By Zheping Huang and Vlad Savov in Hong Kong for Bloomberg Tech Daily
Alibaba added $32 billion to its value, made investors and IPO bankers salivate, and likely appeased Beijing. And all it had to do was chop itself into pieces. Could Tencent pull a similar move?
It’s hard to imagine missing the news of Alibaba Group Holding Ltd. splitting into six units, a move that triggered a 14% bounce in its US shares along with frenzied speculation about who might be next. Just as we were settling in for a staid, no-growth China internet sector, Alibaba gave us the prospect of a half-dozen initial public offerings.
___STEADY_PAYWALL___But we wouldn’t rush to the tempting conclusion that Tencent Holdings Ltd. is a good next candidate for an Alibaba-like chop job. While Alibaba deftly unmade its monolithic image — giving Beijing’s regulators one less reason to worry about its dominance in China’s online commerce sphere — Tencent’s future growth is actually dependent on it being enormous.
At its core, Tencent is a social media company that channels a billion-plus users to other services like games and streaming, selling users’ clicks and likes to marketers and merchants. Underpinning that traffic-driven strategy is WeChat, a structural part of China’s day-to-day economy and the world’s prototypical all-in-one app. It hosts businesses, relationships, a kaleidoscope of mini apps and features including Tencent’s answer to ByteDance Ltd.’s TikTok.
In their quarterly prints, Tencent’s revenue categories — such as advertising — span various business groups, whereas Alibaba has sharper diving lines between business units and products ranging from cloud to local-life services and the Cainiao logistics network. That’s probably for a good reason.
The spinoff question Tencent gets most often from analysts: why not hive off WeChat’s payments and finance bits, following the example of Ant Group Co., the fintech firm spun off from Alibaba? It would save Tencent a lot of furrowed brows from regulators; But Tencent’s answer is that it’s been in enough meetings with authorities to understand the regulations and come into compliance without severing its prized asset.
While WeChat permeates Tencent’s entertainment and fintech empire, the Alibaba family is more self-sustained. Investors cheered Alibaba’s decentralization because the majority of the six new divisions can stand on their own. Alicloud is the domestic market leader and already operates in the black. Cainiao has completed external fundraising before, and Alibaba rival JD.com Inc. has set an example of breaking out its own courier arm.
Tencent could roughly split into four major companies for gaming, cloud computing, WeChat, and, finally, online content platforms ex-WeChat. Setting aside WeChat’s unavoidable centrality to all of them, there are more hurdles to overcome.
For one, Tencent’s cloud arm is still in the middle of a difficult transition to get rid of loss-making contracts and shore up the bottomline. Its aging social and content hubs, including QQ and a Netflix-style streaming site, are going downhill as they lose eyeballs and ad sales to TikTok’s Chinese twin Douyin. A standalone Tencent Games? Regulators wary of internet addiction among younger users probably won’t like that, just as Tencent seeks a more pristine social responsibility profile.
During Tencent’s last company overhaul in 2018, the firm combined three business units into one division called Platform and Content Group. The idea was to fold resources for mobile apps, media websites and ad platforms under one big umbrella to fight off up-and-comers like Douyin, Bilibili, and Kuaishou. This sort of consolidation only intensified over the past three years as Tencent implemented unprecedented cost curbs during China’s Big Tech crackdown.
And on the global stage, Tencent’s most promising growth outlet, being small is not an option. Consider who it’s up against: deep-pocketed Apple Inc. and Amazon.com Inc. in the chase for streaming and intellectual property rights, and a Microsoft Corp. that thinks nothing of spending $69 billion to gobble up Activision Blizzard Inc.’s games lineup. The Activision deal might actually pass regulator approvals because Sony Group Corp. is an even bigger dominant force in the console market.
The difference between Alibaba and Tencent, in simple terms, is that one of them is the size it is for a reason.
Read more:
