The acceleration of Tencent internal integration: forced by intensified industry competition?

Not long ago, the international authoritative business news media Business Insider released the “100 people transforming business in Asia 2020” (100 people transforming business in Asia), as the pioneer of the “pan entertainment” concept, vice president of Tencent Group, CEO of China Literature Group, Tencent Pictures CEO Cheng Wu was successfully selected.

Pan-entertainment, proposed by Cheng Wu in 2011, refers to a fan economy based on the multi-domain symbiosis of the Internet and mobile Internet to create star IP (intellectual property). The core is IP, which can be a story, a character, or any other thing that a large number of users love. Subsequently, Tencent gradually pushed this concept to the full track of online literature, online video, etc., by opening up its layout in the field of entertainment, reforming and improving the production method of cultural products.

According to the relevant research report of CITIC Securities, Tencent is known as the industry leader in the various sub-tracks of the pan-entertainment sector, and the overall valuation of the independent listed companies involved exceeds 300 billion yuan.

However, companies such as Bilibili and ByteDance that have emerged in recent years are constantly threatening Tencent’s entertainment sector. So, can Tencent Holdings continue to maintain a strong trend in the future?

The pan-culture and entertainment industry is developing rapidly and the competitive landscape has changed

According to iResearch Consulting, the scale of my country’s online pan-entertainment industry market in 2019 is expected to be 556.8 billion yuan, a year-on-year increase of 19.93%. It is expected that the market size of the entertainment industry will exceed 600 billion yuan in 2020. In terms of subdividing the scale of track users, according to the statistics of China Internet Network Information Center (CNNIC) and iResearch, the user scale of my country’s online video/online music/online games/online literature/two yuan/game live broadcast is 8.5/6.4/ 5.3/4.6/3.9/2.6 billion people.

Figure 1 The scale and growth rate of my country's online pan-cultural entertainment market

Figure 1 my country’s online pan-cultural entertainment market scale and growth rate

Figure 2 Statistics of user scale (100 million) in the main segments of my country's Internet pan-culture and entertainment industry

Figure 2 Statistics of user scale (100 million) in the main segments of my country’s Internet pan-culture and entertainment industry

The online entertainment industry’s large capital consumption, high MAU, long use time, and synergy with other Internet services are destined to be dominated by Internet giants. According to relevant research data of Roland Berger Management Consulting in 18 years, the four giants of Tencent, Ali, Netease and Baidu accounted for more than 50% of the market in 18 years.

However, after several years of development in the pan-entertainment industry, emerging entertainment traffic platforms such as Bytedance, Kuaishou, and Bilibili have emerged, and their market share has gradually increased, and the market structure has undergone significant changes. According to related financial reports of Bilibili, its revenue in the first quarter of 2020 increased by 68.6% year-on-year, MAU increased by 70% year-on-year, and its gross profit margin increased from 13.8% in the first quarter of 2019 to 22.9% in the first quarter of 2020. Kuaishou, Douyin and other apps began to occupy the top position of the short video MAU list.

According to the relevant viewpoints of the “Pan-entertainment Industry White Paper”, the current development trend of the pan-entertainment industry is to form a comprehensive entertainment group, which will open up the entire upstream and downstream links of the industry in a group-style operation and upgrade it into a new large-scale entertainment industry ecology. Take Tencent as an example. According to relevant research reports from CITIC Securities, in terms of upstream content IP, China Reading Group (MAU>230 million) and Tencent Animation (MAU>10 million) have abundant IP reserves; for midstream development and production, Tencent IEG With strong game development capabilities, Tencent Pictures, Penguin Films and Xinli Media have film and television production capabilities; in terms of downstream platforms and publicity, Tencent has social traffic of WeChat (MAU>1.2 billion) and QQ (MAU~650 million) , And Tencent Video (MAU> 500 million), Tencent Music Entertainment (MAU> 880 million), Douyu (MAU> 160 million), Huya (MAU> 160 million), Maoyan (market share> 60%) and other content and Flow platform, rich flow resources.

From the perspective of new entrants, since the development trend of the pan-entertainment industry is groupization, there are high requirements for the amount of funds, the scale of the group, and whether the group industry chain is complete. For start-ups, if they want to enter the pan-entertainment industry, they need to be able to quickly establish a strong upstream and downstream industrial chain while enhancing their own strength. Therefore, the industry has higher barriers.

From the perspective of alternatives, the pan-entertainment industry is mainly aimed at online, and its alternative should be the offline leisure and entertainment industry. Due to the impact of the epidemic at the beginning of the year, the offline leisure and entertainment industry has been affected to a certain extent, and as the epidemic recovers, the offline leisure and entertainment industry will also pick up. However, during the epidemic, people’s lifestyles and living habits have also been affected to a certain extent. Therefore, the online pan-cultural entertainment industry still has strong competitiveness and room for development.

From a policy perspective, my country’s pan-entertainment industry is currently in a period of rapid growth, and some undesirable phenomena have also emerged. In order to enable the industry to develop more healthily, relevant departments have successively issued a series of policy documents to standardize the industry system. Issued many policies such as “Opinions on Strictly Regulating Management of the Online Game Market”, “Notice on Doing a Good Job in the Exposure of Summer Online Audiovisual Programs”; in September 2018, the National Copyright Administration followed the fight against online infringement and piracy “Jianwang 2018”. “Special actions have made deployment arrangements, and these policies, laws and regulations have promoted the further standardized development of the industry.

On the other hand, with the development of my country’s animation industry, the government has issued a series of policies to support the development of the animation industry. On February 23, 2017, the “Cultural Development and Reform Plan for the 13th Five-Year Plan of the Ministry of Culture” proposed to promote the marketization, internationalization and professional development of key cultural industry exhibitions such as China International Network Culture Expo and China International Animation Game Expo; Support original animation creation, production and promotion, cultivate national animation creativity and brands, and continue to promote the formulation and promotion of mobile phone (mobile terminal) animation and other standards. At the beginning of the “Thirteenth Five-Year Plan”, most provinces and cities also proposed the “Thirteenth Five-Year Plan” for the development of the cultural industry, putting forward new planning directions for the development of the animation industry.

Fierce competition in subdivision of the track, loose leading position

According to the analysis report of the Foresight Research Institute, the online game competition landscape is always in constant change and dynamic adjustment. With the continuous development of the market, a group of online game companies with strong research and operation strength and large revenue scale have emerged. As of the end of 2018, there were 199 listed game companies in China, including 151 A-share listed game companies, 33 Hong Kong-listed game companies, and 15 U.S.-listed game companies. Among them, some outstanding companies stand out. The first echelon is Tencent and Netease, the second echelon is represented by 37 Interactive Entertainment, Perfect World and Youzu Network, and the third echelon is other game companies. From the perspective of the domestic market, in the first quarter of 2018, Tencent games accounted for more than half of the share, about 55.7%; Netease games followed closely with a share of about 13.6%; Tencent and Netease together accounted for 69.3 %, the degree of concentration is high, and the market share is further moving towards the head.

Figure 3 China's mobile game publishing competition landscape in 2019

Figure 3 China’s mobile game publishing competition landscape in 2019

From the perspective of video business, it is divided into long video and short video fields.

Tencent Video is still the leading player in the long video field and is actively expanding its business footprint. On September 17, Tencent announced that it will exclusively take over the entire video copyright operation of the Premier League this season in mainland China. The contract between the two parties is tentatively set for one year.

According to relevant data from China Information Industry Network, from the perspective of film and television dramas, in 2019, there were 489 new dramas on the entire Internet, which was 18 fewer than in 2018. In terms of platforms, the number of new dramas on iQiyi in 19 and 20Q1 was leading. In 19 years, iQiyi released a total of 257 new dramas, 198 new dramas on Tencent Video, 167 new dramas on Youku, and 117 new dramas on Mango TV. From the perspective of variety shows, in 2019, iQiyi’s copyrighted variety shows topped the list with 71, and Mango TV’s self-produced variety shows led by 45. In the first quarter of 2020, the effective broadcast of variety shows on the entire network was 9.1 billion. The effective broadcasts of iQiyi, Tencent Video, and Mango TV remained stable, and Youku declined significantly. In this field, there are also new players joining. On August 31, according to a related announcement issued by Huanxi Media, Bilibili announced a strategic investment of HK$513 million in Huanxi Media Group Co., Ltd., which means the beginning of Bilibili. Get involved in long video fields and traditional film and television entertainment circles.

From the perspective of the short video industry, in addition to the Kuaishou who entered the industry first in 2011, in the past two years, under the active layout of the Internet giants, the main competitors in the short video industry also include Toutiao’s Volcano Video, Watermelon Video, Douyin, Alibaba’s Tudou video, etc., Baidu’s good-looking videos, small videos for all people, etc., Tencent’s Weishi, Yoo video, etc., Sina’s Miaopai, Bobo video, etc., as well as NetEase, Momo, etc. Short video platforms under the 360 ​​series, iQiyi series, and Meitu series. Since its development, Kuaishou and Toutiao apps are the most competitive in the short video industry.

CITIC Securities believes that relying on the strong user base of short video services, Kuaishou has rapidly emerged in the field of game live broadcast. In 2019, Kuaishou launched the “Millions of Game Creators Support Program”. According to data released by Kuaishou during 2020 ChinaJoy, as of May 2020, Kuaishou game live broadcast MAU has exceeded 220 million, which has surpassed Douyu and Huya who have been deeply involved in the game live broadcast industry for many years. In addition, Station B is also ambitious in its game live broadcast business. In August 2020, Station B and Riot Games jointly announced the strategic cooperation of League of Legends global events. Station B officially obtained the exclusive live broadcast rights of global events in mainland China 2020-2022 for three consecutive years. Kuaishou and Station B have made rapid breakthroughs in the field of e-sports live broadcast, and have little synergy with Tencent, and both Kuaishou and Station B have their own independent game business development plans.

In terms of the number of paying members, according to relevant research reports from CITIC Securities, as of the end of 2020Q2, Tencent Video had 114 million paying members, which was comparable to iQiyi (105 million in the same period).

Figure 4 Number of paying members of major online video platforms at the end of 2Q20 (100 million)

Figure 4 Number of paying members of major online video platforms at the end of 2Q20 (100 million)

From the perspective of the music industry, as of the first quarter of 2019, China’s online music apps have entered a total of 4 billion-level active user clubs. The first 3 are all owned by Tencent. They are Kugou Music (294 million monthly active users) and QQ Music ( 270 million monthly active users), Kuwo Music (157 million monthly active users), and NetEase Cloud Music follow closely behind (140 million monthly active users). And Ali’s Xiami Music has less than 50 million monthly active users. NetEase Cloud Music is the most popular music social platform for young people due to its high emphasis on user experience and social sharing. It has the strongest user stickiness. The average daily operating time per user is up to 26.3 minutes, while the average operating time of QQ Music is similar to it. The status of the arena is less matched, only 9.3 minutes. And because NetEase Cloud Music continues to improve its app, making it not only the function of listening to music, but also its emphasis on copyright, and it has developed rapidly. It is a strong competitor of Tencent Music.

A primary market investor who focuses on the Internet media industry believes that the current entertainment model is constantly innovating, and related startup companies are very attractive. “Compared with super carriers like Tencent, the decision-making mechanism of subdivided startups is flexible and can better adapt to the current ever-changing market environment. Although they will not be able to get rid of being acquired by large leading companies in the end, there are many investment opportunities in between.” , The person thinks.

Industry leaders accelerate internal integration

Facing the increasingly fierce development trend, the industry has gradually developed in the direction of the group industry chain. Leading companies in the industry have also begun to accelerate internal integration.

From the perspective of the industry chain of the game industry, Tencent currently has a Reading Group in the upstream, and a strong self-research team in the midstream. The downstream Douyu and Huya are the leaders in the subdivision track. After integration, the upstream Reading Group, Tencent Animation and Tencent Video can jointly inject fresh water into game creativity. As for downstream game live broadcasts and content communities, in the face of the strong rise of platforms such as Kuaishou and Station B, Tencent has also made some strategic arrangements to expand its influence in the vertical game community.

On August 11, 2020, Douyu and Huya successively announced that they had received non-binding preliminary proposals on the merger from their major shareholder Tencent, suggesting that the two should be merged through share swaps. At present, Douyu and Huya both occupy favorable positions in game live broadcasts. According to related research reports, with the merger of Douyu and Huya led by major shareholder Tencent, the two companies can reduce internal friction losses and use their data in the future development. The advantage of interoperability will further increase user stickiness, draw traffic to Tencent’s game business, and improve synergy.

From the perspective of the industry chain of the film and television industry, reading articles provided by upstream IP and Tencent animation are the two main sources of adaptation of Tencent’s film and television content. Reading Group is in a leading position in Chinese online literature. With the further strengthening of cooperation with Penguin Films, Tencent Pictures and other content production links, it will enrich the content supply of Tencent Video to a greater extent; on the other hand, it can control procurement through self-made content cost.

From the perspective of downstream content distribution, Maoyan Entertainment will deepen cooperation with Tencent on film content publicity. According to relevant research reports from CITIC Securities, Maoyan’s leading position in the ticketing vertical track will help Tencent Pictures’ film announcements; in addition, Maoyan’s long-term accumulation of user data will help the content production process to better understand consumers’ content Preference to increase the probability of the output of explosive models. Maoyan will continue to benefit from the only platform for movies, live performances and sports events built into Tencent’s WeChat Pay and QQ Wallet portals, relying on WeChat and QQ user traffic to maintain a stable basic disk. In addition, the collaboration with Tencent in the film production process will open the growth ceiling for Maoyan and bring greater performance flexibility.

From the perspective of the music industry, music content, as an integral part of entertainment methods such as variety shows, film and television, and games, is indispensable to Tencent’s entertainment ecosystem. At the same time, it is expected to bring new opportunities for IP cooperation to the long audio track represented by audiobooks. Incremental space. According to relevant research reports from CITIC Securities, the in-depth linkage between TME and China Reading Group, Tencent Video, Tencent Games, etc. will expand TME’s exclusive music reserves on the one hand, and maximize TME’s music resources and user data on the other. Advantages, custom music works that are more popular with users for content such as movies and games.

Figure 5 Main business relationship diagram of Tencent's entertainment sector

Figure 5 Main business relationship diagram of Tencent’s entertainment sector

But how effective is this integration?

According to the relevant financial report of China Reading Group, the average number of monthly active users of China Reading Group in 2019 was 220 million, a year-on-year increase of 3%, and the growth rate has slowed down. The average monthly paying users were 9.8 million, a decrease of about 9% from the 10.8 million in 2018. The payment ratio is only 4.45%, which is a decrease from the 2018 payment ratio. It can be seen that the number of paying users of China Reading Group is in a downward trend, and its monthly active growth rate has also slowed down.

Although the integration of Reading with other Tencent Film and Television and Xinli Media will reduce costs to a certain extent, the effect has so far been mediocre. According to related news reports, the ratings of Ruyi’s Royal Love in the Palace of 300 million yuan were not as expected; then to Wu Xiubo’s derailment, the overdue TV series “Longing for Life” and the movie “Love Saint 2” failed to air as scheduled; Until now, policies such as “restricting ancient times” also prevented many reserve dramas from being released. Although “Celebrating More Than Years” at the end of the 19th century did explode, the ratings of dramas such as “Elite Lawyer” that were broadcast at the same time were not satisfactory. The adaptation of literary works into film and television works also requires huge investment, and in the case of many uncertain factors and unable to control the audience’s preferences, temporary inaccuracies may lead to huge investment in water.

In addition, although WeChat has a monthly life of 1.1 billion, can it really guide traffic? According to the “Third Party Mobile Payment User Research Report” released by Ipsos from January to March 2019, many data in the report are that Tenpay is higher than Alipay, and Tenpay’s 51% market share is actually the number of transactions. Accounted for 51%, Alipay accounted for 41%, and the transaction amount is Alipay 46% higher than Tenpay 45%. Alipay’s single payment amount will be higher than WeChat Pay, which led to this situation.

In this regard, an industry researcher at a buyer’s organization believes that “the main reason is that Alipay is doing well in derivative finance. Financial applications such as Ant Huabei have made Alipay more and more diverse and can accomplish more and more tasks. As well as Alipay’s functions such as reserve funds and borrowing, it fully meets people’s needs. Alipay’s wealth management products are also excellent. People have become accustomed to buying gold, funds, and regular wealth management products from Alipay. WeChat is mainly focused on small businesses. Payment.”

However, a public equity fund manager said: “The Matthew effect in the Internet industry will not disappear, and the entertainment industry will also be the same. Although it seems that the crisis is full, the actual moat of Tencent is very wide. For this reason, Tencent Holdings is An important consideration for the asset allocation of many public offering funds.”

It can be seen that the current competition in the pan-entertainment industry is becoming increasingly fierce. Tencent itself is in a leading position in the pan-entertainment industry. Although facing increasingly fierce competition, its competitive strategy of actively accelerating internal integration will still be effective to a considerable extent.

Liberal Arts/Liluo Liu Kexin (Intern)