprise service revenue achieved double-digit growth, benefiting from the income generated from e-commerce technology service fees on WeChat Video Accounts and steady growth in cloud services.

Source: Internet

Although Tencent's financial report did not disclose specific data on WeChat Video Accounts, their robust growth is evident from 2023 data. In terms of user engagement, since its internal testing in early 2020, WeChat Video Accounts have rapidly gained traction, with daily and monthly active users closely trailing Douyin and surpassing Kuaishou. According to Guohai Securities' research report, WeChat Video Accounts had 900 million monthly active users (MAU) and 450 million daily active users (DAU) in 2023, with an average daily usage time of 54 minutes per user. In comparison, Douyin had 1.1 billion MAU and 760 million DAU. Meanwhile, Kuaishou's financial report showed 700 million MAU and 374 million DAU at the end of 2023.

The financial report highlights the rapid development of WeChat Video Accounts in recent years. Data indicates that the gross merchandise value (GMV) of WeChat Video Accounts in 2023 grew nearly 13-fold compared to 2022, reaching between RMB 130 billion and RMB 150 billion. The number of orders increased by over 244%, and the number of product offerings grew by approximately 300%. While these figures still lag behind Douyin, they demonstrate a stable user base upon which Tencent can build its e-commerce ecosystem. As a popular saying goes, "If you missed out on official accounts a few years ago, don't miss out on WeChat Video Accounts now."

I believe that Tencent is currently engaged in a "defensive growth battle." The era of aggressive market expansion through flooding the market with resources is over. In such phases, companies tend to expand significantly, often resorting to heavy subsidies. However, trends come and go, and for large companies, it's crucial to focus on their core strengths and explore future business possibilities rather than chasing every trend.

Companies need growth, but not just any kind of growth. The current weak economic fundamentals and consumer downturn do not support large-scale investments and business expansion. Defensive growth, therefore, becomes a suitable choice. It is characterized by: (1) Pursuing steady growth, with business certainty taking precedence over exploration; (2) Maintaining stable cash flow and preferably good profit performance; (3) Keeping leverage low and avoiding growth through unsustainable spending.

In summary, Tencent's current actions align with the principles of defensive growth, prioritizing healthy operations while still investing in future growth opportunities. Whether Tencent will adjust its strategy in the coming year or two remains uncertain. As a large company closely tied to macroeconomic conditions, Tencent will likely prioritize preserving resources until signs of economic improvement emerge.

Alibaba rejects "ineffective internal competition"

01. Change course when stuck in ineffective competition

Alibaba's approach to "defensive growth" is particularly evident, as it has resolutely shifted gears despite the pain associated with such changes. A prime example is Alibaba's recent decision to de-emphasize its "Five-Star Price Power" model, shifting its focus for Taobao to GMV (Gross Merchandise Volume) and AAC (Average Annual Consumption) instead of pursuing high DAC (Daily Active Consumer) through low prices.

There has been a widespread call for Alibaba to learn from Pinduoduo, a sentiment echoed by many within the company as well. Indeed, from daily low prices, limited-time flash sales, and a dedicated low-price version of Taobao, to the introduction of hundred-million subsidies and group buying, consumers have grown accustomed to seeing Taobao increasingly resemble Pinduoduo.

During the 618 sale two months ago, Alibaba made its "low-price strategy" a core group strategy, pushing the e-commerce price war to new heights. According to Goldman Sachs, Taobao and Tmall achieved GMV growth of 10-15% during the 618 period, capturing a market share of 42%, reversing past sluggish growth trends.

An Alibaba employee remarked that it had been years since Taobao and Tmall had seen double-digit growth during the 618 and Singles' Day sales. Multiple Alibaba employees and industry insiders attributed this growth to the distribution of more substantial coupons and category-specific vouchers compared to previous years, heavy investments in beauty, sports, and outdoor products where Douyin excels, and increased spending on hundred-million subsidies.

The results are evident in the second-quarter financial report: Tmall Group's revenue declined by 1% year-on-year to RMB 113.373 billion; Digital Media and Entertainment Group's revenue increased by 4% to RMB 5.581 billion; Cloud Intelligence Group's revenue grew by 6% to RMB 26.549 billion; Local Consumer Services Group's revenue rose by 12% to RMB 16.229 billion; Cainiao Network's revenue increased by 16% to RMB 26.811 billion; and Alibaba Group's International Digital Commerce revenue grew by 32% to RMB 29.293 billion. Except for Tmall Group, all segments reported growth, with the decline in direct retail revenue dragging down overall performance. While customer management revenue grew by 1%, low-margin products weighed on commission rates, resulting in revenue growth lagging behind transaction volume growth.

Learning from Pinduoduo inevitably means facing direct competition. Given Pinduoduo's mastery of the C2M model, engaging in a price war with them is unwise. An insider from Douyin E-commerce noted that despite achieving multiple price-related goals in the first quarter, they still couldn't match Pinduoduo's low prices, with many products priced 10-20% higher.

Even "the king of low prices," Pinduoduo, is struggling. Following Taobao and Douyin E-commerce, Pinduoduo adjusted its business focus in the second quarter of this year, shifting from prioritizing commercialization and "absolute low prices" to making GMV growth its top priority once again.

Some media outlets have suggested that companies are transitioning from a traditional competitive era to a branding era. Those who can create value for users, understand their needs, and genuinely respect them will build barriers in users' minds—i.e., brands.

I believe this assessment is overly optimistic and does not reflect reality. During economic downturns, while some recession-proof brands may emerge, they are typically exceptional, either targeting early-to-mid-stage markets, offering high-margin, creativity-driven products, or operating in markets with tight supply and demand. Expecting companies to learn branding during such times is unrealistic.

The fundamental reason why Taobao no longer wants to engage in price wars is that it realizes it cannot compete with Pinduoduo and JD.com on standardized product prices. Instead, it has shifted its strategy to focus on categories where it excels, such as fashion, personal accessories, home decor, and beauty products. Pursuing excessively low prices without a reasonable pricing ecosystem exposes weaknesses and subsidizes competitors. Price wars only benefit leading factories and traffic platforms. Alibaba's strength lies in operating non-standardized products, where price is less of a deciding factor, making price wars unnecessary.

In 2023, a new round of price wars erupted, with major platforms unveiling low prices as their "strategic weapon." However, low prices do not necessarily mean genuine value. The variety of products participating in low-price promotions makes it difficult for consumers to compare prices across platforms. Additionally, the myriad subsidy tactics, including "subsidies without price protection," make it harder than ever for consumers to find genuinely cost-effective products. In this context, consumers' demand for certainty and straightforward low prices is stronger than ever.

To differentiate itself, Taobao must take a unique approach beyond merely avoiding low prices. Taobao Group has replaced its long-standing seller service evaluation system (DSR) with the Product Experience Index (PXI). While DSR evaluates stores and is a standard for consumers to judge their reliability, PXI focuses more on the product experience, encompassing aspects like product quality, logistics, and service. These scores impact merchants' privileges, such as eligibility for events like Singles' Day, 618, and hundred-million subsidies, as well as product visibility.

02. Alibaba Cloud: A model for technology-driven cost reduction

Interestingly, amidst the chaos of the price war, Alibaba Cloud delivered a different kind of report.

In the second quarter, Alibaba Cloud's revenue from cloud intelligence services grew by over 6% year-on-year to RMB 26.549 billion, with adjusted EBITA profit reaching RMB 2.337 billion. Public cloud revenue achieved double-digit growth, and AI-related product revenue tripled.

Some attribute this growth to Alibaba Cloud's aggressive pricing strategy. On February 29, Alibaba Cloud's official website initiated significant price cuts across over 100 products and 500 specifications, with an average reduction of 20%, attracting more small and medium-sized customers. Additionally, substantial price cuts on nine flagship large models boosted Alibaba Cloud's AI product usage. The financial report disclosed that paid users of Alibaba Cloud's AI platform "Bai Lian" grew by over 200% quarter-over-quarter.

However, Alibaba Cloud did not sacrifice profitability for revenue growth, underscoring its technological cost reduction capabilities.

Alibaba Cloud attributes this growth to its focus on the public cloud strategy and improved operational efficiency. Furthermore, strong AI demand supported the growth of public cloud services.

Alibaba Cloud is not being conservative; rather, its AI infrastructure products like PAI are also growing rapidly. According to Gartner's 2024 Magic Quadrant for Data Science and Machine Learning Platforms, Alibaba Cloud has risen to the Challengers quadrant and is the only Asia-Pacific vendor included in the report.

Alibaba's defensive growth strategy aligns with Tencent's in rejecting ineffective internal competition and leveraging its strengths to consolidate market position.

Closing Remarks

While low prices remain a "critical weapon" in most industries, facing high uncertainty and a downward economic trend, survival takes precedence over market expansion. Alibaba and Tencent understand this well, choosing a defensive growth path that prioritizes stability over speed.

References:

Alibaba's Earnings Struggles: Who's to Blame? Source: International Finance News

Retail: Beyond Low Prices Alone Source: Third Eye View on Retail

After Failing to Copy Pinduoduo, What's Next for Alibaba? Source: Uncrowned Finance

How Alibaba Cloud Achieves Profitability Amidst Price Cuts Source: Leifeng Network

WeChat Video Accounts Move Forward, WeChat Ecosystem Advances Source: Yidu Pro