Tencent Announces Strategic Pivot, Focusing On Cloud and AI

Chinese tech major Tencent announced its first restructuring in six years and third in its 20 year history, including creating a new division to focus on business services such as cloud computing. This pivot comes off the back of the Chinese regulators freezing approvals for games licenses, a key contributor to Tencent’s revenue and an overall tightening in government regulations, which has seen a severe reduction in gaming approvals since March.

Pony Ma, chairman and CEO of Tencent said in a company announcement:

“The proactive reform marks a new beginning for the Company’s next 20 years. It is a very important strategic upgrade as we step into the second stage of the Internet, the industrial Internet era. In the first stage, we connected users to high-quality services. In the second stage, we aspire to enable our partners in different industries to better connected with consumers via an expanding, open and connected ecosystem. As an Internet-based company focused on innovation, communications, and content, Tencent views technology as our core infrastructure.

“With the emergence of AI and 5G, we will use technology as our innovation engine, and to explore new connections between social networks and content. We need to not only focus on our existing businesses, but even more so seek to position ourselves for the long-term future. Together with this strategic upgrade, we will reinforce our investment in cutting-edge technologies.”

Tencent will trim its business groups from seven to six under the reform, reorganising three business groups, Social Network Group, Mobile Internet Group and Online Media Group into two ‘newly-formed’ business groups and one business line: Platform and Content Group and Cloud and Smart Industries Group. Several existing business groups will continue as normal: Corporate Development Group, Interactive Entertainment Group, Weixin Group and Technology Entertainment Group.

The newly established Platform and Content Group will integrate Tencent’s content activities focused around its social ecosystem, namely news, video, music, sports, literature etc. The Cloud and Smart Industries Group will integrate the cloud business and enterprise-facing services, promoting cloud computing solutions, AI and other technologies to various industries, including retail, education, healthcare, transportation and municipal services, enabling digital transformation.

Tencent, has somewhat lagged behind main rival Alibaba when it comes to cloud computing, with Alibaba accounting for approximately 45% of the domestic market share, compared with Tencent’s 10%. Tencent is looking to diversify business services as potential growth areas, as revenue from games and advertising has slowed, with Martin Lau, President of Tencent, stating:

“We need to stay clear-headed, keep alert and look ahead in order to lead the company into the next era. “Connection” is our strategic goal; using internet services to improve the quality of life for people is our mission. These are the driving forces behind Tencent’s relentless quest for progress. In the first stage of the internet era, Tencent has accumulated deep experience and competitive advantages which position us to embrace the second stage. But we must take the attitude of resetting our scorecard to zero, staying humble and proactively seeking out emerging opportunities brought by new and old industries transitioning to online. We need to proactively upgrade our skills and services, to fulfil our vision of acting as a powerful connector and ecosystem partner.”

Tencent is essentially focused on diversifying its revenue streams, after a government clamp down on its breadwinning gaming segment affected its balance sheet. Tencent sees cloud-computing services as its most opportune avenue to focus on, looking to capture market share away from Alibaba, restoring investor confidence once again after a tumultuous second and third quarter.