Strong Ad Sales Support Tencent’s Revenue Amid Government Clampdown on Gaming

Strong ad sales growth of 39 percent year-on-year, was one of the bright spots in Tencent’s Q2 financial results — which saw the company’s first  profit decline since 2005 — which come during an uneasy period in which the company’s value has plummeted. The year so far has been difficult for the Chinese tech giant, with the company losing roughly $170 billion in market value since January, and this trend continued today as it posted it’s first drop in profits in over a decade. Most of this trouble has stemmed from a slow down in Tencent’s gaming business, but as the company has hinted recently at a greater focus and reliance on ad revenue, the strong ad sales growth might be seen as promising.

By most standards the results were strong, with total revenues up 30 percent year-on-year to $11 billion and profits for the period totalling $2.8 billion. However operating profit retracted by three percent year-on-year, which some investors fear is a sign of strain on the company, caused in part by toughening market conditions.

A reshuffle in the Chinese government’s top bureaucratic positions has reportedly resulted in a freeze being put on the approval for sale of new video games in China, and led to new releases like Monster Hunter: World being pulled from Tencent’s online stores.

With gaming a key revenue source for Tencent, this news has spooked investors. The development has a potential knock-on effect for ad-sales too, since video games are used as a hook into social platform WeChat, and lower engagement on WeChat could hurt Tencent’s ad sales.

Any such knock-on effect has not shown up in the financial results though, with social ad revenues having grown 55 percent year-on-year to $1.3 billion. Tencent attributed this to an increase in ad inventory available on WeChat. The company’s introduction of ‘mini programmes’ , which allows developers to create mini apps which run directly via WeChat, has provided more in-app inventory, as has the company’s decision earlier this year to ramp up the ad load on its social news feed.

This second factor is particularly promising, since the increase was from one ad per day on the news feed to two, a much lower ad saturation than that found on similar Western social media platforms. Tencent likely has plenty of room to manoeuvre if it wishes to push up the ad load further, and the WeChat user base itself continues to grow, reaching 1.06 billion monthly active users in Q2.

Media advertising revenue meanwhile saw growth of 16 percent, reaching $679 million. Tencent said this was driven in particular by Tencent Video as a result of its content portfolio and advertisers’ sponsorship campaigns. The company’s video services have now reached 74 million subscriptions, more than doubling in one year, and it is also strengthening its TV and film production capabilities . Earlier this week, Tencent-owned company China Literature acquired film and TV production company New Classics Media for $2.3 billion. Though investors were cold on the purchase (China Literature shares falling 14.6 percent after the announcement), Tencent said the acquisition will allow it to adapt “high-quality literary content” which may then be distributed via its video platforms.

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