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Tencent Is More Like Amazon Than Facebook

By Adam Levy – Nov 30, 2016 at 5:43PM

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Tencent isn't your typical social networking company.

Image Source: Flickr user Sinchen.Lin.

Tencent (TCEHY 1.89%) is the company behind some of the largest social networks in the world. It owns QZone, which has 632 million monthly active users, and the extremely popular messaging app WeChat, which has 864 million users. Tencent's users are highly concentrated in China.

While Tencent often gets compared to global social-network leader Facebook (NASDAQ: FB), it's actually starting to look a lot more like Amazon (AMZN -1.90%). Both Tencent and Amazon are investing heavily in video content and cloud-computing infrastructure. Tencent's spending increased 69% in the third quarter to fuel growth in those areas, as well as payments and games.

Getting its hands on everything

Tencent's aim in investing in various areas is to leverage its position as a leading social-network app and video game maker into a more integral part of people's lives and the internet infrastructure. Likewise, Amazon has used its position as the leading online retailer to get into cloud computing, video and music streaming, a payments platform, and a professional services marketplace, among other things.

Facebook, on the other hand, is largely focused on one particular area -- social-networking apps and the advertising technology used to support them. Even investments in areas like virtual reality and internet connectivity are designed to support that focus instead of the other way around.

There are certainly merits to both strategies. The stellar results of both Amazon and Facebook are proof.

Getting in on video streaming in China

Video-streaming is already popular in China, but the subscription video-on-demand services are still in the very early stages. Baidu's (NASDAQ: BIDU) market-leading iQiyi streaming-video platform has 520 million monthly active users, but only 20 million of those are paid subscribers.

To be sure, the market is growing rapidly. In the year ending June 2016, iQiyi's subscriber count quadrupled. Tencent is in a strong position to take on iQiyi and take advantage of the appetite of Chinese consumers for premium streaming-video content. Tencent's QQLive is a leading online interactive video platform in China. It broadcasts TV programs as well as films, sports, and other videos.

Tencent reportedly plans to spend over $295 million on content between this year and next year. It's already helped finance big-budget Hollywood films like Warcraft -- which was a hit in China -- and Kong: Skull Island.

Tencent is focusing on original content, just like Amazon, to differentiate its product. Importantly, it's taking advantage of the intellectual property found in its games to produce new films and series. It's also buying up the rights to comics, novels, and anime to get its hands on more popular IP for both video content and gaming.

Similarly, Amazon is investing heavily in video content and originals as it aims to attract more customers to Prime. It's also hinted at plans to expand its streaming video service globally.

A cloud-computing king

Cloud computing is still nascent in China, as well. The market size was just $1.5 billion in 2013, but that number is expected to grow to $20 billion by 2020. Tencent has said it plans to invest $1.57 billion in cloud-computing infrastructure between 2016 and 2020.

The company is already making strong progress. In the third quarter, cloud-computing revenue more than tripled. Total revenue for its "others" segment -- which includes cloud computing and its payments business -- increased 348% for the quarter, reaching about $717 million.

Amazon's cloud business, by comparison, is huge. Amazon Web Services -- its cloud-computing segment -- brought in $3.2 billion in revenue last quarter. While its growth is still very strong at 55%, it's nothing compared to the growth of Tencent's business.

The Amazon of social networks

While Tencent's current business looks a lot like Facebook's, it might start looking a lot more like Amazon in the future. With continued investments in video and cloud computing, Tencent is setting itself up for continued high-revenue growth rates even if its revenue growth from WeChat starts to slow down.

Adam Levy owns shares of The Motley Fool owns shares of and recommends, Baidu, and Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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