Summary of Key Points
This article focuses on Tencent's Q2 financial report and discusses three main aspects: First, Tencent's traditional businesses (gaming and advertising) are still generating stable profits, but there has been a significant increase in investment in AI-related initiatives. Second, Tencent is deeply concerned that the "intelligence agents" of the AI era may steal its most valuable advantage, which is its ability to connect users with services. Third, Tencent's strategy is to develop its own AI models to avoid being dependent on external companies and to transition its existing WeChat ecosystem (including user relationships, merchants, and payment systems) to the AI era in order to maintain control over these connections. The article concludes that this strategy may not be popular with investors in the short term, but the key to Tencent's future lies in whether AI will either strengthen or bypass its current business model.
I. Profits and Expenses in the Financial Report: Stable Traditional Businesses, Heavy Investment in AI
Tencent's Q2 results were quite good: total revenue reached 204.8 billion yuan, an increase of 11% year-over-year. Revenue from domestic gaming increased by 17%, and advertising revenue rose by 22%. Even AI has started to contribute to advertising revenue generation. However, a striking statistic is the significant increase in capital expenditures, which jumped from 31.9 billion yuan in Q1 to 52.8 billion yuan in Q2, a rise of 65%. More specifically, excluding the impact of new AI products (such as Hy and Xiaowei), Tencent's actual operating profit decreased by 10.5 billion yuan. This does not mean that Tencent spent 10.5 billion yuan solely on AI research and development; rather, investments in AI-related areas (such as hiring personnel, purchasing computing power, and developing products) have impacted short-term profits.
In simple terms, Tencent's traditional businesses are still profitable, but the company is making substantial investments in AI to transform its business model.
II. Tencent's Anxiety about AI: Will Agents Steal Its Connection Advantage?
What makes Tencent most valuable is its ability to connect users with services. For example, people use WeChat Mini-programs for shopping, Enterprise WeChat for work, and Video Accounts for accessing content. However, the AI era could change this landscape: in the future, users might not need to open apps directly; they could simply ask an intelligent agent to book a hotel in Shanghai or notify colleagues. In that case, it would be the agents, rather than users, who decide which hotel to use and which payment method to use.
This poses a threat to Tencent's business model because if agents operate outside of its ecosystem, its connection advantage would be lost. Users would no longer use WeChat directly but instead rely on external agents to access its services, turning Tencent from a leader into a provider of tools.
III. Tencent's AI Strategy: Developing Own Models While Focusing on Connections
Tencent's approach is clear:
1. Developing Its Own Models: It needs to have its own advanced models, such as the Hunyuan Large Model, to avoid being dependent on external companies for core capabilities (which could limit pricing and data access).
2. Not Relying on Being the Strongest in Models: Tencent has invested in DeepSeek, another AI company. Even if DeepSeek's coding capabilities are stronger than its own, as long as Tencent's AI programming tool, CodeBuddy, can utilize DeepSeek’s technology effectively, that’s sufficient.
3. Connecting the Existing Ecosystem: Tools like WorkBuddy aim to integrate Enterprise WeChat, meetings, and documents, while Xiaowei (WeChat’s AI assistant) aims to connect merchants, Mini-programs, and payment systems. The goal is for agents to access services within Tencent’s ecosystem, shifting the user interaction from "people finding services" to "agents finding services," with Tencent still playing a central role in the connection process.
IV. Why Isn’t the Capital Market Buying In? Defensive Spending Is Unpopular
Investors prefer "offensive spending" that directly generates new revenue, such as rapid growth in new businesses. However, Tencent’s current AI investments are more defensive in nature, aimed at maintaining its existing business model. Since there is no immediate profit from these AI initiatives and profits have been affected, Tencent’s stock price declined after the report was released. Investors question whether the investment will be worthwhile.
The article suggests that this strategy may not be well-received by investors for a while, but Tencent has no choice: if it doesn’t invest in AI, it may lose its connection advantage in the future; if it does, short-term profits could be impacted.
V. The Ultimate Bet for Tencent: Can It Maintain Its Connection Advantage in the AI Era?
The success of Tencent’s AI investments depends on whether AI will strengthen or bypass its current business model:
- Success Scenario: If Xiaowei can integrate all WeChat services and WorkBuddy becomes a core tool for work, Tencent would successfully transition its ecosystem to the AI era. Even if competitors have better models, they cannot replicate the extensive user relationships, merchant networks, and payment systems that Tencent has built over the years.
- Failure Scenario: If agents are controlled by external companies and fewer users use WeChat directly, Tencent’s status could decline from a core player in the internet to just another tool being utilized by others.
The ultimate question is whether Tencent can retain its position as a leader in connecting users with services in the AI era.
While the article does not predict stock prices, it highlights the critical challenge for Tencent: how to preserve its connection advantage as the internet evolves through AI. For readers, understanding Tencent’s concerns and strategies helps explain why it is investing so heavily in AI and what the potential risks and opportunities lie ahead.