Tencent unrolls multibillion dollar bet on the cloud

Chinese internet giant Tencent will invest billions of dollars to spur the company’s push into cloud computing aimed at business clients, a senior executive of the company said Friday.

The move, which is part of an organizational overhaul announced in late September, comes as the company seeks a new growth narrative amid ongoing challenges to its core consumer-facing businesses including gaming and social apps. Expansion out of their traditional strengths and into more business and industry-focused customers could test the company’s fortitude.

“It’s definitely a challenge,” Dowson Tong, senior executive vice president of Tencent and president of the company’s Cloud and Smart Industries business group (CSIG) said in an interview. “But we’re not complete strangers to the enterprise model,” he said, adding that Tencent has hundreds of thousands of existing customers for its enterprise cloud business.

Many of its WeChat functions also have heavy business components such as WeChat Pay and some advertising products, Tong said.

To develop the company’s ability to thrive in the market for computing solutions, AI and other technologies targeted at various industries, Tencent will embark on an investment program in the billions of dollars, focusing on people, capability development and infrastructure, he said.

Tencent declined to give more precise investment plans citing the company’s upcoming third quarter 2018 financial results, which are due out on November 14. It was also unclear what timeline the company has in mind for its investment push.

CSIG was created as part of the company’s reorganization. It integrates the company’s cloud business and enterprise-facing services. Tong was speaking on the sidelines of Tencent’s global partner forum in the eastern Chinese city of Nanjing, which runs through November 3.

Earlier in the week Pony Ma, the company’s founder, said in an open letter that the development of internet over the next two decades will be on business and industry. Helping industry digitize would help customers save costs and improve efficiency and assist them in finding new customers, Ma added.

Cloud over games, social apps

The prospects for Tencent’s core gaming business remain uncertain, given closer government scrutiny of the sector and the halting of approval of new games—a situation that’s expected to continue until Spring of next year.

In addition, Shenzhen-based Tencent’s content and social media businesses, including the popular WeChat messaging app, faces a competitive threat from Bytedance, the company behind the hit short video platform Douyin (known as Tik Tok internationally) and content aggregator Jinri Toutiao.

In a note issued in late October, CLSA analyst Elinor Leung said Tencent’s third quarter results will likely remain weak. Still, total revenue will likely grow 21% RMB 78.8 billion and adjusted operating profit would likely increase 13% year on year to RMB 24.4 billion, the note added.

Tong said the company had hired more than 1000 employees skilled in enterprise-focused cloud computing, many of whom are older than their counterparts in Tencent’s consumer-facing divisions. “Enterprise customers expect a lot of experience from the people who serve them,” said Tong. Tencent is also setting up teams that are dedicated to targeting specific industries and sectors such as retail, medical, education, transport. Such an approach was necessary, he said, because different industries have different needs.

A key element of Tencent’s cloud market strategy will be partnering with other companies, including consulting companies and independent software vendors, to meet market demand. These companies help up for the pieces that Tencent may lack or offer expertise or access to certain industries, he explained.

Citing education as an example, he said Tencent partnered with learning institutions to offer an overall package that included technology elements, cloud computing and content such as language-learning modules.

In terms of industries, priority will be given to those that have a significant consumer-focused element such as retail. This means those that could get greater business benefits from existing Tencent products such as mini programs and WeChat. Specifically, Tong cited e-commerce, banking and automotive as industries that could benefit from Tencent’s technological offerings, including cloud services, cybersecurity, and big data applications.

Tencent could offer banks products that would allow the financial institution to lend money with greater confidence to legitimate customers. In addition, Tencent could help the leverage data more efficiently to target existing customers, he said.

Similarly, in automotive, Tencent has worked with leading global auto brands such as BMW, Audi, and Daimler Mercedes-Benz, and that industry has great scope for the future, including seamless integration of content into cars.

China’s market for cloud computing and related activities could have a value of more than $100 billion by 2020, according to statistics posted to Tencent’s website. Currently, the clear market leader is Alibaba. Other Chinese players include Huawei, while AWS and Microsoft are also present in the market.

Tong said that, according to data available to Tencent, the company ranks second in China in cloud, adding that third spot was there for other players to compete for.

Tencent hoped to build market share by targeting Chinese companies who are going overseas, mentioning Southeast Asia in particular. Such companies could benefit from a single platform at home and abroad. He also said foreign companies doing business in China also represented a good fit in terms of the company’s marketing goals.

Focus on mainland China

At present, the company would not take a US-driven expansion path. “It’s not the right time,” Tong said. “But never say never,” he added, saying the market for cloud is “very dynamic,” and it’s impossible to predict how things might look in five years from now.

Craig Tavares is the director for product innovation and technology at Canadian company Cogeco Peer 1, a Tencent partner who hosts Tencent’s cloud in Canada.

Cogeco is a hybrid managed solutions provider, which means it provides services including hosting, data centers, cloud computing, security managed services and network connectivity. The company owns 16 data centers globally, has its own fiber network, primarily in North America, to deliver IT and infrastructure to its enterprise customers.

Tavares described Tencent as a “great partner.” Cogeco enabled them to enter the Canadian market going back around five years, and they’ve been evolving and growing, said Tavares, who participated at the global partner conference. “They do very innovative stuff continuously.”

“Our facility is just one of many facilities across the world they’re leveraging to offer their service,” he said.  Tencent has taken a unique position by focusing on very specific technologies.

“AI has been one of those leading technologies,” Tavares said. “I think they’ll probably hone and specialize in that area,” said Tavares.

In addition, Tencent had helped Asian companies who wanted to create a presence in North America by offering infrastructure and services. Asked whether that market would be big enough for Tencent to become a global player, Tavares said: “It’s certainly a starting place.”