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How Content Streaming Affected Tencent’s Revenues and Costs

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How much did advertising revenue grow?

Tencent’s (TCEHY) revenue rose at a three-year CAGR (compound annual growth rate) of 44% to 237.8 billion yuan ($36.4 billion) in fiscal 2017. The revenue growth accelerated from 30% in fiscal 2015 to 56% in fiscal 2017. Online advertising’s revenue contribution increased from 11% in fiscal 2014 to 17% in fiscal 2017. The revenue increased by 39% to 147.2 billion yuan ($22.2 billion) in the six months ended June 30, 2018. Online advertising generated 16%–17% of the company’s revenue for the periods. Tencent Video has been the primary revenue driver of online advertising.
TCEHY REV COST

What drove the costs?

Tencent’s cost of revenue increased at a three-year CAGR of 58% to 120.8 billion yuan in fiscal 2017. The cost grew by 35% in fiscal 2015 compared to 79% in fiscal 2017. The cost margin rose from 39% in fiscal 2014 to 51% in fiscal 2017. Higher content costs of subscription video streaming and traffic acquisition costs were the main cost drivers. The costs rose 44% to 75.7 billion yuan in the six months ended June 30, 2018. The cost of revenue used up 49%–51% of revenue in the six months ended June 30, 2017, and June 30, 2018.

Blockbuster content

Candle in the Tomb, Rule the World, and The Tomorrow Children drove the 137 million plus daily users. The company also intends to adapt The Tibet Code, Mystery of the Antiques, and Manga’s Prince of Tennis for television. Tencent invested around $1 billion each in China’s live streaming platforms Douyu and Huya (HUYA) before their IPOs in Hong Kong and the US. The gaming major is stepping up its competition against iQiyi (IQ) and Alibaba (BABA).

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