Tencent Looks to Games, WeChat and AI to Boost Ad Revenue
Overtaking Baidu is within reach, but maintaining the user experience is key
For Facebook users, sometimes you have barely finished scrolling through the post at the top of your feed before you’ve seen an advert of some description. For all its humble origins as a university networking website and its current mission statement of building communities and bringing the world together, its aggressively commercial nature is increasingly plain to see. You are the product, as a recent essay in the London Review of Books memorably put it.
The platform’s true nature is also revealed in its annual report—last year, Facebook derived 97% of its revenue from advertising, up two percentage points on the previous year. But although China’s internet giants control similarly large platforms with their own reams of data, advertising represents a significantly less important source of income, particularly for Tencent, whose ubiquitous WeChat app acts as several Western platforms rolled into one and currently has 980 million monthly active users.
In the third quarter of 2017, online advertising only represented 16.9% of revenue, but now Tencent executives are increasingly trying to improve the figure as they battle to gain a larger slice of China’s digital advertising market, which in 2017 is estimated by eMarketer to be worth $50.31 billion. In terms of overall ad spending worldwide, China is second only to the US.
“For internet companies, the most popular model all over the world is advertising . . . so we are working on that,” Steven Chang, a Tencent vice-president, told the Financial Times in September.
As ad spending increasingly moves from traditional media to digital, Tencent would seem well placed to capture much of that shift. In 2019, eMarketer estimates that digital ad spending will account for 68.5% of total spending, up from 47% in 2014, with TV being the main loser.
Much of that growth is being driven by mobile, with advertisers following the media consumption habits of younger consumers who have more spending power, and ad spending on mobile in 2019 will be triple that of TV. Digital video, meanwhile, another area that Tencent is strong in, is expected in the same year to reach 11.6% of total ad spending, up from 5.9% in 2015, and to take over TV in 2021.
Going for growth
But currently, Tencent lags behind not only global tech firms, but also its domestic competitors. Alibaba, thanks for its dominance in e-commerce, enjoys the largest share of ad spending this year, at 31.9%, according to eMarketer, while Baidu sits in second on 18.5%. Tencent rounds out the top three on 12%.
In order to grow its advertising capabilities, Tencent is looking to harness the vast amount of data that it sits on. With WeChat and Tenpay enjoying a centrality to urban Chinese life that Facebook can currently only dream of in the West, Tencent has access to a rich pool of data about social networks, routines and consumer preferences. The company has its own machine learning division, whose algorithms it hopes will increase the effectiveness of its ad targeting, making its platforms that much more appealing to advertisers.
In addition, the company is developing a location-based service in order to facilitate online-to-offline commerce. This will allow advertisers to push adverts and special offers to consumers in their region, or even urban district.
“For long-tail clients, we hope to increase the amount of small and regional advertisers by optimizing targeting algorithms and upgrading self-service tools for better marketing management and measurability,” SY Lau, senior executive vice president at Tencent and now chairman of advertising at the company, said in a June interview published by China Tech Insights.
Industry insiders say that the quality of Tencent’s targeting compares favorably with its competitors.
“The targeting is on par with global standards, e.g. for labeling, tags, by category, devices, etc.” explains Victor Lee, assistant director in Shanghai for a global media advertising company. “Tencent uses the same advertising standard as what the media advertising world uses.”
For foreign companies seeking to build their brands and awareness of their products in China, apps such as WeChat are an obvious point of call when it comes to advertising.
“[Tencent] is the de facto company for any brand trying to reach the mainstream Chinese consumer,” says Lee.
That is something that Tencent is well aware of, and in September the company launched an ad bureau in Palo Alto, California.
As well as helping American companies to target consumers, it will enable them to reach those planning to visit the United States in the near future. Part of the office’s work will be to assist those companies in understanding the China market and tailoring their marketing and messaging accordingly.
But this was by no means Tencent’s first foray into boosting its advertising reach internationally. In January 2016, it signed a partnership with the French multinational advertising and PR firm Publicis Groupe, their first such agreement globally. In addition to incubating startups and working together on content creation, the agreement saw Tencent commit to giving Publicis access to its online behavioral data in order to benefit clients.
While still some way off from rivaling Alibaba, the improved use of data and increasing the accessibility of its advertising platforms to foreign companies, combined with broader industry trends, could see Tencent supplant Baidu in terms of digital advertising revenue. By 2019, eMarketer expects Tencent’s share to increase to 17.2%, and Baidu’s to fall to 17.5%, in part because the latter company has had to scale back its search-related advertising due to controversy over sponsored search results.
But one of the big challenges for Tencent is to increase the amount of advertising without undermining the user experience. Currently, adverts on WeChat’s Moments feature—a Facebook-like social feed where users can share pictures, videos, messages, articles and website links with their contacts—only appear occasionally, and much less so than on platforms such as Facebook and Instagram.
While that might suggest there is significant scope for increasing the number of them, Tencent executives have been at pains to make clear that they will be taking the process slowly. And the company’s own research indicates a strong need to do so—according to an April report published by China Tech Insights, which is owned by Tencent, less than 20% of users wanted to see brands or products in their Moments feed.
“We will gradually scale up the intensity of advertising without damaging user experience,” said Lau. “That means we need a powerful location ability to choose the right advertisers. This is the strategy on WeChat advertising.”
As a result, Tencent is currently focusing its advertising efforts on improving targeting and algorithms, as well as leveraging opportunities in the company’s other products and services. Notably, that has meant branded items in Tencent’s massively popular computer games, such as a BMW tie-in for a character “skin” in Honour of Kings. With the rapid growth in eSports in China, such approaches could prove to be extremely lucrative as adoption by professional players would see a brand gaining exposure to millions of viewers, not just other players.
Lau also highlighted demand for advertising with news aggregators, the adoption of which by consumers has been a major trend in China in the past year. “It has huge business potential,” he said.
But for any service, there is an important balance to be struck when it comes to advertising.
“This is an issue overall in advertising where consumers are more resistance to brands shoving ads in their face,” says Lee. “More educated consumers will able to find ways to bypass it. Overall, it depends on the segment and types of publishing medium: OTV, video, webs, apps, etc.
“But in general, Tencent is very mature in making money from selling subscriptions, in-game upgrades, coupons and discounts,” he continued. “The growing trend currently is selling subscription on their services, therefore bypassing ads all together. This was not the case five years ago when the consumers were not that mature.”
In this respect, Tencent’s relatively light approach to advertising in some ways might stand it in good stead in a world where the use of ad-blocking services are growing rapidly. At a presentation given to British and Japanese entrepreneurs and investors as part of a fintech event at the British Embassy Tokyo in September, Michael Harte, head of group innovation at Barclays, cited WeChat as a model of the future where services are forced to exist on the consumers’ terms. “And guess where banking is? Hidden and in the background. Simplified in one page with no advertising”, he said.
Too good to be true?
From both Tencent and an advertiser’s perspective, perhaps the bigger concern is the reliability of the metrics used to measure views or engagement with digital ads. Although not a China-specific issue, it is one that is particularly acute in the country, with many individuals and small companies offering services to inflate engagement rates, while for advertisers opaque structures among the big ad providers make it difficult to get a sense of what is going on. According to the China-based advertising technology company AdMaster, in 2016 30% of all digital ad traffic was fraudulent.
Indeed, asked what could be improved about Tencent’s ad services, Lee replied, “Cheaper and more open with data.”
“Tencent ads and data are a walled garden with no external access from a third party whatsoever,” he added.
“It is not specific to Tencent, but in general the advertising world is murky and shady and involves a lot of kickbacks, rebates and untransparent processes in buying. It is a global issue.”
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