Facebook vs Tencent: Revenue Streams and the Future of Social Media
(Yicai Global) Aug. 17 — Some 3 billion of the world’s 3.8 billion internet users are on social media, data from Hootsuite and We Are Social shows, meaning almost half of the global population use the platforms run by Facebook [NASDAQ:FB], Tencent Holdings Ltd. [HKG:0700] and a horde of other providers.
Tencent, however, is also a major online gaming firm. Its second-quarter financial report shows 42 percent of its total revenue game from games, whereas Facebook’s income is primarily from advertising.
The two firms, with market caps close to around USD400 billion (Tencent) and USD500 billion (Facebook), are both looking to break into each other’s primary markets.
Tencent has long been trying to explore the commercial value in social networks but has suffered setbacks in its efforts to go international. It hopes to become a global technological giant in the consumer industry, Liu Chiping, president, said. Meanwhile, Facebook, which has a monthly active user base of 2 billion users but is banned in China, is itching to move into the world’s second largest economy. It recently made a breakthrough in the country through the release of Colorful Balloons, a smartphone application.
Revenue Composition: Gaming vs Advertising
The two firms have quite different revenue models, with Tencent bringing in cash through its gaming sector and Facebook generating its income through advertising.
Facebook’s total revenue in the second quarter this year was USD9.3 billion, its financial report showed. Some USD9.16 billion of this came from advertising, up by 47 percent on the year. Income from mobile advertising made up 87 percent of the advertising total. However, Dave Wehner, chief financial officer, previously hinted that ad-driven profit growth is not sustainable. He predicted that from the middle of this year advertising’s contribution to profit growth will decrease significantly.
For Tencent, web advertising is its second largest source of revenue and is growing rapidly through data stream traffic and increased advertising on WeChat and its other mobile apps. In the second quarter, the firm’s web advertising revenue grew 55 percent annually to reach CNY10.1 billion (USD1.51 billion), while revenue from media advertising grew 48 percent to CNY4.1 billion, driven mostly by a rise in Tencent’s video services and news channels. Its advertising revenue from social media leapt 61 percent to CNY6.1 billion, mostly thanks to its smartphone apps.
Growth in Tencent’s advertising revenue was mainly attributed to a significant improvement in its advertising positioning technology, Liu Chiping said after releasing the financial report. This enabled the firm to up its prices. There were other positive factors, including increases in ad inventory and overall traffic. Tencent implemented secondary advertising in some cities but its inventory was still small compared to some overseas internet firms, he added. The traffic increase mostly came from WeChat moments, where users can post statuses and messages for friends to see, and other mobile apps.
The Chinese internet giant’s revenue was CNY56.6 billion (USD8.4 billion) in the second quarter, up 59 percent on the year. Revenue from gaming jumped 39 percent to CNY23.9 billion to make up 42 percent of total income. Revenue from mobile gaming topped computer gaming for the first time, growing 54 percent to CNY14.8 billion. Tencent didn’t disclose the amount pulled in from smash hit King of Glory, though research from US-based Superdata suggests it may be the world’s most profitable game with revenues of up to CNY1 billion in June alone.
A number of the firm’s units showed strong revenue growth, Pony Ma, chief executive, said after releasing the report. Tencent is trying to develop a healthy way to participate in online games while maintaining continued growth of its gaming division, he added.
Facebook’s other revenue source, payments and service charges, came in at USD157 million in the second quarter, down 7 percent from the same period last year while income from Tencent’s non-advertising businesses grew 177 percent to CNY9.65 billion (USD1.45 billion). Payments and cloud services were a key driving force, with offline transactions growing rapidly and enhanced cooperation with Meituan Dianping, China’s biggest group deal platform, and other distribution partners playing a big role. Tencent Cloud is also beefing up its infrastructure to cover the whole world and is building on its presence in 34 national markets.
Social Network Giants Look Ahead to AI
Pony Ma’s biggest concern right now is technology, a big change from two years ago when his focus was on consumers and end users as he could not “figure out what young people love,” he told Yicai Global.
Mark Zuckerberg, Facebook’s chief executive, is more afraid of missing “the opportunity to change the world” than making disruptive changes within his company.
In terms of technology, Tencent is increasing investment in its cloud business and artificial intelligence technologies. AI is a must-have capability and can benefit businesses by enhancing user experience, strengthening precise targeting technology and revitalizing partners in its ecosystem, Tencent said in its financial report.
Although the firm was not an early leader in the AI sector, it is quickly stepping up its presence. It set up the AI Lab last April, with prominent scientist Zhang Tong taking a leading position, and set up more Silicon Valley labs this year. Its rich build-up in data and computing power are basic conditions in which AI sector research can thrive.
Tencent also released an AI medical imaging product this month, TencentMiying (literally meaning Tencent Imaging Seeker), to assist doctors in the early detection of esophageal cancer. The firm says the product’s accuracy for screening is up to 90% and clinical trials have started at a number of hospitals.
Facebook has also attracted media attention after rumors it will shutt down its AI bots, which started communicating in their own language. Facebook did not turn off its robotic chat system but is looking to make them smarter and more controllable.
There was also a public difference of opinion between Zuckerberg and Tesla Inc. [NASDAQ:TSLA] CEO Elon Musk on the risks of artificial intelligence. Musk argued that it is a “terrible problem and threat” for human civilization, while Zuckerberg is optimistic over the rise of the technology.
“I think people who are naysayers and try to drum up these doomsday scenarios — I just, I don’t understand it,” the Facebook head said. “It’s really negative and in some ways I actually think it is pretty irresponsible.”
Following future growth concerns in the advertising revenue sector, Facebook has hinted at strengthening commercialization efforts of its AI assistant in the hope of profiting from its chat bot.
“AI assistants are the focus of research and development for Facebook in the future, and users can expect to see more practical results”, said Yann LeCun, Facebook’s director of AI research, in an interview with Yicai Global last month. The company will use research findings from its artificial intelligence research department to aid the further development of assistant products, he added.