Advertising is a billion-dollar industry in China. According to a recent report by Statista, digital ad spending in China is expected to hit USD 176 billion by 2026, half of which would come from e-commerce and social advertising.
But over the past year, as business confidence waned in China, some of the country’s biggest internet companies, including gaming and social media giant Tencent, are experiencing a slowdown in their advertising revenue growth.
Tencent was founded in 1998 with the launch of its free PC-based instant messaging service, QQ. The tech behemoth, which operates China’s ubiquitous social media app, WeChat, has since grown into a diversified internet conglomerate focusing on gaming and networking.
While the conglomerate has expanded to become one of the world’s most valuable companies by market value, its growth has slowed in recent years. The share price of the social media giant has also taken a beating: as of June 2022, Tencent has lost around half its market value since its peak in February 2021, following Beijing’s regulatory crackdown.
In its latest earnings report, Tencent posted its slowest revenue gain since going public in 2004. Revenue inched up 0.1% to RMB 135.5 billion (USD 20 billion) for the three months ended March 2022, largely due to China’s slowing economy and lockdowns to reinforce its zero-COVID goal. Profit for the period was RMB 26.3 billion (USD 4.1 billion), a decrease of 24% year-on-year.
The company operates through three main segments: value-added services (VAS), online advertising, and payment-related services. Tencent’s revenue from the VAS unit—which includes domestic video games, international video games, and non-advertising social and streaming media services—rose by 0.4% year-on-year to RMB 72.7 billion (USD 10.9 billion) during the first quarter, largely due to China’s restrictions on licensing new games. Revenue growth in its fintech and business services segment rose by 10% to RMB 42.8 billion (USD 6.4 billion) in Q1, compared to an increase of 47% in the same period one year ago.
Notably, advertising sales slumped 18% in the first quarter this year, following a 13% fall in the October-December period in 2021. A significant component of Tencent’s overall advertising revenue comes from social and other advertising, which fell by 15% to RMB 15.7 billion (USD 2.35 billion), mostly due to sharply lower advertising revenues from its mobile advertising network. Revenue from media advertising also declined, registering a fall of 30% to RMB 2.3 billion (USD 344.3 million) over the same period, reflecting lower advertising revenues from Tencent’s media platforms including Tencent News and Tencent Video.
While Tencent’s digital advertising division initially thrived during the pandemic as online education, gaming, and e-commerce businesses increased their ad expenditure to attract more stay-at-home consumers, recent regulatory tightening by Chinese authorities has weighed on the company’s advertising revenue.
Last year, China’s market regulator, the State Administration of Market Regulation, increased its regulatory scrutiny of Chinese internet giants by revising the country’s regulations on online advertising. Some of the new rules ranged from prohibitions on data collection and pop-up internet ads to stamping out fake reviews.
Beijing’s crackdown also included tightened rules on the education sector. Last July, the Chinese government launched a “double reduction” policy that aimed to ease the burden of excessive homework and off-campus tutoring for students.
The new ruling called for a ban on all online and offline advertising of off-campus education programs targeting kids in kindergarten, primary, and middle schools. As a result, annual advertising revenue in China’s education sector fell by 69.6%, based on the 2021 China Internet Advertising Data Report. This eliminated edtech companies’ appetite for online ads, which took a toll on Tencent’s ad revenue.
The decline in Tencent’s advertising revenue was also due to China’s COVID-19 lockdowns, which led to supply chain and operational disruptions. This in turn led to reduced spending on daily and big-ticket items, and a fall in revenue generated by mobile payments.
The lockdowns also weighed on advertising demand by brands. According to James Mitchell, Tencent’s chief strategy officer, many multinational corporations cut back on their advertising budgets due to the prolonged COVID-19 lockdown in Shanghai.
In the wake of the pandemic, more brands were also turning to livestream e-commerce, which had a negative impact on Tencent’s ad revenue, said Jason Jiang, founder of Focus Media, a leading Chinese advertising and digital media company.
Due to COVID-19, more Chinese consumers have shifted from the use of traditional mass media to mobile devices for information and entertainment. Livestreaming has emerged as a viable way for brands to market and sell their products online. In fact, the proportion of mobile internet advertising is expected to increase to 63% by 2024, with live commerce advertising becoming the new driving force, according to a PwC report on China’s entertainment and media outlook.
Meanwhile, Tencent’s domestic rivals posted weaker ad revenue growth in 2021 due to China’s tech crackdown, according to a report published by research firm Zhongguancun Interactive Marketing Lab and accounting and consulting firm PwC. Major competitor ByteDance recorded stagnant advertising revenue in China over the past six months, based on a report by Shanghai Securities News. As China’s COVID-19 containment measures persist, the country’s biggest internet giants have warned of continued weak ad spending by their customers in the second quarter of this year.
Nevertheless, there is light at the end of the tunnel. Tencent’s management said in March that it expects China’s online advertising market to recover towards the end of 2022, largely due to easing government restrictions.
In May this year, Chinese Vice Premier Liu He said the government supported the development of the tech sector as well as public listings for technology companies in a sign that the crackdown is easing.
“We can clearly see that from the most senior level, there’s a pretty clear signal of support,” Tencent president Martin Lau told analysts on a conference call. “But for this to translate into real impact on our business, there is going to be a time lag.”
According to a recent report by Fitch Ratings, Tencent’s advertising revenue will remain weak in 2022: advertising revenue will take a few quarters to recover and will likely return to growth only in Q4 2022, supported by government stimulus to revitalize China’s economy.
This article was adapted based on portions of a feature originally written by Tan Xiaohan and published on Wuji Ciaijing (WeChat ID: wujicaijing). KrASIA is authorized to translate, adapt, and publish its contents.