Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Over the past few years, Tencent Holdings Ltd. has been diversifying its revenue sources away from social network subscriptions and PC games. That move came not a moment too soon.

While net income just missed, revenue beat expectations and that upside is thanks to just three areas: smartphone games, performance-based ads, and payment and cloud services.

Growth Spike
Tencent net income has jumped in the past few quarters as it leverages China's addiction to its social networks
Source: Bloomberg

Were growth in those three divisions to have been in line with the rest of the company, I calculate Tencent would have posted third-quarter revenue about 15 percent lower than it did. Let's look at them in turn:

Smartphone games revenue climbed 87 percent from a year earlier, while its other games fell.  Once the king of PC-based role-playing games, Tencent has successfully ported that loyalty to mobile with multiplayer online battle title Honour of Kings being the standout hit at 40 million active daily users.

Online advertising increased by a respectable 51 percent overall, but a paltry 21 percent rise in brand display ads was eclipsed by its performance-based offering -- where Tencent gets paid for actual calls to action such as clicks and engagement over Weixin, its messenger platform. This category shot up 83 percent to surpass 10 percent of revenue for the first time since it started reporting the metric.

Then there's other services, a category that climbed more than four-fold, driven by the popularity of its online payments and cloud business. At 12 percent of revenue, these services are no longer mere marketing vehicles to keep users stuck inside the Tencent ecosystem, but instead look like viable products in their own right.

A Little Extra
While online games have been the mainstay, performance-based ads and cloud & payments services have topped up Tencent's revenue growth
Source: Tencent, Bloomberg
Note: 3Q 2016 figures are Bloomberg calculations based on preliminary data from Tencent

Each of these units have something in common, and that's Tencent's ability to make its universe ubiquitous and addictive, especially through the Weixin chat app that now has 846 million users. Back in March, I argued that its risky decision to start charging a nominal fee for withdrawals from its payment system showed it had the confidence to start acting rationally instead of doing whatever it takes to get users. With Wednesday's results, it's clear that it can monetize China's Weixin addiction across its whole suite of products.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net