Now I'd like to hand the conference over to Ms. Wendy Huang from Tencent IR team. Thank you. Please go ahead, ma'am.
Thank you, Amber. Good evening. Welcome to our 2021 first quarter results conference call. Before we start the presentation, we would like to remind you that it includes forward-looking statements which are underlined by a number of risks and uncertainties, and it may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents on the IR section of our website. Let me introduce the management team on the call tonight. Our Chairman and CEO, Pony Ma, will kick off with a short overview.
President Martin Lau will discuss strategy review. Chief Strategy Officer James Mitchell will speak to business review, Chief Financial Officer John Lo will conclude with financial discussion before we open the floor for questions. I will now turn the call over to Pony.
Thank you, Wendy. Good evening. Thanks, everyone, for joining us. During the first quarter, we achieved solid growth across our businesses, in particular in our fintech and business services, and advertising revenue streams. We are also stepping up investment in areas including business services and enterprise software, high production value games, and short-form video, which will be covered in more details in the strategy section. Let me go through the headline financial numbers for the quarter. Total revenue was RMB 135 billion , up 25% year-on-year and 1% quarter-on-quarter. Gross profit was RMB 63 billion , up 19% year-on-year and 6% quarter-on-quarter. Non-IFRS operating profit was RMB 43 billion , up 20% year-on-year and 12% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was RMB 33 billion , up 22% year-on-year and stable quarter-on-quarter.
For our key services, despite intensive competition across the China internet industry, we generally retain or extend our first-place position in activities including social, games, long-form video, news, music, literature, payment, and mobile utilities. We believe we gain market share in cloud services. Combined MAU of Weixin and WeChat was 1.24 billion. Mobile devices MAU of QQ was 606 million. Martin and James will discuss our future strategy and progress across some of these activities in detail. I hand over to Martin for the strategy review.
Thank you, Pony. Good evening and good morning to everybody. Today, I will walk you through a few strategic investment areas that we believe will support our long-term growth. In the course of 2020, we saw exciting new market opportunities emerging. First, businesses are accelerating their movement online and industries are speeding up their digitization across their value chains. Second, the audience for games structurally expanded due to the stay-at-home period. We believe emerging genres and advanced technologies would drive further game audience growth. Third, as the short video market matures, we believe users will seek more diverse and nutritious short-form video content. At the same time, the entire internet industry is undergoing a new round of additional investment in which investors and companies are prioritizing growth over profit.
We can see this in our own investee portfolio, where heavy investments are made in areas such as community group buy, electric vehicles, and user acquisition. On the other hand, these initiatives boosted market valuation, with the market value of our stakes in listed investees exceeding $200 billion as of quarter end. On the other hand, our top five loss-making associates reduced our non-IFRS net profit by 7% in the first quarter. As for Tencent, we see opportunities to proactively invest in several areas where we can be an early mover and a shaper of industry evolution rather than playing catch-up later. First of all, business services. We're adding headcounts and infrastructure to assist the digitalization of various industries. Second, games. We're investing in high production value games with global appeal. Third, short-form video content. We're cultivating multiple ecosystems to meet users' emerging needs for more interesting content.
Fourth, Sustainable Social Value. We announced the establishment of new SSV org to bring technology benefits to the society. Funding these investments will absorb a portion of our incremental profits from existing businesses for 2021, but we expect such investment will deliver very high return over the longer run. In the next few slides, I will discuss the specific opportunities, the progress and achievements we have made so far, and the initiatives that we are funding going forward. Now let's start with business services. Since we upgraded our strategy to embrace industrial internet in 2018, we have seen product and service providers and customers aspiring to optimize their connection with consumers digitally. Various industries are deepening digitalization across customer engagement, operations, production, and supply chain, particularly after COVID-19. Meanwhile, enterprises widely adopted online collaboration tools internally to improve their efficiency. We have achieved some structural strength in this area.
For example, on the scale front, we believe that across our internal usage and external customers, our cloud service now run the largest number of servers in China. On the platform and software front, we provide leading CRM, collaboration, and productivity solutions in a market where those services are highly valued by enterprises. After a period of disruption due to COVID-19, our cloud services moved back to an above-industry revenue growth rate in the first quarter. To double down on these trends, we're increasing headcounts for product development to enhance our service offering and also expanding our sales team to facilitate client acquisitions and service. We're strengthening the capabilities and interconnections of our productivity SaaS products and security software to extend their leadership positions. At the same time, we're growing the networks of independent software vendors and SaaS partners through strategic operations and investments.
We're also deepening our smart industry strategy by expanding coverage and enhancing upsell and cross-sell competencies in key verticals such as healthcare, retail, education, and transportation. Turning to games, we believe the global industry opportunities and the resources required to capture the opportunities are larger than ever. First, mobile devices are extending the total addressable market for games, which was further boosted by the stay-at-home period. We believe emerging genres and development toward the metaverse will further expand the market. Second, game players are becoming more discerning and quality sensitive. High production value, innovative, and cross-platform games can attract and retain large audiences to an extent not previously possible. Thirdly, Chinese game developers are attaining early success in global markets. We believe we are already in the early stages of capitalizing on these trends.
Our high DAU franchise games such as Honor of Kings, PUBG MOBILE, Peacekeeper Elite, and League of Legends uphold our leadership in major genres. Each one of them consistently deliver large, loyal audiences as well as solid monetization. On top of that, our internal and investee studios are working on a large and diverse game pipeline. International revenues now also account for a substantial portion of our game revenues, and titles such as PUBG MOBILE, League of Legends, and VALORANT have achieved sustained player recognition globally. Looking forward, we aspire to lead the industry and are committing the necessary additional resources. We're making long-term investments in developing large-scale, high production value games to attract players globally. We're funding development of innovative games in emerging verticals. We're building up IP franchises suitable for games and expanding across media.
We'll step up marketing expenditures and attract bigger audience to new games. We are investing in emerging areas such as our cloud gaming services. Next, we'll talk about our investment in the short-form video arena. China consumers have shown great appetite for watching short-form video. We're investing to address how we see that appetite evolving going forward. First, we're positioning Video Accounts as a new infrastructure in Weixin, connecting users with real-life content and bridging high-quality content creators with consumers. We provide resources as well as handy creation and monetization tools to attract diverse content creators, thus incubating a unique content portfolio. We optimize technology to unlock potential of social plus algorithmic recommendations, leveraging the strength to increase exposure of knowledge-based content. Besides, we're adding servers and bandwidth to support the solid organic growth in Video Accounts.
We're confident that these investments will benefit the ecosystem and engage greater audience over time. Second, we recently merged Tencent Video and Weishi, our short-form video app in PCG, seeking to bring integrated viewing experiences to users, enrich content offerings, as well as sharpen algorithmic recommendation. Along with this internal business reorg, we are escalating self-commission production to further expand our IP content library, which can facilitate creation of more video clips by our creator network and better serve users' emerging needs for high-quality short content. We'll also leverage our capabilities acquired through building up Weishi to empower our long-form video business in terms of content creation, recommendation, user acquisition, and operations. Finally, we announced our aspiration to promote sustainable innovations for social value.
We seek to bring sustainable benefits and value to society by leveraging our technology and products, and to elevate the importance of sustainable social value when making decisions in all our products and services. By integrating our existing corporate social responsibility and charitable activities into a new Sustainable Social Value Organisation, SSV Org, we created a dedicated team to deploy social value initiatives in a professional and entrepreneurial way. We'll incubate projects in various areas such as basic science, education, innovation, rural revitalization, carbon neutrality, and food, energy, and water provision. Where appropriate, we'll link these projects with our existing businesses. In addition to making charitable donations, we'll seek to promote the development of self-sustainable operations, which will create new value for related industries and for society. Throughout the process, we'll pursue long-term social value rather than economic profits.
We are committing an initial capital of RMB 50 billion to be funded by our investment gains. We believe that our strategic upgrade and the new initiatives will allow us to make an even more positive impact to the society and usher in a new phase of development for Tencent. Now with that, I will pass to James to talk about our business review.
Thank you very much, Martin. For the first quarter of 2021, our total revenue grew 25% year-on-year. VAS represented 54% of our revenue, within which games were 32% and social networks 22%. Online advertising was 16%, and fintech and business services represented 29% of total revenue. For value-added services, segment revenue was RMB 72 billion, up 16% year-on-year and up 8% quarter-on-quarter. Social networks revenue increased 15% year-on-year to RMB 29 billion on moderate growth of digital content subscriptions and in-game item sales. Total VAS subscriptions increased 14% year-on-year to 226 million. Video subscriptions grew 12% to 125 million, benefiting from adaptation of IPs such as The Land of Warriors into animated and live-action drama series. Music subscriptions expanded 43% to 61 million due to better content, effective marketing campaigns, and an improved retention rate.
Games revenue grew 17% year-on-year to RMB 44 billion against the high base stay-at-home period, which started in China in the first quarter of 2020. Growth was primarily driven by mobile games in China and by mobile and PC games in international markets. Sequentially, game revenue increased 12% due to Chinese New Year seasonality. For mobile games, total revenue increased 19% year-on-year to RMB 41 billion, benefiting from robust performance of existing games such as Honor of Kings, PUBG MOBILE, and Peacekeeper Elite, as well as contributions from new games such as Moonlight Blade Mobile and Call of Duty Mobile in China.
For PC client games, revenue increased 1% year-on-year to RMB 12 billion as contributions from VALORANT and Warframe, as well as growth in CrossFire, offset a decline from Dungeon & Fighter. For Weixin, we provided more support for our partners and are together building a vibrant content and service ecosystem. On the content front, we attract and cultivate Video Accounts creators by providing customized onboarding services, favorable traffic allocation to build their initial audiences, and training in video production best practices. On the services front, we provide capabilities to increase penetration of mini programs, particularly among SMEs. Our low-code development platform enables smaller businesses to create mini programs in a more cost-effective way, and we launched new tools to assist system integrators. The number of active mini programs served by system integrators more than tripled year-on-year.
For QQ, we're leveraging technology to better integrate social and content consumption experiences, such as seamless connection between instant messaging and games. Users can team up with QQ friends to start a multiplayer game battle with one click, and QQ mini programs facilitate users staying up-to-date with in-game events. Looking forward, QQ's new leadership team will seek to upgrade the product's technology, operations, and content to better serve the social and entertainment needs of younger users. Turning to games, aggregate user engagement and user spending increased year-on-year despite the high 1Q 2020 comparison period. We released Honor of Kings' biggest update in January to improve graphics and game experiences, and then launched appealing marketing campaigns with top-tier skins during the Chinese New Year, which drove the game's DAU and paying users to record high levels in February.
We reduced the application file size of PUBG MOBILE and enhanced our local market operating capabilities, boosting PUBG MOBILE's DAU in countries including Turkey, Egypt, and Russia. For League of Legends, we distributed bigger and better Lunar Revel content for the core game mode as well as for Teamfight Tactics, contributing to higher global revenue year-on-year. Beyond these large audience games, we're also cultivating emerging genres. For example, new releases Komori Life and The Walnut Diary ranked among China's top 10 life simulation mobile games by DAU in April. Our pipeline includes action, battle arena, role-playing, simulation, strategy, and survival games. For China, many of these new games are adapted from popular existing game and literature IPs. Internationally, we expect our substantial prior investments in best-in-class PC console and mobile studios to begin contributing a range of genre-innovating games in the quarters to come. Moving to online advertising.
Total revenue was RMB 22 billion in the quarter, up 23% year-on-year, assisted by three factors beyond our ongoing product innovation and ad tech improvements. First, higher ad spend from the e-commerce and education verticals. Second, FMCG and automobile-related advertising revenue benefiting from economic growth. Third, full quarter consolidation of the Bitauto automobile vertical site. We enhanced the transaction capabilities of our ad properties and customized marketing solutions for key verticals, including games, retail, and automobiles, delivering higher ROIs for advertisers. Looking forward, IDFA deprecation on iOS devices appears to have limited impact on the China ad market so far. Other potential uncertainties include possible regulatory headwinds for K-12 education and potential delays to the video content release schedule.
Our social and others advertising revenue expanded 27% year-on-year to RMB 19 billion, driven by Moments and Mobile Ad Network, within which Moments impressions and revenue increased as we added inventory and as more advertisers adopted mini programs as landing pages. Our Mobile Ad Network revenue grew rapidly, reflecting increased video ad inventories primarily within games, online reading, and tool applications. Our media advertising revenue rose 7% year-on-year, RMB 3 billion, largely due to increased ad inventory and eCPM within our music apps. During the quarter, we released several popular self-commissioned variety shows including CHUANG 2021 and Roast! Season five, driving our sponsor ad revenue. Looking at Fintech and business services, segment revenue was RMB 39 billion, up 47% year-on-year and up 1% quarter-on-quarter.
Within Fintech services, the year-on-year revenue growth rate was higher than in prior quarters, benefiting from an easy base period as stay-at-home activity reduced offline consumption in 1Q 2020. Our payment business is also structurally benefiting from the broader digitalization of consumer habits and of the economy. Payment volume and revenue increased slightly quarter-on-quarter, despite seasonally reduced e-commerce activity. Offline spending picked up as many people stayed in the cities in which they work during the Chinese New Year holiday, which boosted local spending on retail and dining services. For business services, revenue grew at a healthy rate year-on-year, benefiting from resume project deployment and robust demand from industries including enterprise software and online video provision. Increased customer uptake of our security communication and CRM solutions drove notable growth in our PaaS and SaaS revenue, both absolutely and as a proportion of our overall business services revenue.
Our cloud marketplace now includes thousands of partners, Software as a Service products. We launched Enterprise App Connector with unified login accounts and data flows across different SaaS products, allowing SaaS providers to develop and deliver their products more efficiently while facilitating enterprise clients to better integrate multiple software solutions. With that, I'll pass to John to discuss the financials.
Thank you, James. For the first quarter of 2021, total revenue was RMB 135.3 billion, up 25% year-on-year or 1% quarter-on-quarter. Gross profit was RMB 62.6 billion, up 19% year-on-year or 6% quarter-on-quarter. Net other gains were RMB 19.5 billion, up 384% year-on-year or down 41% quarter-on-quarter. This mainly comprised non-IFRS adjustment items, including fair value gains reflecting increased valuation of the investee companies in verticals such as Fintech and social media, as well as net gains on deemed disposal and disposals of certain investee companies. Operating profit was RMB 56.3 billion, up 51% year-on-year or down 12% quarter-on-quarter. Net finance costs were RMB 1.4 billion, down 19% year-on-year or 39% quarter-on-quarter. The year-on-year decrease was mainly driven by reduced interest rate as we capture favorable interest environments in our treasury exercise.
The QoQ decrease was primarily caused by forex gain this quarter, while we recorded a forex loss a quarter ago. Share profit of associates and joint ventures was RMB 1.3 billion compared to share of losses for the first quarter last year, as we benefited from non-IFRS adjustment items, including a non-recurring fair value gain on investment of an associate, as well as improved performance of certain associates. On a non-IFRS basis, we record a share of profit of half a billion RMB for the first quarter of 2021, comparing to RMB 164 million a year ago. Income tax expense was RMB 7.2 billion this quarter. Effective tax rate for the quarter was 12.9%. IFRS net profit attributable to equity holders was RMB 47.8 billion, up 65% year-on-year or down 19% quarter-on-quarter. Diluted EPS was RMB 4.917, up 64% year-on-year or down 20% quarter-on-quarter.
Now, I'll share with you our non-IFRS financial figures. For the first quarter, operating profit was RMB 42.8 billion, up 20% year-on-year or 12% quarter-on-quarter. Net profit after NCI was RMB 33.1 billion, up 22% year-on-year or largely stable quarter-on-quarter. Diluted EPS was RMB 3.415, up 21% year-on-year or largely stable quarter-on-quarter. Moving on to gross margin. The overall gross margin was 46.3%, down 2.6 percentage points year-on-year or up 2.3 percentage points quarter-on-quarter. Analyzed by segment, gross margin for VAS was 55.1%, down 3.9 percentage points year-on-year, or up 3.6 percentage points quarter-on-quarter. The year-on-year decline was mainly due to, number one, increased content cost from more airing of dramas and variety shows versus a year ago. Number two, its revenue mix shift from higher margin PC client games and QQ subscriptions to lower margin digital content services.
The sequential increase benefits from revenue mix shift towards higher margin mobile games amid favorable seasonality for games. Gross margin for online advertising was 45.1%, down 4.1 percentage points year-on-year and 8.2 percentage points quarter-on-quarter. The year-on-year decrease was mainly due to higher revenue contribution from Mobile Ad Network business, which carry a lower margin sequentially. The decline mainly reflected seasonality and increased content cost for more airing of drama series and sports events. Gross margin for Fintech and business services was 32.3%, up 4.4 percentage points year-on-year and 3.8 percentage points quarter-on-quarter. Both year-on-year and quarter-on-quarter margin growth were mainly due to revenue mix shift towards merchant payment and wealth management services, which carry relatively higher corporate margin. In addition, better operational efficiency of business services helped on our sequential margin growth.
On operating expenses, selling and marketing expenses were RMB 8.5 billion, up 21% year-on-year or down 15% quarter-on-quarter. The year-on-year increase was mainly due to increased marketing spending, particularly on business services and games, and the consolidation of newly acquired subsidiaries such as Bitauto, as well as higher staff costs and welfare expenses. Sequentially, marketing expense was lower because of seasonality. As a percentage of revenues, selling marketing expenses was 6.3% of revenues, largely stable when compared to first quarter of 2020. G&A expenses were RMB 19 billion, up 34% year-on-year or down 4% quarter-on-quarter. The year-on-year increase mainly reflected greater R&D costs. The Q-on-Q decline was mainly driven by seasonally lower office travel and entertainment expenses. Within G&A, R&D expenses were RMB 11.3 billion, up 41% year-on-year and 1% quarter-on-quarter. G&A and R&D represented 14% and 8.4% of revenues respectively.
As at quarter end, we had approximately 89,000 employees, an increase of 39% year-on-year and 4% quarter-on-quarter. Let's take a look at the operating and net margin ratios. For the first quarter 2021, non-IFRS operating margin was 31.6%, down 1.3 percentage points year-on-year or up 3.1 percentage points quarter-on-quarter. non-IFRS net margin was 25.5%, largely stable both year-on-year and quarter-on-quarter. Finally, I'll share some key financial metrics for the quarter. Total CapEx was RMB 7.7 billion, an increase of 26% year-on-year or decrease of 20% quarter-on-quarter, within which operating CapEx grew 20% year-on-year to RMB 6.6 billion due to more spending on servers and network equipment to augment our business growth. Non-operating CapEx increased 69% year-on-year to RMB 1.1 billion, mainly driven by increased expenditure on cloud data centers and office properties. Free cash flow for the quarter was RMB 33.2 billion, down 15% year-on-year or up 20% quarter-on-quarter.
Net cash position declined sequentially to RMB 5.6 billion , mainly due to net cash outflow for M&A activities, partially offset by free cash flow generation. The fair value of our shareholdings in listed investee companies, excluding subsidiaries, was approximately RMB 1.4 trillion or $207 billion as at the end of first quarter. Thank you. We shall now open the floor for questions.
Operator, we will take one main question and up to one follow-up question each time. Please invite the first question.
Thank you. As a reminder, ladies and gentlemen, to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, you may press the pound or hash key. Our first question comes from the line of Alicia Yap from Citigroup. Please go ahead.
Hi. Good evening, management. Thanks for taking my questions. Congrats on the solid results. I have two questions. The first one is regarding your comment about stepping up the investment in game development. When you say the large scale and high production value games, do you plan to invest games that will turn into strong global IPs that the gamers will play and maybe remember for their lifetime? Is that mean we could take multiple years of development before we see any final product? Is this rationale also because of we are seeing growing gamers tractions in markets such as India, LatAm, EMEA, or even in the U.S., that we look into penetrate further, that we can leverage our experience in mobile game developments to grow our global share? The second question is on the cloud business.
We are seeing or hearing from peers a little bit slowdown on the industry. Is Tencent Cloud also experience some industry transition where the existing infrastructure cloud customer, which is already quite sizable and maybe facing industry slowdown, and making some penetration effort into new industry vertical? Is that fair to say we actually are already envision this transition better and already started to move more proactively in strengthening the higher margin SaaS capability that we actually could start to see the cloud revenue to further re-accelerate in the coming quarters? Thank you.
Alicia, thank you for the questions, and I'll take a shot at both of them, although Martin will likely supplement. The short answer to the first question is yes. We absolutely would aspire to make games that players enjoy and ideally play for life. Of course, it's easier to express that aspiration than realize that aspiration. Now, you're right to say that creating those lifelong game experiences requires many years of game development. This is a trend that we've identified many years ago, and we have a number of products that have indeed already been in development for many years. Some of those are games that we're creating in China in our big internal studios like TiMi and Quantum and MoreFun and Aurora. Some of those are games that we're creating outside China at studios which we invest in around the world.
Over the coming quarters and years, we hope to bring some of those big budget, long production cycle games to market. As to why we're focused on this now and what changes now versus the past, we are indeed seeing that the global audience for games has grown, both before, during, and after COVID-19. We're seeing particular growth in emerging markets such as the ones you highlight, but also in developed markets. We're also seeing that game players are increasingly willing to form longer-term relationships with games that they particularly enjoy, such as a League of Legends or a Fortnite or an Honor of Kings, which have very high retention rates. Gamers, even if they churn, they come back to and enjoy again.
On our side, while historically our focus was primarily on the China market, as you know, in recent quarters, we've had some hits globally that were developed in China, including PUBG MOBILE, including Call of Duty Mobile, all of which gives us more confidence to step up our rate of investment. Step up our rate of investment means fund bigger, better games, if necessary, for longer periods of time. It also means fund more experimental games. It also means invest more in game marketing and game publishing capabilities. Finally, it means investing in frontier technologies such as cloud-based gaming that will further grow the game industry in the future. That's on your game question. With regards to your cloud question, I think that we don't necessarily see a sudden transition in the industry this year versus previous years.
Rather, our belief is that when you're in the cloud business, it is inevitable that if you're renting infrastructure to very big companies, then those big companies will use their negotiating power to protect their own economics. As a result, the path to long-term economic returns in cloud is not to get big fast on infrastructure, but actually to cultivate Platform as a Service and Software as a Service. That's something that we've been doing now for several years. Platform as a Service, in particular, is a substantial percentage of our total cloud revenues now, and that's an important underlying reason why we believe that we're able to outgrow the industry in the first quarter this year.
Just one point to add on the gaming side. I think you emphasized one is new creation of IPs, and two is many years before you can see final product. I think if you look at our recent pipeline of games, which we have announced of more than 40 of them, I think it's a combination. Some are original IPs, which will take a very long time to develop. Some are actually existing IPs that we're going to take existing assets, pretty proven gameplay, and we will add our innovation for mobile, and then we'll develop it for launch. There are also some smaller trial titles, niche titles, which would have multiple iterations, probably will be developed and released within a shorter period of time and then iterated over time in order to make them bigger.
It's a combination of these different types of titles that constitute a pipeline.
Great. Thank you. Our next question comes from William Packer from BNP Paribas. Please go ahead.
Hi, management. Congrats on the strong numbers and thanks for taking my questions. First question is, in your update today, you've presented investment plans to exploit the growth opportunities for the future.
In Q1 2021, you invested and delivered a 25% profit drop through on your 25% revenue growth. Should we think of Q1 as a relevant benchmark for the rest of the year? My second question is around regulation. The news flow has continued to be intense. Last quarter, you provided a helpful update on regulation of fintech and your minority investments. Is there any incremental update to share today? Thank you.
In terms of the incremental investment plan, I would not say the first quarter is the right benchmark. I think our investment plan is actually stepping up from the first quarter level. If you look at the first quarter results, I would say the benchmark is that our non-IFRS profit grew by 22% year-on-year. What we're saying is that we're going to be investing a portion of the incremental profit into new areas. That means it's somewhere between 0% and 22% from a quantitative basis. I think that's the quantification.
In terms of the regulatory news flow, I think the most significant one is basically after the first quarter results, there was a meeting in which the financial regulator asked 13 fintech companies to have a meeting and also announce certain principles as well as ask the fintech companies to have an internal review of their own business and practices. I think, the principles are public, and they're largely focused on all businesses have to be conducted through licensed entities, and they ask for transparency. At the same time, I think there's quite a bit of focus on making sure that there's not going to be systemic risk. My understanding is it's quite focused on the size of lending business and making sure that there's no over-lending or over-borrowing by consumers.
Toward that front, I would say, as we have emphasized in our last conference call, we are very focused on compliance. We are very focused on risk management. We are very self-restrained in terms of the size of our non-payment financial products, especially on the lending side. When we look into the internal review and when we look into what are the things that need to be done in order to make sure that we are compliant with the spirit of the regulators. I think it is actually relatively manageable. That is sort of the update I have on the regulatory side.
Great. Thank you. Our next question comes from John Choi from Daiwa Capital Markets. Please ask your question.
Good evening, and thank you for taking my question. I have two questions here. On the reinvesting of profits, I think Martin just mentioned that it's going to be like 0%-22%, but if you look at it, can you kind of walk us through what are going to be the pecking order of the three that you guys did mention of business services and games and now short-form video? Also, is it going to be a combination of your equity investments or through actually investment in operation that will have a P&L impact? That's my first question. The second question is a follow-up to your game business.
I think it's interesting to see that we're seeing a lot of new genre games that Tencent probably has been strong exposure, but also at the same time, there are new genres like metaverse and et cetera, that Tencent doesn't have that much exposure in your market. How do you see the opportunities here, and what kind of relevant investments and strategic decisions that you have to make in order to take advantage of these new genres emerging throughout the world? Thank you.
Why don't I start on the second question? There are continually new genres emerging, and some of them are best left to our partners, our investee companies to address. Others are genres that we think we can bring some value to the table, bring some innovation to users, and therefore, we would address ourselves. I wouldn't say that Metaverse is a genre. Metaverse is more of an overarching opportunity in which different kinds of games are played within a single sort of social graph and software suite. If you look at Roblox, then Roblox is arguably a Metaverse but for younger gamers. Over time, as graphical fidelity improves, then we believe it's highly probable that you'll see similar Metaverses emerge that are consistent with the demands and expectations of older users. That's a wide-open field at the moment.
No one has realized that vision yet, although some people are closer than others. We certainly believe that we're in a good position to be one of the companies that realize that vision given our expertise at creating and operating games, given our history of facilitating social interactions, and also given our cloud infrastructure at the back end, because the Metaverse will be very infrastructure intensive. I think that's on the games question. In terms of the reinvestments question, then I'll let Martin speak to it, but I would just say that. When we talk about reinvestment in this situation, we're talking about owned and operated businesses primarily.
I think that in each of these three verticals, we've already been active for a number of years in terms of investing in successful game studios, both in China and globally, in terms of investing in successful short video companies such as Kuaishou in China, and investing in a very wide range now of early-stage enterprise software companies.
In terms of the areas of investment, I would say mostly, as James talked about, it's on the operating side. A big part of it is actually people. These are engineers that we're going to hire additionally to create the products, perfect the products, and develop better services. Some of these new employees are of a higher pay because they are essentially experts and professionals in their respective areas.
To a lesser extent, it will be bandwidth and infrastructure costs, and to some extent, maybe delayed monetization on the video side, for example. These are sort of the investments that we're talking about, which are actually having a bottom-line impact. In terms of the magnitude, I would say business services, games, and video in that pecking order. The nature is slightly different. Business services would actually take a longer time, and it's a larger strategy of building scale first and then over time, monetizing. Games, basically, can monetize relatively quickly once you can launch the game and achieve success. The investment is actually in the development phase in which there's no revenue, but then you have some incurred cost.
Versus video, as I said, there's a continuous increase in terms of the number of people in order for us to improve the product, improve the operations, improve the tools, and at the same time, in some cases, some extent of delayed monetization on the advertising front.
Thank you. Our next question comes from Han Joon Kim from Macquarie. Please go ahead.
Great. Thank you for your time today. I have a two-part question on advertisement. You guys have talked about a lot of different things and confluence of events going on there. I was wondering if you could help us repackage that into ad inventory growth versus kind of eCPM growth and where we're seeing the trajectory variance for that. That leads into the second part of the question, which is as we go more videoization, and a lot of the industry is going towards video. In theory, I think the ad inventory for creative video in the market does increase. How does that sort of impact the overall market rates, eCPM rates, and sort of where our ad pricing can go from here? Thank you.
Thank you for the question, Han Joon. It wasn't completely clear, so I apologize if we misheard sections of it, but we'll try to answer. On the first part around inventory versus pricing growth, both are increasing. I think on the inventory side, sometimes the outside world oversimplifies that into looking at what's happening with Weixin Moments. In reality, Weixin Moments is a pretty small fraction of the inventory of the number of daily impressions we bring to bear. Our ad network, for example, is a much bigger source of raw impressions. Our ad network continues to grow impressions quite quickly as the overall China Internet expands and diversifies and as more media owners join our ad network.
Ad inventory expanding both for internal reasons like unlocking more inventory in Weixin Moments, as well as for sort of more market-driven reasons such as the growth of our ad network. eCPM growth, yeah, I think that over time, given increasing appetite for demand, it's natural that pricing trends sideways to upwards, that there was a disruption period when there was a sort of supply shock from the short video companies in 2019, but that's been somewhat digested by the industry as a whole now. In general, what we see is that pricing is flattish for non-video and then increases as videoization occurs. In terms of videoization and the eCPMs around video in general, as you expect, video eCPMs are high, but there are interesting discrepancies between the different video formats.
Actually, the highest eCPM is often the promotional video ads within the ad networks. Those are typically for game companies, education companies, perhaps e-commerce companies. There you could be looking at CNY 40 plus in revenue per thousand impressions. The short video eCPMs are also quite high and are fairly stable just because there's so much short video inventory now in China. Interestingly, the long-form video eCPMs are actually very low. Whereas in the rest of the world, you would expect that, let's say, Hulu eCPMs would be higher than YouTube eCPMs. In China, it's the other way around, and the eCPMs for drama series and movies and so forth are about half the level of the eCPMs for short video.
I think that's because advertisers currently find it easier to create five-second commercials that are suitable for short video than 15-second commercials that are suitable for long video. Also because users have a higher propensity to click through ads within a short video site where they're constantly clicking through short videos they do and don't like, versus a lower propensity to click through ads on a long video site, which is more of a lean-back experience. It's a sort of challenge for the China internet industry as a whole in that it's forcing monetization and therefore investment toward short video at the expense of long video. Eventually, it will probably sort of mean revert as consumers and advertisers recognize the distinctive professionally generated quality of long-form video. That process isn't yet happening today.
Anyway, overall, videoization results in higher eCPMs, which is good for the industry and good for us within the industry.
Great. Thank you. Our next question comes from Eddie Leung from Bank of America Merrill Lynch. Please go ahead.
Good evening. Thank you for taking my questions. Just a follow-up to Alicia and Han Joon Kim's questions on games. I understand, James, your point about developing large-scale and high production value games, which could last a long term. For example, you mentioned that there have been some success of other Chinese studios in overseas markets recently, when we look at quite a number of them, are actually not those traditional blockbuster games, right? We are looking at, let's say, card games, makeover games, costume changing games. It seems like they are actually quite cleverly designed games, not necessarily those large-scale and high production value games. That's only my own interpretation. Just wondering if you could share your thought on this one, between your investment strategy and what we have observed recently.
Secondly, just an accounting question on the Sustainable Social Value Organisation. Wondering about the timing of the funding. Will it be funded in full within a short period of time or over a long period of time? In terms of accounting, will it be treated as a contra item to the investment gains or to be under other expenses? Thank you.
Eddie, you raised a good question on game industry trends. If you take a step back, the game industry globally is a really big industry. It's about $150 billion in revenue a year, which means that it's bigger than movies and music and literature and so forth put together. When an industry is that big, then you can actually have different and apparently contradictory trends playing out at the same time. If you look at linear video, then on the one hand, there's an explosion in short video consumption globally. On the other hand, there's an explosion in the number of people paying for Netflix and Disney+ and Paramount+ and HBO+ globally. Those are sort of two apparently contradictory trends. People are watching more ad-funded short video. They're also watching more subscription-funded long video, but the industry is big enough to accommodate both.
I think the same thing is true in the game industry, that there is a very clear trend toward very casual games where the innovation is around quirky gameplay and where these games are able to onboard large numbers of users very quickly. The challenge for these games will be establishing competitive modes and also retaining users over the much longer term. That is a trend where, as you say, a number of sort of casual Chinese game developers are now doing very well. On the other hand, there's also a trend for high production value games often made by studios who have been focused on these games for 10 years or more, often studios with 1,000 plus employees, to really catch the attention of a global audience in a way that wasn't possible before.
There I'm thinking about a game like Genshin Impact, where miHoYo has been making this kind of game for 10 years. It has over 1,000 employees. It's spent many years on the game. I'm thinking about games like our own PUBG MOBILE and Call of Duty Mobile, which exhibit similar characteristics. I think that the industry is big enough that both those trends are playing out, and there are certain studios at Tencent that are more focused on the first approach of the more casual, quirky, innovative games. There are other studios in Tencent that are more focused on high production value.
When we talk about our desire to step up our rate of investment, we're referring primarily to the second group, to the desire to take games that we've already conceptualized or we've already begun development and really double down on the development process, increase development resources, lengthen the development cycle, invest heavily in the marketing when we launch the game so that we give the games the best possible shot at a global audience when we do release them.
While we are still in the midst of working on the proper accounting treatment with our auditors, ideally, the treatment will be similar to that of donation. That is, expense upon contribution to a separate pool. However, it hasn't been finalized yet. The other point I would like to make is, it's most likely to be treated as non-IFRS adjustment, as its funding source is basically our investment gain, which Martin has talked about earlier. Those investment gains also recorded a non-IFRS adjustment. All this type of contribution will be captured under other gains in our financial statements. In terms of the funding timing, I think once the infrastructure has been set up, we will contribute the first set of funding into the pool. I think usually we might fund once or twice in a year, in respect of the SSV initiatives.
Right. Thank you. Our next question comes from Alex Yao from JPMorgan. Please ask your question.
Thank you, operator, good evening, Management. Thank you for taking my question. The first one is to follow up the question on your investment strategy this year. You guys have been investing consistently for future growth in the past several years, particularly for the three areas that you plan to step up investments. All these have been around for quite some time. What make you to decide to further step up the investment in this year? What are the new opportunities and the challenges you are seeing that we are not aware of? The second question is regarding the social organization you just established. We understand that you guys will further pursue social responsibility. As a public company, how do you plan to align value creation to the society and the value creation to the shareholder? Thank you.
Alex, in terms of the stepped-up investment, I think it's a bit of both, right? The most important driver is that we have seen an acceleration of market trends, as we have detailed in our strategy section, which include expanding business around the businesses moving online. We have seen an expansion in terms of the game users, and we also seen the next stage of the short video content growth. I think that's the main driver of our decision to step up because of COVID-19, because of new trends emerging quickly. We want to put in additional resources so that we can actually stay ahead of the curve. Part of that is also the fact that the industry is actually moving faster ahead, right?
If you look at the history of Tencent, we have always tried to stay ahead of the curve, invest ahead of the curve, and be a shaper in terms of industry trend. If the entire industry is actually moving faster, then we actually sort of have to step up that gas pedal in order to stay even more ahead of the others. I think that's sort of the secondary reason in terms of why we are stepping up the overall investment. In terms of social responsibility, I'll answer it partly from a philosophical perspective, right? I think running a company, building a company is like building a person, right? You try to do the right things, and over time you believe that good things will happen to that person.
You don't really sort of at every step of your way, calculate what is the individual gain in some of the movement that you make. I think that's sort of our overall belief, right? When you build up an organization, if you do the right things, good things will happen. On a more granular basis, I would say if we actually sort of leverage our technology and leverage our products to deliver bigger social good, I think overall we'll be better received by our users, by our customers, by the government, and by our employees. When that happen, I think it's going to be good for the shareholders over the long run.
Thank you. Our next question comes from Gary Yu from Morgan Stanley. Please go ahead.
Hi. Good evening, management, and thank you for the opportunity to ask question. I have one more follow-up question on the investment strategy. In the statement, it specifically mentioned that we intend to invest a portion of 2021 incremental profit for these investments. Should we assume that beyond 2021, then we probably expect a normal growth trend to go back to organic growth, and then hopefully some of these investment will start to bear fruits in the form of faster growth in the future. When we look at kind of management, how to evaluate the potential returns of this investment, what are the key metrics that management usually follow to evaluate investment in business service, Video Accounts and games respectively? What kind of rate of return should we expect from these investment? Thank you.
Well, I have to disappoint you in saying there's no specific.
quantitative metrics. I think a lot of times in our industry, you actually sort of look at the trend, you look at the right things to do, and then you put in the resources. Over time, if you actually are right, and if you do it well, the return is usually so much greater than what you can anticipate. If you do all the calculations and say, oh, this is actually the rate of investment, and you invest according to that calculative mode, usually you won't be able to deliver over and beyond what the users want, and you will not be able to be a leader at the trend. Usually that means you're not going to even reap that return. I think that's essentially what it is. I think what we are saying is this year we are stepping up the investment.
That's a strategic move, and that increase in investment will actually continue. We will start to see some benefits over time. Now, exactly what's the timing, I think it's hard to predict. I think it's fair to say, at least at this point in time, the financial impact will probably be biggest as we start stepping into the investment.
Thank you. Our next question comes from Robin Zhu from Bernstein. Please go ahead.
Thank you. Thanks, management, and thanks for taking my question. I guess two questions, please. The first one is could we get an update on WeChat ecommerce? You very helpfully provided us with some numbers for 2020. Just wanted to get your thoughts on how that's trended so far in 2021, your growth expectations for ecommerce growth, especially independent merchant growth for this year and whether the company is doing anything proactively to drive growth, or is it mainly just an organic process? The second thing on Weixin Video Accounts, wondering if you could share some metrics in terms of the progress so far, whether it's time spent or video views. Again, strategically longer term, do you envision this being more of a PGC versus UGC type of ecosystem? Any specific sort of examples of how you're trying to improve content there? Thank you.
Robin, on the e-commerce within Weixin, we're very pleased with the progress. I think we said last quarter that the GMV was growing at a triple-digit rate year-on-year last year, and the GMV continued to grow at a triple-digit rate year-on-year in the first quarter of this year, despite a challenging base period because of people staying at home and conducting more e-commerce transactions last year. In terms of the specific initiatives we're undertaking to stimulate growth, we talked about some of them earlier in facilitating smaller companies making mini programs, building an ecosystem for intermediaries to assist merchants, offline merchants in opening and operating their mini program experiences. I don't think there's necessarily a single silver bullet at this point. We have the traffic, we have the payment solution, we have increasingly user trust and confidence and merchant trust and confidence.
It's more just an ongoing process of organically assisting all of the participants in what's becoming an increasingly vibrant ecosystem and one that's very differentiated from the other platforms or retailers in the market. In terms of Video Accounts, I would say both the number of users using it as well as the user time spent on average has been growing on organic basis and solid basis. In terms of further cultivating the content ecosystem, I think what we wanted to be able to do is actually a funnel in which it would include as many UGCs as possible. We would also provide all the tools and all the operating procedures and guidelines, as well as the monetization tools in order to help these UGCs to really leverage our tools and make themselves into more professional providers of video content.
As a result, they will become PUGCs over time, and these PUGCs would be offering very differentiated as well as high-quality content. Because these users a lot of times have got certain expertise and professional knowledge in different areas, so their content will be more nutritious and will be differentiated from the pure entertainment-related content, which are now in the other platforms. That's sort of the way that we are trying to curate the ecosystem for Video Accounts.
All right. Thank you. Our next question comes from Thomas Chong from Jefferies. Please go ahead.
Hi, good evening. Thanks, management, for taking my questions. I have a question relating to the payment side. Given that digital currency is getting increasingly popular in China, what's our strategy on this one? In terms of the monetization on payment, are there any other new business model that we can tap into these opportunities? My second question is relating to the advertising side. Given that management has talked about more stringent rules in the education sector as well as a special event, how should we think about the trend on the advertising in the next couple of quarters? Thank you.
I think in terms of digital currency, I think we have already talked about it before in that our WeBank is actually a participant within the trial for digital currency. We will be developing in order to get WeBank to be supporting that. Over time, as we continue to develop our payment, as well as our other platforms, would actually try to see whether we can provide more support for digital currency. The main reason is because digital currency is essentially a substitution for cash. As a result, you can actually look at it as another form of cash that will be running through the banking system and then eventually running through the third-party payment system and getting into the merchants. From that front, we are very clear that it would be quite conducive for our overall payment platform as well as for our WeBank.
That's why we'll be participating in a very active way in the continuous rollout of digital currency. In terms of the payment business, I think we have a very solid payment business and the business model is actually multifold, right? In that, for the large merchants, we actually have a take rate on the payment for the online players in particular, and you have a very solid payment take rate. At the same time, there will also be multiple value-added services that we provide to the different merchants, such that we can actually capture some kind of economics. I think that business model is actually quite solid, and we'll continue to build on it.
On the advertising side, given the size and scale of the China advertising market, I think it would be naive to assume there'll ever be a period going forward when every industry is green light and over-performing and all cylinders firing all across the Chinese economy. When we look at the landscape today, of course, that there are uncertainties. The impact of IDFA deprecation has actually been, I think, less than widely feared for a number of reasons. We are in a period when there's some sort of content airing uncertainty, but that should begin to clarify from July the 1st onwards. We're in the latter stages of that period. We also mentioned in the prepared remarks that there's some uncertainty around the K-12 after-school tuition education. That education sector has become one of the top five advertiser categories online.
What happens in that sector could have some moderate consequences industry-wide. If you take a step back and look at the broader picture, then I think that all of us would agree that we'd much rather be in a world where the primary challenge is K-12 after-school education regulations than a world where the primary challenge is a COVID-19 pandemic ripping out of control that appeared to be the case this time last year. While there'll always be challenges, I think that in the grand scheme of things, the ad industry is in a much better place now than it was a year ago.
Operator, let's take the last question from the queue.
Certainly. Our last question comes from Jerry Liu from UBS. Please ask your question.
Hey. Yes, thank you for squeezing me in. I just have two quick ones. First, on VAS, if I look at the gross margins this quarter, it was a little lower than the last two first quarters. Just wanted to dig a little bit more into the drivers and what's the implication for margins here the rest of the year. I assume maybe the video mix is up a little bit, but curious about what the drivers look like within especially the gaming business. Secondarily, on going back again to the incremental investments we're laying out this year. If the focus here for us is more engineers and long-term development of games, et cetera, versus some of the other peers in the sector, really a lot of what they're spending is on users and near-term promotions, et cetera.
It just feels like our spend, the pace and the magnitude may be a little smoother. I just want to see if that is the right understanding. Thank you.
Yeah, I think in terms of the drop in the VAS margin, there are a few reasons. Number one, that the higher live broadcast proportion that is due to the consolidation of the various.
Yeah.
The organic growth of some of our live broadcasting services. At the same time, there's a mix shift PC versus mobile games. That PC sort of have a higher margin profile. In terms of other low margin products, just like this digital subscription services also further drag down the profit or gross margin.
Yeah. In terms of the investment, I would say your observation is correct. That's the reason why we're saying we will be investing a portion of our incremental profits as opposed to other more e-commerce and transaction-related peers in the market, in which it may be all of their incremental profit, in some cases, and in some cases, it may be all of their profit. I think that's a correct observation. I also want to point out that we do pick up some of the incremental investments industry-wide. As you look at our investment associate losses, we in the prepared remarks did point out that it actually has a 7% hit to our non-IFRS profit. We have already, to some extent, weathered it in the current quarter.
Thank you. Operator, I think Operator?
Yes. I'll now hand the call back to Ms. Wendy Huang for closing remarks.
Thank you. If you wish to check out our press release and other financial information, please visit the IR section of our company website at www.tencent.com. The replay of this webcast will also be available very soon. Thank you, and see you next quarter.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.