The full Tencents

Ma Huateng: shaking things up

While most internet firms in China dominate a specific area – Baidu in search and Alibaba in e-commerce – Tencent is something of an exception. Not only does the company own China’s leading chat service QQ, which boasts over 751.9 million subscribers, it is also the country’s largest online game operator.

And Tencent is now aiming to be something even bigger. The company said last week it will restructure its business operations into six groups, comprising corporate development, interactive entertainment, mobile internet, online media, social networking, and technology and engineering. It will also set up a wholly-owned subsidiary for its e-commerce business.

Tencent’s chief executive Ma Huateng says the move will help the company “incubate new businesses,” adding that the company “will pool certain of our technology and engineering teams to further develop core technologies and operational platforms so as to better support future business growth.”

“The giant is transforming,” believes 21CN Business Herald. The last time Tencent reorganised its business was seven years ago, the newspaper reports. But since then the industry has undergone such drastic change that a new business model makes sense. Given the scope of Tencent’s business, restructuring could help it be more responsive to market change and more nimble in execution.

Mark Natkin, managing director of Marbridge Consulting, concurs. “It’s easy for a company as it grows for certain departments or certain functions to become very powerful and in the process make it difficult for newer, smaller units to really achieve much growth,” he told the Wall Street Journal.

Indeed, Tencent has come a long way since starting out as a clone of ICQ, a chat service. The Shenzhen-based internet firm is now China’s largest internet company by market capitalisation at $52 billion, surpassing Baidu’s $43 billion. Revenue in the first quarter of the year surged 52.2% to $1.5 billion from a year ago.

Tencent has plenty of challenges ahead, too. The company has been forced to spend heavily on its microblog offering in order to maintain its status as China’s largest provider of social networking services, in the face of competition from Sina, China’s largest news portal (see WiC138). As a result, despite the big increase in top line revenue, Tencent made a profit of only $470.6 million, up just 2.8% from a year earlier.

Also a concern is Tencent’s other big revenue stream – online gaming – which is showing signs of slowing. The company makes the bulk of its earnings from online games offered via its social networking platforms. And although online gaming has supported healthy profits and revenue performance in recent years, growth in China’s gaming industry is tipped to slow, with the user base already so huge.

Others say the restructuring move could see Tencent spin-off some of its businesses in the months ahead. One rumour is that Tencent may be looking to list its e-commerce platform first. The report from CBN is unclear about the timing of a potential IPO. But if it did happen, the likelihood is that Tencent would deploy the funds to establish a broader e-commerce platform, presumably similar to Alibaba Group’s hugely successful TMall and Taobao.

Tencent’s revenues from e-commerce during the first quarter of this year were Rmb752 million, accounting for 7.8% of its total sales, and constituting its third biggest revenue source.

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