Internet & Tech

Novel takeover

Tencent takes back control as it ousts China Literature team

Wu Wenhui-w

Wu Wenhui: gone guy

Big is often beautiful in the corporate world and all the more so in moments of crisis. That’s feeding into expectations for Tencent’s latest earnings, which are due next week.

The forecast is that the social media giant has fared better than most during the first three months of the year because of its online focus, something that we outlined in WiC488. The breadth of Tencent’s offering has also helped to make its business model more resilient, with a mix of cyclical and counter-cyclical traits, says Binnie Wong, head of internet research for HSBC in Asia-Pacific, in a research report this week.

The coronavirus has been having a conflicting impact, even within the same business unit. For instance, the pandemic boosted billings in Tencent’s gaming division from the titles played on smartphones as people spent long periods indoors, for instance. But the downside to the lockdown was that cyber cafes were closed so there were fewer games played on PCs, a higher margin segment.

Tencent’s advertising sales also saw trade-offs, with companies pulling ads for luxury goods, real estate, cars and tourism because people haven’t been in shopping mood (see this week’s “Economy”). Fortunately, spending on ‘social ads’ for e-commerce and online education has been much more resilient.

Stronger performance in parts of the empire is smoothing out the impact of slower progress in others, such as fintech, where payments fell from fewer people going to shops and restaurants.

Longer term, Tencent is planning for payments to be a larger contributor, however, as indicated by an announcement last Friday that it was now a substantial shareholder in Afterpay, ‘a buy-now pay-later’ platform. Tencent invested $300 million in building a 5% stake in the Australian payment provider from the end of March.

Afterpay gives its users eight weeks to pay off their purchases (in effect, offering microloans on a no-interest basis, providing that shoppers pay on time). Customer numbers have been growing strongest among Millennials in markets including the United States but Tencent sees the potential across smart retail and digital payments in general, where it wants to make more of a splash against archrival Alibaba.

For Afterpay, Tencent’s involvement promises an introduction to Asian markets with huge populations of younger shoppers less likely to have credit cards. There’s also the chance to ride on the Shenzhen firm’s vast network of products and services.

Another story from a different territory in Tencent’s empire shows how the parent company is always striving to cross-pollinate its product offering. But there’s also a warning for the companies that come into the ‘kingdom’ that they have to do the emperor’s bidding.

The case relates to China Literature, the largest of the nation’s online reading platforms, where Tencent has just shown the door to the company’s founders.

Out goes the management team led by Wu Wenhui and Liang Xiaodong, who have been replaced by Tencent insiders led by Cheng Wu, the CEO of Tencent Pictures.

China Literature’s shares were much in demand when they made a spectacular debut on the Hong Kong bourse in December 2018 (see WiC387). Tencent stayed on as controlling shareholder but the previous model of charging subscriptions for literary content came under pressure from free-to-read or ‘freemium’ equivalents (see WiC455). After the IPO there was a push to broaden out into other forms of content that could be promoted across Tencent’s online channels and this shift has accelerated into a much bigger contribution from ‘intellectual property operations’. China Literature licenced more than 150 literary works to third parties for adaptation last year (and we wrote about how it was teaming up with Disney in a bid to learn more about licencing; see WiC472)

The implication of the ousting, however, is that the founding team have struggled to adapt to a new era in which advertising and freemium material plays as much of a role as subscription fees and in which content licencing is becoming a key driver for income.

In another indication of the shake-up at the platform, shares in China Literature fell sharply at the start of this week amid a row over changes in the wording of its contracts with authors. Critics on social media were furious that the new contract gives the company much more say over how reading fees are distributed. It is also asking for the rights to revenues from adaptations of the original content.

“Like many parents, we have to allow our children to grow and we must step back in time to let them start a new path in life,” said Wu Wenhui, one of the departing executives.

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