Tencent Reported Its Earnings. How Did the Three Companies That Control the Chinese Internet Do Last Year?

More than a decade on, the same three companies still monopolize the Chinese internet — but some things have started to change.

Yesterday afternoon, Tencent published its full-year 2016 financial figures. Over the past year Tencent took in 151.9 billion yuan in revenue, 47.62% more than in 2015.

While a new generation of internet companies like Didi and Meituan are still struggling to turn a profit, Tencent made 56.1 billion yuan from games, advertising, and value-added services.

Some things simply haven't changed. Tencent, Alibaba, and Baidu, which controlled the Chinese internet more than a decade ago, are still the most profitable companies here. Most of the new services you use have their money behind them too.

But some things have changed. Tencent's advertising revenue kept growing, reaching 26.9 billion yuan, up 54% from a year earlier. This used to be Baidu's home turf.

And the number of payments made through WeChat each day has passed 600 million. Alipay, once thought to have payments locked up, won't disclose its own figure. Tencent is taking Alibaba's business too.

Alibaba and Baidu published last year's numbers in January and February. With that, all three have opened their books.

We used 20 charts to see what changed over the past year for these three monopolists of the Chinese internet.

Four years on, Baidu has hired more and more people — and fallen further and further behind

Alibaba's e-commerce, Tencent's social networking, and Baidu's search are the three companies' core businesses, and none of them has met a real challenger yet.

But compare revenue and profit, and Baidu has fallen behind completely.

Of the three, Tencent has the highest revenue and Alibaba the highest profit. Baidu... has the most employees. As of the first quarter of 2016, Baidu had 43,500 employees — 7,000 more than Alibaba and 12,000 more than Tencent.

In 2013 and 2014, Baidu's headcount grew by roughly 50% two years running. In that stretch, of the more than 10,000 people hired each year, about half were R&D staff and half were sales and marketing staff.

Tencent has the highest revenue of the three. As WeChat came to cover the entire population of Chinese internet users, Tencent's advertising revenue rose sharply.

Tencent's regard for WeChat showed up early in the layout of its annual reports — from 2011 to 2013, the WeChat logo sat beside the page number on every page. By 2014 the pages alternated: one WeChat, the next QQ.

Alibaba, the most profitable of the three, took in 143.8 billion yuan in revenue and 68.1 billion yuan in operating profit in 2016. E-commerce is still its main source of revenue.

Baidu's 2016 was not a quiet year. A medical scandal ran its advertising business into a ceiling, and the small fixes it was used to making couldn't solve the problem this time. Last year it took in only 70.5 billion yuan in revenue and 10 billion yuan in operating profit — revenue grew just 6%, while profit fell 15%.

Tencent and Alibaba became China's two most valuable companies, and they still monopolize the Chinese internet

Most people assume China's most valuable listed companies are big state-owned enterprises like PetroChina, Sinopec, China Mobile, or the four big state banks.

That changed last year. In August, Alibaba and Tencent released their second-quarter 2016 earnings one after the other. Alibaba first posted its strongest growth since going public and became Asia's most valuable internet company; then Tencent overtook Alibaba to become the most valuable company in China.

Suddenly two of China's three most valuable companies were private internet companies, and that has held ever since. Tencent and Alibaba became China's two most valuable companies. Each one leads the fifth- and sixth-place companies, China Construction Bank and PetroChina, by about the value of one Baidu.

Inside the internet world, meanwhile, Tencent, Alibaba, and Baidu — the three highest by market value — still monopolize the Chinese internet. Latecomers are still some way off.

Among China's ten largest internet companies, Ant Group is an Alibaba subsidiary. Of the rest, all but NetEase and Toutiao have investment from at least one of Alibaba, Tencent, or Baidu behind them.

Among the top 100 free apps in Apple's China app store, once games are set aside, more than half are services these three own or have invested in.

The three founders' fortunes swung sharply — on average, each Alibaba employee earned Jack Ma 1.21 million yuan

According to the Bloomberg Billionaires Index, the fortunes of the three founders — Jack Ma, Pony Ma, and Robin Li — have all moved sharply since January 1, 2016.

Jack Ma, worth 249.3 billion yuan, is the richest of the three; his fortune grew by 44.204 billion yuan. Pony Ma's grew by 36.607 billion yuan, while Robin Li's shrank by 10.63 billion yuan.

Work it out and each employee at Alibaba and at Tencent earned their company's founder more than a million yuan.

Where did all this new wealth go? Some of it went into buying homes and land overseas.

According to a Reuters report, Pony Ma, Tencent President Martin Lau, Tencent Chief Strategy Officer James Mitchell, Sequoia Capital partner Neil Shen, and others, together with the Hong Kong private equity fund Gaw Capital, have formed a consortium that plans to take out a loan to buy the Four Seasons resort on Bora Bora, in Tahiti. Jack Ma bought $23 million worth of land in New York.

The three made 152 investments last year — Tencent's portfolio is the broadest, but it was Baidu that pocketed the most cash

Since the start of 2016, Baidu, Alibaba, and Tencent have disclosed 152 outside investments or acquisitions between them.

Those investments spread across local services, finance, enterprise services, travel, e-commerce, education, healthcare, entertainment, and gaming.

Tencent is still the most active investor of the three, and the one with the broadest portfolio.

Baidu invests the least, which has plainly hurt how it does in markets like finance and offline services.

But since high-valuation companies like Didi and Meituan can't go public, look purely at investment returns and Baidu may be the one of the three that has gained the most directly.

In the fourth quarter of 2016, Baidu booked a net gain from an equity deal at one of the companies it had invested in. Its earnings report shows that when Didi bought Uber China, Baidu, a shareholder in Uber China, gained 1.796 billion yuan. That is roughly what Baidu's 131 million users earned the company over the past year.

Earlier, in the fourth quarter of 2015, Baidu booked a 24.2-billion-yuan investment gain from the Qunar–Trip.com Group share swap — 2.57 times Baidu's net profit for that year.

As for overseas investment, Tencent and Alibaba haven't held back either — they've even borrowed heavily from banks

Alibaba has invested in Uber rival Lyft, the South Korean entertainment company SM, the augmented-reality hardware maker Magic Leap, the Southeast Asian e-commerce platform Lazada, and the Indian payments company Paytm-One, and has taken strategic stakes in logistics companies in Singapore, South Korea, and Japan.

Tencent's largest acquisition was the $8.6 billion purchase of the Finnish mobile game maker Supercell.

Alibaba's overseas investments in 2016

2016.1

$1 billion investment in Lyft

2016.2

$794 million investment in Magic Leap

2016.2

195 million yuan investment in SM Entertainment

2016.4

$1 billion acquisition of Lazada

2016.8

Investment in Paytm-One97, amount undisclosed

2016.10

$25 million investment in PlaceIQ

2016.11

$18 million investment in InfinityAR

2016.11

$24 million investment in Barefoot

Reuters reported early this month that Alibaba has begun talks with several banks over a five-year, $5 billion loan, with principal and interest due in a single payment at maturity. Over the same period, Tencent has been discussing a $2 billion financing plan with several banks.

Their most direct reason to borrow is that money costs less abroad, and companies routinely use low-interest loans from banks and other financial institutions to run day to day.

On a loan of several billion dollars, banks do not charge a company the standard lending rate; they work from the cheaper interbank rate instead. The rate Alibaba pays on this loan may be around 2.76%.

That is far below the 4.75% domestic lending rate (three-to-five-year term) at ICBC. On a $5 billion loan, borrowing abroad instead of at home would save Alibaba close to $500 million in interest.

Another draw for companies like Alibaba is that money borrowed abroad can go straight into overseas investment, outside mainland China's foreign-exchange controls.

Tencent said in its annual report that tens of billions of yuan of its cash reserves are held back by foreign-exchange controls and cannot be used to pay dividends, buy back shares, or invest overseas.

Jiemian News reported earlier that several Hollywood acquisitions, including deals by Wanda and Xinke New Materials, had been called off — read as a sign that China's foreign-exchange oversight was tightening, to stop companies from moving large sums abroad so easily.

Each company's own new businesses are still burning cash

The Chinese internet has developed to the point where user growth at all three companies has basically topped out: the number of people who open WeChat, QQ, or Baidu search each month passed the total number of internet users in China long ago.

How to make more money from each user is the most important question in front of every one of them. None of the new businesses the three have found for themselves is yet a pillar of growth. Over the past year these three still made their money mainly from their old core businesses; their new businesses are still some way from bringing in a large share of revenue.

E-commerce is the business Alibaba leans on most, contributing 116.5 billion yuan of its 143.8 billion in revenue. And each user is spending more on Taobao and Tmall. In the most recent quarter, spending per user on Taobao and Tmall rose to 241 yuan, from 184 yuan a year earlier.

Outside e-commerce, Alibaba's cloud computing, digital entertainment, and other businesses are all still losing money.

In digital entertainment, Alibaba announced in the second half of last year that it was setting up a digital media and entertainment group and would put 10 billion yuan into the entertainment industry. It lost 4.8 billion yuan first.

Alibaba Cloud is probably the best of these new businesses, with triple-digit percentage growth for seven straight quarters, though it also takes heavy investment. Policy has kept competitors like Amazon and Microsoft out at home, but Alibaba Cloud still has a long way to go before it reaches the global market.

Advertising is more than 90% of Baidu's revenue, and that has barely changed since it got into the ad business in 2002.

Outside search, the business Baidu subsidizes most is video. In the fourth quarter of 2016, more than 14% of Baidu's revenue — 2.5 billion yuan — went to subsidize iQiyi. For the full year the figure reached 7.8 billion yuan.

But the spending hasn't produced profit. iQiyi makes most of its money from advertising, and while that figure keeps climbing, licensing costs are simply too expensive, so the site's losses keep widening too — they are now three times what they were two years ago.

Tencent has gone furthest in exploring new businesses. Its advertising revenue has kept growing at more than 50%, and its earlier investments have helped WeChat advertising develop fast.

The arrangement in which each company holds its own ground has lasted many years, but that balance is now shifting.

Tencent has moved onto Baidu's and Alibaba's home turf, and a balance that held for more than a decade is shifting

Baidu's advertising business ran into serious trouble in 2016. After the hemophilia forum affair early in the year and the Wei Zexi case in May, Baidu stopped commercializing disease-related forums on Baidu Tieba and cut a large number of ads on serious-illness keywords.

A government investigation team moved into Baidu in early May, and a week later announced rectification requirements that restricted its bid-ranking mechanism and the way ads were displayed, and ordered medical ads taken down.

Then in July the government issued the Interim Measures for the Administration of Internet Advertising, setting rules on ad types, content review, labeling, and tax rates.

This run of events hit Baidu's ad revenue hard. In the third and fourth quarters of last year, Baidu's ad revenue fell year over year by 1.2 billion and 1.3 billion yuan.

Tencent's advertising business, by contrast, has grown in recent years. It brought in 26.9 billion yuan in ad revenue in 2016, more than three times what it made in 2014. That money comes mainly from WeChat official accounts, Moments, and mobile Qzone.

For now there is still a sizable gap between Tencent's yearly ad revenue and Baidu's, and Tencent still has to fix its inefficiency in placing and settling ads. Tencent's advertising rests on the OMG sales team, the underlying technology of Guangdiantong, and WeChat's traffic, and internally it still runs a cumbersome, complicated settlement process.

But at the two companies' current growth rates in advertising, Tencent passing Baidu is basically a matter of time. If Tencent fixes the efficiency problem, it will happen faster.

On another front, on the strength of WeChat's absolute advantage in social networking, Tencent has also begun to challenge Alibaba's position in mobile payments.

Alipay started in payments and has found social features hard going. WeChat, which started in social and moved into payments, has had a much easier time. During Chinese New Year 2015, its red-envelope campaign got WeChat Pay linked to 200 million bank cards — a mark it had taken Alipay eight years to reach.

In the second half of last year, WeChat ran a months-long "incentive fund" program: pay with WeChat Pay for an offline purchase on any given day and you earned incentive funds, and if you kept accumulating them through the weekend they counted double against a purchase.

More important, most people keep WeChat on the first screen of their phone and open it dozens of times a day, and they don't do that with Alipay. At the end of last year, Pony Ma said in a public speech that WeChat had already passed Alipay offline.

Tencent's mobile payments now have more than 600 million monthly active accounts and more than 600 million transactions a day on average.

Alipay has never released comparable figures, but WeChat Pay's growth has clearly made it nervous.

That shows in Alipay's aggressive attempts at social over the past year and more, and most recently in its three-month "incentive fund" plan, lifted straight from WeChat's.

WeChat Pay could rise this fast, and catch up with Alipay this quickly, because of Tencent's broad investment portfolio. A number of everyday big-company services are dropping Alipay: companies where Baidu or Tencent led the investment are all moving away from it, and among the companies Tencent has backed, whether e-commerce like JD.com and Xiaohongshu or offline consumption like Meituan, all of them put WeChat Pay first.

Of Alibaba, Tencent, and Baidu, only Tencent is pushing into the other two companies' core businesses.

As Baidu falls further and further behind, and WeChat Pay passes Alipay, a balance that held for more than a decade is shifting.

The monopoly, though, probably isn't going anywhere.

Charts by Feng Xiuxia; cover image from Visualhunt

Appendix

Here is how Baidu, Tencent, and Alibaba's 2016 investments broke down by sector:

Local services

• Baidu: Lianjia
• Tencent: Yihongzhuang, Meituan
• Alibaba: Hema Fresh, Yiguo Fresh, Parkson China, Groupon, Ele.me, Sanjiang Shopping Club

Finance

• Baidu: Yixin Financial, Dazhong Kahui, ZestFinance, Circle Internet
• Tencent: Yixin Financial, Linklogis, Qingsongchou, Shuidi Mutual Aid, Lufax, Waddle
• Alibaba: Paytm, Ascend Money

Enterprise services

• Baidu: Dynamic Yield, Doumi Part-time Jobs
• Tencent: Clear Labs, Woyun Network, Barefoot, Petuum, Doumi Part-time Jobs, Skymind, Haiyun Jiexun, Teambition
• Alibaba: Jiagouyun, AISpeech, Shopline, Barefoot, PlaceIQ

Travel

• Baidu: /
• Tencent: Tongcheng Travel, Ibibo
• Alibaba: Wanzi Diqiu

E-commerce

• Baidu: /
• Tencent: Jinshangzhi, JD.com, Renrenche, Pinduoduo, Yiche Mall, Asitao
• Alibaba: Ruhan E-Commerce, Lazada, Suning Commerce, DayDayCook

Education

• Baidu: Jizhi Pigaiwang, SmartIVY, Li Jiaoshou
• Tencent: Yuantiku, ABC Berry English, New Oriental Online
• Alibaba: /

Hardware

• Baidu: Velodyne Lidar, Kuailianwang
• Tencent: Meta
• Alibaba: Magic Leap, InfinityAR

Mobility

• Baidu: /
• Tencent: Didi, Mobike
• Alibaba: Lyft, Banma, UCAR

Entertainment and gaming

• Baidu: Kuaishou
• Tencent: Supercell, YG Entertainment, Ocean Music, Kugou, Kuwo, Bona Film Group, Haiqiu Technology, Douyu, Discord, VC Mobile
• Alibaba: Radar Sports, Heyi Group, SM Entertainment, Dadi Cinemas, Giant Network, Amblin Partners, Hehe Pictures, Bona Film Group

Healthcare

• Baidu: Quyiyuan
• Tencent: Gengmei, iCarbonX, SoYoung, Linjia Haoyi, Wasti
• Alibaba: Wanli Cloud, Health2Sync

Social

• Baidu: /
• Tencent: women.com
• Alibaba: Sina Weibo, Wandoujia

Logistics

• Baidu: Baichuan Express
• Tencent: G7
• Alibaba: GoGoVan