Alibaba and Tencent Reported Earnings: 10 Charts on What Has Changed at the Two Companies That Control the Chinese Internet

The monopoly keeps getting more concentrated

Tencent and Alibaba both released their latest quarterly earnings this week. The two internet companies, each worth more than $400 billion, have left the company in third place far behind.

Alibaba's e-commerce business grew 58% from a year earlier; revenue and net profit reached 50.184 billion yuan and 14.031 billion yuan.

Over the same three months, Tencent took in 56.606 billion yuan, up 59% from the same period in 2016. Mobile game revenue passed PC game revenue for the first time, making it Tencent's most profitable business. Over the past six months Alibaba's stock rose more than 80%, making it the first company in Asia worth more than $400 billion.

Right behind it, Tencent crossed the same mark.

Yesterday, during the trading day, Tencent's stock rose as much as 5% to a record high and closed up 1.92%. Alibaba's stock rose 2.77%, even as share prices fell almost everywhere in the world overnight.

JD.com and NetEase fell 6.53% and 1.78%. The companies that once challenged them in e-commerce and gaming have been left far behind.

At the end of June, JD.com and Baidu were briefly neck and neck, with JD.com worth less than $700 million below Baidu at one point. Had Liu Qiangdong's company risen 1% more, or Robin Li's fallen 1% more, China's third-largest internet company would have changed hands.

But whoever ends up third, Alibaba and Tencent have already pulled far ahead. Here are ten charts on what is happening at the most valuable companies on the Chinese internet.

Tencent's and Alibaba's Growth Still Comes From Their Old Core Businesses

Alibaba, that enormous online economy, still runs mainly on what its users buy.

Between March and June this year, 466 million people shopped on Alibaba's e-commerce platforms — close to a third of China's population — and the revenue each of them generated rose from 202 yuan to 273 yuan. E-commerce made up 86% of Alibaba's total revenue, against 73% a year earlier.

Chinese shoppers are more and more used to buying everyday goods on Taobao and Tmall, and both the number of paying merchants on Tmall and their average spending hit record highs.

Alibaba CFO Maggie Wu credited part of that growth to "the growth in new users, and the technology dividend that came from stronger personalized recommendations last year." Since last year Alibaba has also begun stressing a second number alongside active buyers: active users. This quarter its monthly active users grew by 22 million from three months earlier, to 529 million.

Tencent, the internet company with the highest revenue, is still at bottom a game company.

WeChat's active users grew to 960 million over the past three months, which covers essentially every Chinese-language internet user. Tencent's advertising revenue rose for a third straight quarter, reaching 12.943 billion yuan, or 22.8% of total revenue.

But the largest share of Tencent's revenue still comes from games. A full year of rising monthly active users for Honor of Kings pushed Tencent's mobile game revenue to 14.8 billion yuan, past PC game revenue for the first time.

As Onmyoji cooled off, the gap between NetEase's and Tencent's game revenue widened. In games, Tencent has left its chasers far behind.

All of the new growth is in core businesses, and in those businesses neither company faces a strong chaser. Squeezing more money out of users through the core business is now the most important job.

Profits Jumped for Other Reasons Too — Tencent Through Investing, Alibaba Through Saving

Tencent and Alibaba have invested in a pile of companies at home and abroad, some for financial return and some for strategy.

Tencent's net profit rose 70% this quarter. Beyond the continued fast growth of core businesses like games and advertising, good investments helped it earn more.

In 2016 Tencent held 22% of Netmarble, South Korea's largest mobile game company, through an investment fund, making it the third-largest shareholder. Netmarble took in about 8.7 billion yuan in revenue in 2016.

This April Netmarble listed in South Korea at a market value of about $9.9 billion (roughly 66.7 billion yuan). Tencent's stake was worth about 14.6 billion yuan — it could turn a profit just by selling.

That investment looks more financial than strategic. Tencent never brought Lineage 2, Netmarble's most popular game, into mainland China, and Hong Kong and Taiwan are run by Netmarble directly.

Alibaba's investments in new businesses are still losing money, but it has kept the costs of the core business and its operating expenses well under control.

It met JD.com head-on at the June 18 shopping festival. Because JD.com had to pay for subsidies, publicity, promotion and stock, its operating expenses rose from 84% of revenue to 86%.

Alibaba's went the other way, from 73.6% a year earlier to 65.2%. Its R&D, marketing and administrative costs also fell as a share of revenue, by varying amounts. Total expenses including share-based compensation fell 8% as a share of revenue from a year earlier.

Strong operating results also left Alibaba with 25.3 billion yuan in operating cash flow this quarter, while it held investment cash outflows to 13.9 billion yuan — saving money inside the company and outside it.

Alibaba and Tencent Each Net About 30 Yuan Per User Per Quarter

China has 751 million internet users today. Almost all of them use WeChat, and half spend more than 90 minutes a day on it. Another 529 million open Taobao on their phones every month.

Do the arithmetic and every user hands Tencent and Alibaba about 30 yuan of net profit each, every quarter.

After a 2016 full of trouble, Lu Qi replaced Robin Li as the man actually running Baidu. Six months into the job, Lu Qi announced a plan to remake the company, and found a new source of revenue — feed advertising.

JD.com's e-commerce revenue is roughly twice Alibaba's, but its profit does not compare: it lost 287 million yuan in a single quarter. Liu Qiangdong's company lost about 0.2 yuan on every active user.

The Big Companies' Ad Businesses Are All Turning Into Toutiao

Baidu's net profit fell by two-thirds across 2016, the first annual drop since the company was founded. This quarter, it finally grew again.

The reason is a new source of revenue — feed advertising. Adding a constantly refreshing news feed to its mobile search app is the model Baidu has pushed hardest this year.

Baidu, whose core business is advertising, finally got its ad revenue growing again a year after the medical-advertising scandals and the management turmoil of 2016. This quarter Baidu's online marketing revenue — that is, advertising — rose 5.6% to 17.883 billion yuan. That business, nearly 90% of total revenue, had fallen for four straight quarters before this.

"Compared with the first quarter, revenue from native advertising by large clients rose 250%, and feed advertising revenue rose 200%. Clients' continued confidence and willingness to spend show that our search business is shaking off the negative effects of the past," Robin Li wrote in an internal letter after the earnings release.

QuestMobile data shows the Baidu mobile app had more than 100 million daily active users in the second quarter.

Personalized recommendations of the sort Toutiao pioneered have lifted Baidu's feed advertising revenue from 10 million yuan a day at the end of the first quarter to 30 million yuan a day now.

At the old Baidu, users who found what they were searching for stopped browsing, which kept ad impressions from growing. A search box plus a feed keeps them on the app longer.

Hence the 200% jump in Baidu's feed advertising revenue over the first quarter.

Tencent's advertising growth used to rest almost entirely on WeChat and Qzone. In 2016 its brand display advertising revenue grew only 11%, mostly from Tencent News.

This quarter Tencent's media advertising growth bounced back to 48%, because Tencent keeps making its media operation more like Toutiao, leaning on self-published content from platforms such as Qi'e Hao.

So Tencent's advertising revenue passed 10 billion yuan for the first time in the second quarter, up 55% from a year earlier.

They all offer a similar interface, similar innuendo, similar shock and similar ads.

Baidu uses search to pull users in and content to keep them there. Tencent uses a large number of self-published accounts to raise the volume of content and lower the cost of making it.

UC Browser, which Alibaba bought, started turning into a content platform last year, and its interface and its content now both look more like Toutiao. Behind the "UC shock headline" is Alibaba's hope of using data to turn its content into Toutiao's kind of content.

But Their New Businesses Are All Still Burning Cash — Except Alibaba Cloud

Tencent's second-quarter report showed QQ's monthly active users down another 5.4%.

The number has been falling for a year. Tencent explains the decline as a loss of non-core users and stresses that core users are more engaged. WeChat's user base is still growing at the same time, but it all points one way: making more money from the users they already have is what these companies must be ready to do before the ceiling on user growth arrives.

The same holds for Alibaba and Baidu.

Beyond the core business, making more money from new businesses has become the most important job — and none of them has done it well.

Over the past year Alibaba, Tencent and Baidu all still made their money from old businesses. In 2017 nothing has changed; if anything, the core businesses earn more than ever.

The cost of Tencent's online advertising business rose 76% from a year earlier in the second quarter of 2017, to 6.307 billion yuan, most of it spent on content and marketing for a new business, Tencent Video.

Martin Lau, Tencent's executive director, admitted on the earnings call that although video advertising and subscriber numbers both rose sharply, content costs rose faster, and for now the online video business's net losses are widening.

Baidu's problem is worse. Outside search, Baidu subsidized iQiyi to the tune of 7.8 billion yuan last year. That figure keeps climbing: Baidu's content costs rose to 3.112 billion yuan in the second quarter.

On revenue, iQiyi brought in more than 1 billion yuan in the second quarter. On margins, it cut Baidu's non-GAAP operating margin by 11.5% in the second quarter of 2017.

The new video business has become a contest of spending more to buy share, using the advertising and subscription income that subscribers bring in to slow the burn. It will probably be a long time before these new businesses account for a large share of revenue.

Alibaba's new businesses, both cloud computing and digital entertainment, did relatively better this quarter. Paying cloud customers passed 1 million for the first time, making it the first cloud company in Asia at that scale. The earnings report puts Alibaba Cloud's revenue at 2.431 billion yuan for the quarter, with losses narrowed to 4%. Its long investment is starting to pay back, and breaking even is a matter of time.

Alibaba's other businesses are still losing money. Digital entertainment is its second-largest source of revenue, bringing in 4.081 billion yuan this quarter, up 30% from a year earlier. The revenue is large, but the segment — mainly UC, Youku, Tudou, Alisports, Alibaba Music, Alibaba Games and Damai — will have to spend more on content. This quarter Alibaba's digital media and entertainment segment lost 3.388 billion yuan.

Other Chinese Tech Companies Keep Falling Further Behind Alibaba and Tencent

Finding new businesses is hard, but because their main businesses keep growing, Alibaba and Tencent's lead over the rest of Chinese tech keeps widening.

At the end of 2016 NetEase's game revenue grew 78% from a year earlier, to 10.7 billion yuan. Onmyoji was such a hit that the argument over whether it or Honor of Kings was the top mobile game never stopped.

Six months later, Tencent's game business sped up and NetEase slowed down. The same thing happened to JD.com. Huge spending still did not get users into the habit of buying, and after one profitable quarter the company chasing Alibaba had to slow down and return to losses.

Alibaba, in the same quarter, grew revenue more and nearly doubled its profit.

Today Alibaba and Tencent lead the market-value ranking of overseas-listed Chinese tech companies. The next eight largest are worth $240 billion combined, about 60% of Tencent alone.

Baidu, in third place, is worth only about 20% of Alibaba or Tencent.

As for the companies that have not gone public, the bigger ones have mostly taken money from the two already.

If anything has changed about this market's long-standing monopoly, it is that the monopoly has grown more concentrated.

Charts in this article by / Xiuxia Feng

Cover image from VisualHunt