The game business is reviving while the advertising business is slowing down, and Tencent has a new story again.

Text | Wang Yuchan

Editor | Qiao Qian

In the third quarter of this year, Tencent's performance was moderate. The total revenue increased by 8% year-on-year, and the gross profit increased by 16% year-on-year, basically in line with expectations.

At the same time, the Q3 financial report shows several key changes: The local game business finally returned to double-digit growth; The advertising business did not continue the high growth rate but slowed down; Operating expenses and the number of employees increased significantly, seemingly contrary to the previous "cost reduction and efficiency increase" strategy.

This quarter is the 8th quarter in which Tencent Group's gross profit growth rate is double that of the revenue growth rate year-on-year. Like the previous quarter, the high growth of gross profit is not "saved". Promotion expenses, content costs, and R & D expenditures have all increased significantly - the growth of gross profit is mainly due to the growth of high-margin revenue sources such as local market games, Video Accounts, and WeChat Search.

It can be seen that in Tencent's "high gross profit" carriage, a new "leading horse" has been added, that is, WeChat Search. Last quarter, the three leading horses that drove gross profit were local market games, Video Account advertising and commissions, and mini-game commissions.

Just like traveling thousands of miles by carriage, although each horse may be tired occasionally, Tencent can always lead a new horse from the spare horses to replace the old one to maintain a constant speed. In the three months of Q3, even the new and old horses advanced together, not only with a new story but also with the rejuvenation of the local game business.

Advertising settles, search rises, behind is the slowly advancing WeChat e-commerce

Starting from this quarter, Tencent's advertising business segment is renamed "Marketing Services". The revenue of this business increased by 16.6% year-on-year to 30 billion yuan, and the growth rate is the slowest in the past five quarters. However, the advertising revenue of Video Accounts still has a year-on-year increase of more than 60% in the third quarter.

Over the past year, the outside world has been accustomed to the continuous increase in Tencent's advertising revenue with the help of Video Account advertising. However, the impact of the macroeconomic environment on the advertising market actually still exists, and as a product that has existed for 4 years, the low-base advantage of Video Accounts will also gradually fade.

Then, under the premise that the macroeconomic environment will not change in the short term and Video Accounts still maintains a relatively low advertising load rate (3%-4%), Tencent needs to find a new stimulant for the advertising business. Currently, it is WeChat Search.

"In the field of WeChat search, we observe that advertisers in industries such as financial services, Internet services, games, automotive local services, and luxury goods are actively purchasing keywords." said James Mitchell, Tencent's Chief Strategy Officer. Tencent plans to add search functions in Video Accounts and Mini Programs, use search technology to optimize the information flow, and add commercial search entrances in different locations.

Referring to the data of other live e-commerce platforms, consumers who come through searching for keywords usually have a higher conversion efficiency. For advertisers who pursue immediate conversion effects, purchasing keywords is a rigid demand.

"We hope to create a unified and trustworthy shopping experience through the WeChat ecosystem, The key lies in indexing and standardization. " said Liu Chiping, President of Tencent. In the future, Tencent hopes to form more incremental closed loops through the combination of Video Accounts and WeChat Search, and use AI large models to improve the relevance of search results.

In the conference call, James Mitchell said that with the continuous improvement of advertising technology, the growth of WeChat Search, and the increase of the advertising load rate, Tencent is confident of exceeding the development level of the advertising market in the next few years. "Especially to complete the e-commerce closed loop of WeChat Mini Store, which will be very beneficial to our advertising business."

In addition, Liu Chiping once again described in the conference call the vision of WeChat Mini Store becoming an existence that "surpasses live e-commerce and Mini Program e-commerce". This quarter, the transaction volume of Mini Programs exceeded 2 trillion yuan, with a year-on-year growth of more than ten percentage points. Although the results are good, many Mini Program merchants are indeed worried about how the future Mini Program store system will coexist with the WeChat Mini Store system based on Video Accounts.

Liu Chiping said that many sales behaviors of Mini Program merchants are formed based on old customers who already know the brand and have visited the store, and merchants lack channels to acquire new customers. And Video Accounts can allow them to acquire new customers through the public domain.

"This is why we think it actually provides a better experience for merchants than Mini Programs." Liu Chiping said.

The old games released nearly a decade ago once again support Tencent's local market

Tencent's game business revenue in China has not seen double-digit growth for many years. From Q3 2021 to now, this "too mature" business has had 6 quarters of no growth or negative growth, and the rest are small single-digit growth. Until this quarter, the local game revenue achieved a 14% year-on-year growth.

Image source: Honor of Kings

Two flagship evergreen games, "Honor of Kings" and "Peace Elite", once again took the lead and achieved a healthy revenue. When the outside world worried that they were getting old and constantly checked the new game pipeline, Tencent once again proved the value of evergreen games. "The evergreen games that last for a long time are the truly scarce resources in the industry." said James Mitchell.

In October, some media reported that Tencent Games ushered in an organizational structure adjustment. Huang Lanxiao, the executive producer of "Honor of Kings", stepped down, and the two ace teams, TiMi and Photon, faced mergers and reorganizations. The 13 studios of TiMi Studio may be merged into 4.

James Mitchell responded to this series of reports, saying that in fact, the adjustment for "Honor of Kings" had already occurred at the end of last year, and the adjustment for the "Peace Elite" team was made earlier this year. "Now, it can be seen that the adjustment has indeed had an effect. When a game already has a large player base, whether it can become an evergreen game does not depend on the game itself, but on the development, operation, and community management team." James Mitchell said. "When we see that a team has no creativity, we must make adjustments. After the team is adjusted, the game will also be good."

"For those games that were very successful at that time, as long as appropriate funds are invested, the chance of making them evergreen games is greater than ever before." Mitchell said, and Tencent's strategy is to truly exert the capabilities of those "time-tested studios".

Now, Tencent Games' thinking is very clear, that is, large studios replace small teams to produce fewer and more refined games. "Each game must have a very strong positioning, a very strong genre, a very strong gameplay, a strong production force, and a high production value, so that we can exceed the expectations of players." James Mitchell said.

Currently, the most promising to become the next-generation evergreen game is Tencent's first multi-terminal first-person shooter game "Delta Force: Xtreme". The financial report mentioned that this game achieved a relatively high average daily usage time and retention rate for users. Although the revenue situation has not been disclosed, Mitchell said in the conference call that the profitability of "Delta Force: Xtreme" is actually very good, "much better than some of our existing large PVP multiplayer games when they were just released".

Currently, in addition to "Delta Force: Xtreme", "DNF" and "Valorant" are also expected to take over as the next-generation evergreen games. From the perspective of the new game pipeline, the upcoming ones include "Starlight of Aeons", "Roco Kingdom Mobile Game" and "Honor of Kings World", etc.

In this quarter, Tencent's overseas game revenue increased by 9% year-on-year, lower than the market expectation of 15%. Mitchell explained that this is because large flagship games in the overseas market usually have a longer revenue deferral cycle due to high retention rates, higher than the average level of 6 - 9 months in China. The actual overseas game revenue growth rate is higher than 9%, and the company is optimistic about the prospects of international game revenue.