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Tencent Holdings has a curious timing. And it's not a day too soon.
The social media giant has announced a reorganization in the middle of a long weekend in Hong Kong and the beginning of the October week of China. The pace is not unusual, being once every six or seven years (the previous reorgs took place in 2005 and in 2012).
While Tencent is reducing the number of its business groups from seven to seven, the company is strengthening its structure.
The first key change is the one that is certainly late. The company will combine three existing units – the social networking group, the mobile Internet group and the online media group – under a new platform and a new content group. This seems to attest to the fact that, with WeChat at the heart of most of its activities, the dividing line between the various content channels such as news, video and payments is fading.
I see this as a recognition and a reconciliation of transformation at Tencent since 2012.
At the same time, training a new business indicates where the company sees its future.
According to Tencent, the cloud and smart industries group will include health, education, security and localization services. This does not mean that the old gaming and social assistance businesses are finished, but shows where management wants to start generating new revenue.
As Matthew Brennan, a Tencent and WeChat consultant, pointed out nearly a year ago, the company decided to go into B2B.
According to his statements, Tencent believes it is time to move from a consumer Internet to an industrial Internet. It's more than just a marketing speech. The last 20 years of Internet history have focused on how consumers interact with information, with businesses and with each other.
The upcoming introduction of faster 5G mobile networks and the introduction of more Internet-connected devices will suggest a future where machines will become more important in the online environment.
For Tencent, the timing of this change is important.
In March, when many of them applauded the good results of the company, I foresaw a structural weakness of the social media giant, which could not be dominated by exceptional gains in the IPO of its companies in portfolio. The operating margin decreased; and as the company increased its marketing budget by more than its R & D spend, user growth slowed. In other words, Tencent did not enjoy the scale benefits that the billion users of WeChat should provide, and investors were about to feel this pain.
Tencent shares have since mirrored this reality, falling 19% from a high in March. They are now 16% off this brand.
By leveraging a significant user base to carry out its artificial intelligence efforts, then combining it with sectors such as health, transportation, security and distribution, Tencent can attract more and more people. users and industrial machinery to feed the data cycle and analysis.
To achieve this, however, society will need to boost R & D, probably to levels not seen since 2014, when the figure briefly exceeded 10% of revenues. This means that we have to reverse a recent trend that seems to want to sacrifice research spending for greater marketing strength. Admittedly, both figures are up but marketing has exceeded R & D in the last three quarters.
Management also needs to think more carefully about its acquisition strategy, spending more time and money buying companies that build products under the hood than those offering consumer services.
If Tencent really believes that it has to deal with a change in Internet consumption of the Internet, it will have to show that it can exceed the billion users it has today and focus on the ten billion machines that he will be able to connect in the future.
© 2018 Bloomberg L.P
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