Tencent responds to the "Apple tax dispute": It has not circumvented the issue through in-app purchases and is negotiating with Apple to achieve a win-win situation for all parties
2024-08-15
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Tencent delivered a pretty good report card in the second quarter.
On August 14, Tencent Holdings (0700.HK) released its second quarter financial report for 2024: total revenue was 161.1 billion yuan, an increase of 8% year-on-year; net profit was 47.6 billion yuan, an increase of 82% year-on-year. Net profit under non-IFRS standards was 57.3 billion yuan, an increase of 53% year-on-year.
Judging from the financial report, the rapid growth of net profit mainly comes from the growth of high-gross-margin income such as local market game revenue, video account advertising revenue, small game platform service fees and video account merchant technical service fees. In addition, the performance of associated companies including Pinduoduo has increased significantly, which has also brought considerable support to Tencent's financial report.
When it comes to the stock repurchase plan, Tencent President Martin Lau responded in a conference call: "There is no updated plan."
Responding to the "Apple Tax": Hope the discussion can achieve a win-win-win situation
The financial report shows that Tencent's value-added service (mainly games) revenue in the second quarter increased by 6% year-on-year to 78.8 billion yuan, and international game revenue increased to 13.9 billion yuan, both increasing by 9% at a fixed exchange rate. The growth rate of total game turnover in the international market significantly exceeded the growth rate of revenue.
Game revenue in the domestic market resumed year-on-year growth, increasing by 9% to RMB 34.6 billion, mainly due to the revenue growth of Valorant and the successful release of Dungeon Fighter: Origins. The growth rate of total game turnover in the domestic market exceeded the growth rate of revenue.
It is worth noting that Apple was previously exposed to have forced WeChat to plug payment loopholes in order to impose a 30% Apple tax on the WeChat ecosystem, targeting the WeChat mini-games that have grown rapidly in recent years. In response, Tencent executives said they hope to achieve commercialization under economically sustainable and fair conditions. This discussion is currently ongoing.
"There is a natural tension between the gaming industry or digital content industry and the app stores, and the fundamental reason is that the app stores charge up to 30% of the revenue for games and similar forms of digital content," said a Tencent executive. "The gaming industry sees this as a very heavy burden."
“I think there is some misunderstanding about the nature of the current situation, which is that we are not currently monetizing small games on iOS through in-app purchases (bypassing payment). I think if we can monetize, it is not only in our interests and Apple’s interests, but also in the interests of game developers and users. But we want to achieve this goal on economically sustainable and fair terms.”
Tencent said it hopes the discussions will yield positive results as it would be a win-win-win for all parties, “but if the discussions do not progress, then the current status quo will continue, and if the discussions do progress, then it will bring incremental benefits to us, to game developers, and possibly to Apple, and it will certainly give Apple users a better experience.”
The so-called "Apple tax" refers to channel sharing: mobile app stores obtain profits from game users' recharges through commissions. The Apple App Store's share ratio is about 30%. It is understood that it is an industry practice for mobile phone manufacturers to take commissions through app stores. The commission ratios of different channels are also different. The Apple App Store's commission ratio is about 30%, which is not the highest in the industry. In the Android application market channel, the general sharing ratio is 5:5 between the channel and the manufacturer, that is, the game developer and operator can only get half of the game flow. This does not include various additional expenses incurred by game manufacturers for advertising in the application market. The Android application platforms of many mobile phone manufacturers such as Huawei, OPPO, vivo, and Xiaomi are also nicknamed "Hardcore Alliance" by the outside world.
Regarding the follow-up plan for the game business, Tencent executives said that they have made very long-term and strategic investments in the content industry. The content industry, whether it is games or TV series derived from novels, is essentially an industry that attaches great importance to long-term investment. "The recent acceleration of our game business and our success in TV series are actually due to the investment we made many years ago."
"It is becoming increasingly difficult to launch successful hit games nowadays, because as players' expectations increase, the quality of games also needs to be higher." Tencent said, "As the overall environment continues to improve, the game industry is expected to recover faster."
Talking about WeChat Ecosystem: Repositioning Livestreaming Sales
Regarding the WeChat ecosystem that has attracted much attention from the outside world, Tencent disclosed that in the second quarter, the user time spent on WeChat mini-programs increased by more than 20% year-on-year, and the transaction volume facilitated by mini-programs also achieved double-digit year-on-year growth; among them, the monthly active users of mini-games reached 500 million, the user usage time continued to grow, and the total turnover of mini-games increased by more than 30% year-on-year.
The mini-game platform has served more than 400,000 developers, of which more than 240 games have a quarterly turnover of more than 10 million. The creator ecosystem of Video Account has further prospered, and the total user usage time of Video Account has increased significantly year-on-year.
Tencent executives said that compared with other short video platforms, they have not seen a slowdown in transaction growth. The main reason is that the GMV of goods brought in is actually very small compared with other platforms, so there is still a lot of room for growth.
In addition, Tencent said that it has repositioned its live streaming sales business and hopes to build a complete e-commerce ecosystem within WeChat to achieve better synergy. "E-commerce live streaming can grow very fast, but there is a natural upper limit. However, if we can build a sales ecosystem within WeChat in a systematic way and use all the power within WeChat, then we hope to build a larger, more meaningful, and higher-ceiling sales ecosystem."
Talking about AI: Leasing business becomes the driving force of growth curve
In terms of AI technology, in the second quarter, Tencent's generative AI application Yuanbao continued to upgrade its functions after its launch. Tencent executives revealed that they hope to integrate AI technology into more of its ecosystems. Currently, Tencent's Hunyuan Big Model has been implemented in nearly 700 Tencent internal businesses and scenarios, helping Tencent Conference, Enterprise WeChat and other SaaS products to upgrade intelligently.
In gaming applications, AI has great potential to bridge the gap between different game modes and even create new game modes, allowing players to play directly against machines. "With AI, machines are like players and can have different skill levels. Users playing against machines can achieve a better experience and further explore the gameplay."
It is worth noting that in addition to meeting its own business, AI leasing is also a curve that drives revenue growth. "In our cloud services, customers' demand for leasing GPU resources to meet their AI business is growing very rapidly, and the growth rate is very fast."
According to Tencent executives, the demand for AI leasing has been growing. "There are many startups in China that don't have that much capital, maybe $1 billion or $2 billion, instead of the $10 billion or $90 billion that some large VC-funded startups in the United States have in this field. They want to build their own large language models, and they will do it through leasing. In our cloud services, customers' demand for leasing GPU resources to meet their AI business is growing very rapidly, and the growth rate is very fast."
In terms of investment income, the financial report shows that Tencent recorded a share of 7.7 billion yuan in profits from associates and joint ventures in the second quarter, compared with 2.2 billion yuan in profits in the previous quarter. Under non-IFRS, profits increased from 5.5 billion yuan in the first quarter to 9.9 billion yuan, due to the improved business performance of several domestic associates and several overseas game studio associates.
During the conference call, Tencent executives said that the profit share of associated companies, including Pinduoduo, has rebounded significantly since the first quarter of 2023, and further accelerated in the second half of 2023. It is expected that the year-on-year growth rate will decline in the second half of this year.
The Paper reporter Fan Jialai and intern Zhang Yujia
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