Three Ways Alibaba and Tencent Are Courting Consumers and Marketers

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Like the United States, China is seeing bidding wars erupt for streaming video, data picking winners and losers among marketers and online shopping reshape retail at a rapid clip.

That's the takeway from this week's quarterly earnings reports by internet giants Tencent and Alibaba, China's most valuable companies by market value and among the global top five for digital ad revenue, according to eMarketer. The behemoths have reshaped how China's consumers shop, keep in touch and entertain themselves.

Chinese consumers on the rise

WeChat. Credit: Bloomberg Finance LP

China's leaders have been trying to shift the economy to one powered by consumption instead of relying on exports and investments. Alibaba Group's and Tencent Holdings' financial results are one example of how the transformation is happening -- in part, through spending online. Alibaba's revenue for the quarter ended in March 2017 jumped 60% to $5.6 billion; the company takes commissions on online shopping purchases and sells ad space on its platforms.

Tencent, the maker of all-purpose app WeChat, is mostly fueled by spending on online games like smartphone title "Honor of Kings," though it's getting an ever-larger share of revenue from advertising. Its quarterly revenue rose 55% to $7.2 billion. Despite concerns about a softening of some economic indicators, online sales were up 32% in the first four months of the year, and total retail sales rose 10.2%, according to the National Bureau of Statistics.

Digital video in big demand
Alibaba owns online video platform Youku-Tudou, while Tencent also has its own similar platform. Both have been pouring money into licensing content as they try to compete against each other and against the No. 3 Chinese internet giant Baidu, which owns a video site called iQiyi. Offering compelling video content is one way for internet giants to keep people hooked on their ecosystem.

In a call with analysts, Alibaba Vice Chairman Joseph Tsai said that competition for licensed content was "fierce," though the company is working on its own content, so the price should come down eventually.

Tencent Chief Financial Officer John Lo told analysts that it expects video to be "loss-making for the foreseeable future," though it's seeing growth in traffic, ad revenue and subscriptions.

Massive stores of data
"You're really starting to see Tencent and Alibaba's vast banks of valuable data coming through in their strategies, enabling them to pick winners and promote them through their powerful channels," said Mark Tanner, managing director of marketing and research company China Skinny. That's helping Tencent and Alibaba grow even more dominant, and as Tanner says, makes "the rich get richer."

"It's not unlike the consolidation happening everywhere online," Tanner said. "Those with the data are able to really understand what Chinese consumers want, and then they can deliver it through their established channels."

Both are using consumer data for more ad targeting. Tencent Chief Strategy Officer James Mitchell said, for example, that more offline retailers were buying ads on mobile app WeChat to target customers nearby their shop locations. Its quarterly ad revenue was up 47% from a year earlier.

Alibaba, meanwhile, said its marketing service revenues for its China shopping business grew 46%. Alibaba Chief Financial Officer Maggie Wu said user growth and the ability to deliver more relevant content led to higher average spending by more brands and merchants.

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