Tencent happily parting ways with loss-making cloud customers

Cutting costs across sprawling business as COVID makes life hard in China

Chinese tech giant Tencent has recorded its first ever quarter-to-quarter revenue fall, warned that COVID-19 lockdowns will hurt messing with its business, and cautioned against assumptions that Beijing is ready to enthusiastically support tech companies.

On its Q1 2022 earnings call yesterday, the company offered more explanation of its shifting cloud strategy.

Chief strategy officer James Mitchell told investors the company is pleased to have shown loss-making cloud customers the door, and “proactively scaled back … deeply discounted infrastructure-only contracts for basic services such as cloud compute and content delivery network.” Projects that had high costs and/or relied on sub-contractors have also been scaled back.

Tencent is instead chasing platform-as-a-service deals across in video, cloud and cybersecurity.

Mitchell was asked about Tencent Cloud’s revenue mix and opined that the local cloud market is different to that in the West because around half of Chinese clouds’ revenue comes from other internet companies. Of the remainder, most comes from businesses born offline such as financial services, manufacturing, and government. Western clouds have satisfied those customers with what Mithcell characterised as system solutions backed by IT consultancy services.

Tencent plans to take a different path, by focusing on “platform software and industry solutions” to lure offline businesses into the cloud, hopefully accounting for half its revenue. Infrastructure should account for the other half.

Delivering that strategy may be difficult: Mitchell said China’s COVID-19 lockdowns have seen use of its collaboration tools grow but have meant “some negative impact on cloud project launches” and also put a dent in ad spend across Tencent’s properties.

Company president Martin Lau cautioned investors not to expect China’s government to make life easier for Tencent in the short term. Hopes have been raised that Beijing has softened its attitude to tech companies, as typified by vice premier Liu He this week advocating for more collaboration between government and tech companies. Lau cited similar comments senior Chinese officials have made in recent days and weeks and said “normalized regulation” is clearly coming, but warned investors not to expect swift change or support. He added that the prospect of relaxed regulations feels like a reward for complying with Beijing’s crackdowns on online content it deems unacceptable.

The company’s overall performance was poor. Revenue of ¥135.47 billion ($20.06 billion) was flat year on year, but down six percent quarter on quarter. That’s the first time Tencent revenue hasn’t grown in a quarter since its 2004 IPO. Domestic games were the only segment to grow.

Ma and other execs spoke of numerous cost-cutting measures across Tencent’s sprawling content and e-commerce businesses – among them the plan to cut unprofitable cloud products.

One of the tactics the company hopes will improve matters is games based on licenced properties, with Tencent-owned studio Funcom having acquired the rights to Conan The Barbarian, and Dune. The latter is being turned into what Lau described as “an open world survival game”, presumably in the hope that a game that makes the spice flow will also make profit flow for Tencent. ®

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