As game sales slump, China's Tencent signals a popular ad trend it's betting on

As game sales slump, China’s Tencent signals a popular ad trend it’s betting on

Tencent runs the ubiquitous Chinese messaging app WeChat. The company has a short video feature in the app and has started monetizing it through video ads in the feed. Tencent said such ads could become a “substantial” source of revenue in the future.

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Tencent said advertising on its burgeoning short video platform could become a “substantial” revenue source in the future, even if other areas of its business — such as gaming — are under pressure.

The focus on this ad product from one of China’s biggest tech giants puts it in direct competition with the country’s two leading short video players: ByteDance’s Douyin, the Chinese cousin of TikTok and Kuaishou.

On Wednesday, Tencent reported its first quarterly annualized revenue as its gaming business faced headwinds. Stricter technical regulations, the resurgence of Covid and the subsequent economic weakness in China weighed on the company as a whole.

Tencent operates China’s most popular messaging app, WeChat, which has more than a billion users. A short video platform has been built within WeChat. Users can scroll through different videos. In July, Tencent first started showing ads to users in that service it calls video accounts.

The company said it will release more video ad inventory this month.

Video ads will eventually grow into a substantial source of income for us over time.

Martin Lau

President, Tencent

On Wednesday, Tencent spent much of its earnings call opening explaining the potential of video advertising, underscoring how important the revenue stream could be.

“Video accounts have become one of the most popular short video services in China with significant user engagement,” Martin Lau, president of Tencent, told analysts.

“Strategically, they allow us to expand our ad market share. Since advertisers are already aggressively spending on multiple short video platforms, we should be able to pull in more ad budgets.”

Lau said it took five quarters for WeChat Moments, a social feature where users can post photos, videos and status updates, to reach 1 billion yuan ($147.42 million) in quarterly ad revenue. He said video accounts will reach that goal faster, given the “current volume of traffic and the already strong demand from advertisers for short video ads.”

“Video ads will grow into a substantial source of income for us over time,” Lau said.

Tencent’s online ad revenue fell 18% year-on-year to 18.6 billion Chinese yuan in the second quarter as macroeconomic issues in China caused brands to cut budgets.

The company, headquartered in Shenzhen, hopes video ads can boost the division in the coming quarters.

Competition is increasing

Tencent’s foray into short videos is relatively new and it’s now looking for a bigger challenge for TikTok’s Chinese version Douyin and Kuaishou.

The market potential can be great.

According to data from QuestMobile, short form video revenue accounts for about 39% of total digital advertising revenue in China. It is the largest category of ad revenue, ahead of categories like social networks and news.

Many of the Chinese tech giants have switched to short video and live streaming to unlock new revenue streams.

James Mitchell, Tencent’s chief strategy officer, said the revenue potential “per minute spent” on video accounts will be higher than Moments.

Companies like Alibaba have been trying to use live streaming and short video as a way to generate sales on their e-commerce platform. An influencer can advertise products through video and users can click on items in the video to buy them.

When asked by an analyst whether Tencent will move in this direction, Lau said e-commerce live streaming is an “opportunity” but it “will take time.”

Lau said Tencent needs to raise awareness of the video product and then get merchants and advertisers on board.

“We’ll try to take it step by step,” Lau said, referring to video account development.

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