Ladies and gentlemen, thank you for standing by, and welcome to the Tencent Holdings Limited 2018 third quarter results announcement conference call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question and answer session. At which time, if you wish to ask a question, please press star followed by one on the telephone keypad. I must advise you that this conference is being recorded today. I will now turn the conference over to our first speaker, Ms. Jane Yip. Thank you. Please go ahead.
Thank you. Good evening. Welcome to our 2018 third quarter results conference call. I am Jane Yip from the IR team of Tencent. 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 may not be realized in 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-GAAP 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-GAAP measures, please refer to our disclosure documents on the IR section of our website. Let me introduce the management team on the call tonight.
We have our Chairman and Chief Executive Officer, Pony Ma, President Martin Lau, Chief Strategy Officer James Mitchell, and Chief Financial Officer John Lo. Pony will kick off with a short overview. Martin will discuss strategic highlights. James will speak to business overview, and John will go through the financials before we take your questions. I will now turn the call over to Pony.
Okay. Thank you, Jane. Good evening, everyone. Thank you for joining us. During the third quarter of 2018, we registered strong operating results in our businesses and maintained healthy financial measures. Our advertising, digital content, payment, and cloud services sustained robust activity and revenue growth and now account for the majority of our revenue. For our games business, we implement stringent self-imposed limitations on game playing by minors, which we believe put the game industry on a healthy and more solid foundation for future development. At the end of the quarter, we upgrade our organization to help enterprises and various industry to benefit from the new chance of industrial internet through digitalization and technology innovation. To provide consumers with better integrated entertainment and social experiences, as well as to unify our advertising sales platforms.
We believe the strategic organizational upgrade will position us well for future long-term growth. Martin will discuss in details in the strategic highlights section. Let me highlight the key financial numbers and defer the discussion to John's financial section. Total revenue was RMB 80.6 billion, up 24% year-on-year and up 9% quarter-on-quarter. Non-GAAP net profit attributable to shareholders was RMB 19.7 billion, up 15% year-on-year and flat quarter-on-quarter. Moving on to our key platforms. Combined MAU of Weixin and WeChat increased 10.5% year-on-year to 1.08 billion, benefiting from the increasing use case offered by Mini Programs and Weixin Pay. Smart device MAU for QQ was 698 million, up 6.9% year-on-year. We strengthened entertainment-driven features and video content, which appeal to young users, increasing their time spent on smart devices. In particular, DAU of QQ Kandian, our news feed services, exceeds 100 million.
For games, we further increased our smartphone game market share by users and time spent. We launched several new games, increasing our paying user base and contributing to revenue growth. Our AOV and PUBG MOBILE games enjoyed global popularity. For media business, we maintained our leadership in video, news, music, and literature, and saw rapid uptake of short and mini videos across our platforms. For fintech, we continue to be the market leader in mobile payment by active users. We are now expanding our fintech services offering, leveraging our large-scale payment platform and core technologies. For mobile utilities, we maintained our industry leadership in mobile security, mobile browser, and Android app store in China. With that, I will pass to Martin to discuss strategic highlights.
Thank you, Pony, and good evening, good morning to everybody. I will first start by elaborating on a key aspect of our recently announced strategic organizational upgrade, especially on our strategy to extend from consumer internet into industrial internet. The creation of our Cloud and Smart Industries Group, CSIG. We see this initiative as a natural extension of our connection strategy from connecting people with people, to later on connecting people with content and services, and now as a next step to connecting industries with consumers, supply chains and resources. We view partners in different industries are poised to benefit from the trends of mobile internet ubiquity, insights from big data, and the advent of artificial intelligence technology. We want to position ourselves as a digital assistant to help our partners to really take advantage of these benefits while respecting their independence.
We believe we are uniquely positioned to help businesses to embrace the industrial internet because firstly, we host over a billion users across our social and other high-traffic platforms, and are now connecting these users to industries. Secondly, our enterprise services such as Mini Programs, Official Accounts, WeChat Work, and Weixin Pay, facilitate communications between consumers and industries, and the completion of transactions. Thirdly, using our advanced technologies in cloud computing, AI, security, LBS, et cetera, we help industries to aggregate their data and unlock the value in their data. Last but not least, together with our strategic partners, we have cultivated a thriving internet ecosystem, which provides broad industry knowledge, insights, deep consumer understanding, as well as enabling powerful consumer-specific solutions. Within this strategic initiative, our cloud services business is the foundation for our industrial internet solutions and for our Cloud and Smart Industries Business Group.
Our cloud business is rapidly growing in terms of revenue, clients, and capabilities. From the first quarter to third quarter of 2018, our cloud services revenue exceeded RMB 6 billion, more than doubling year-on-year and gaining market share. We reinforced our already strong position in customer verticals such as games, video, and internet services while advancing into finance, government, smart retail, and industrial verticals. We grew our paying customers at a triple digit rate year-on-year, allowing us to establish an increasingly diversified customer base. At the same time, we're implementing several initiatives to sustain future growth of this business, including on the technology front, we're integrating our own capabilities such as security, location-based services, and face recognition, to name a few, into our external cloud-based solutions, enabling our customers to benefit from our proprietary technology.
From a product perspective, we have an expanding portfolio of products offering over 200 cloud products as well as over 70 industry solutions. From cost perspective, we are combining the procurement scale for our in-house services and our cloud business. We're pursuing relentless cost optimization measures in order to provide cost-competitive solutions to our customers. In terms of customer acquisition, we are working with over 4,000 channel partners, including ISVs and strategic partners, to build customer-specific solutions. We're also unifying our sales teams to increase efficiency in acquiring key accounts. We're leveraging the popularity of our services, such as Mini Programs, to attract SMEs and entrepreneurial customers. Turning to the next page, I will use smart healthcare and smart transportation as two examples of how we are helping industries to upgrade, and in doing so, create business opportunities for ourselves. Let's start with smart healthcare.
The healthcare industry in China faces numerous challenges, in particular, under-resourced healthcare providers such as hospitals, patients lacking objective information to enable them to select amongst providers, and poor and infrequent communications between providers and patients. We believe we can provide solutions to address some of these challenges. These include our AI diagnostic capabilities, our ability to help patients find the right experts, and our platform for connecting patients and medical care providers. In helping the industry solve these problems, we can extend our cloud services to healthcare providers, we can drive new payment use cases, and we can also offer value-added services to patients. How do we do that? Specifically, we provide products to patients, such as Mini Programs that allow patients to register for appointments with hospitals or conduct video appointments with specialists online. Weixin Pay settlement for medical treatment expenses.
Tencent Medipedia, which is an online medical resource that offers patients preliminary understanding of over 1,000 symptoms online via Weixin, QQ, and mobile QQ browser. We also provide services to the medical industry, such as Tencent AIMIS, which applies AI to assist doctors in screening and diagnosing polyps. AIMIS has read over 100 million images and served over 1 million patients. In addition, our security, cloud computing, and AI capabilities can help hospitals manage internal staff and external patient relationships more efficiently. Let's now move to smart transportation. The transportation industry similarly faces some important trends and challenges, including drivers' demand for in-car connectivity, the rise of electric vehicles, the future of autonomous driving, OEMs' desire to connect more closely with their customers, and transport as a service via ride-hailing solutions.
We believe Tencent can help the industry meet these challenges via our in-car software capabilities, our cloud and data services, as well as CRM for OEMs, and payment solutions for mass transit services. By helping the industry, we create opportunities for Tencent in areas such as cloud services, the in-car digital content market, and acting as a marketing platform for auto sales, auto after-sales services, auto loans, and auto insurance. Specifically, we provide services to drivers and passengers, including integrating Weixin and our digital content services into vehicles' smart systems, enhancing the in-car experience. Transit QR codes based on Mini Programs, which have served over 50 million passengers in 120 cities. We provide services to the transportation industry, including Tencent LBS, which receive over 60 billion location requests per day, empowering car navigation.
Tencent Auto Intelligence System, on which we have cooperated with 15 OEMs and over 300 third-party partners for delivering our cloud-based solutions and CRM solutions. Autonomous driving-related services, including high-definition map simulation, cloud computing, and security. Now, I will pass on to James to go over the business review section.
Thank you, Martin. Good morning and good evening, everyone. In the third quarter of 2018, our revenue grew 24% year-on-year. VAS represents 55% of our revenue, of which online games contributed 32% and social networks 23%. Online advertising was 20% of our total revenue, and the other segments accounted for 25% of total revenue. As Pony mentioned, advertising, digital content, payments, and cloud generated the majority of our revenue this quarter. For value-added services, segment revenue was RMB 44 billion in the third quarter, up 5% year-on-year and up 5% quarter-on-quarter. Social network revenue is RMB 18.2 billion, up 19% year-on-year and up 8% quarter-on-quarter. Sales of virtual gifts on our live broadcast services and significant uptake of video subscriptions drove the year-on-year and quarter-on-quarter growth. More game-related item sales also contribute to the sequential revenue growth.
Our VAS subscriptions increased by 23% year-on-year to 154 million, with growth primarily driven by video subscriptions. Our video subscription count grew 79% year-on-year, benefiting from exclusive drama and anime content. Online games revenue was RMB 25.8 billion. Revenue decreased 4% year-on-year due to fewer paying users in our PC games and slower smartphone game revenue growth, as popular tactical tournament games in China are not being monetized. Sequentially, our online game revenue increased by 2% as higher contributions from smartphone games more than offset lower revenue from PC games. Starting with social networks, the emerging trend of short and Mini Videos is contributing substantially to user activity growth within QQ and Weixin. For content videos, we have grown to over 7 billion daily short and Mini Content Video views across Tencent platforms.
Content video is particularly popular in QQ Kandian and driven by, first, a new shortcut to video feeds, which facilitates discovery and consumption. Second, an enhanced recommendation algorithm targeting relevant content to users. Third, we're broadening our breadth of content, including more professionally generated, professional user-generated, and user-generated content. Fourth, we're expanding video formats beyond our already established position in short videos to quickly expand in mini videos, which are typically less than 20 seconds in length. For social video, which is primarily created, uploaded, and shared by one's social connections, hundreds of millions of social videos are now uploaded to Weixin each day. We believe the huge volume of video uploads is a good indicator of our industry leadership in social video.
Users who watch social videos do so primarily inside Weixin group chats and in Weixin Moments, where we recently extended the maximum social video duration from 10 to 15 seconds. Users who wish to create social videos can use our standalone app, Weishi, which provides video shooting and editing tools such as dynamic props, background music, and AI-powered beautification. For long-form video, we remain number one in the China industry in terms of DAU, time spent, and revenue, benefiting from leadership across a wide range of content, including drama, Chinese anime, variety shows, and documentaries. At quarter end, we had 82 million video subscribers, up 79% year-on-year, and our video subscription revenue similarly rose 79% year-on-year.
Subscriber growth benefited from hit content such as our fantasy drama series, "Legend of Fu Yao," which achieved over 14 billion video views, and our historical drama series, "Ruyi's Love in the Palace," which generated over 16 billion video views. Our video advertising revenue increased 34% year-on-year, benefiting from increased traffic and sponsorships. Integration with our performance ad platform expanded our advertiser base and increased in feed revenue. As well as commercial success, our video content has also achieved critical acclaim. For example, our anime series, "The Land of Warriors," won the best anime award in the Chinese Comics and Games Expo. Our food documentary, "Once Upon a Bite," scored a 9.3 rating on the review site Douban. For smartphone games, total revenue was RMB 19.5 billion, up 7% year-on-year, due to contributions from new action and RPG titles.
Revenue grew 11% quarter-on-quarter, primarily due to new games released at the end of the second quarter and during the third quarter. In China, "Honor of Kings" remains the top title in terms of active users and revenue. We released new avatar personalization items and dancing motions in the quarter, which increased paying users and revenue sequentially. Our tactical tournament games grew active users quarter-on-quarter but remained unmonetized. We launched several role-playing games associated with popular intellectual properties, among which "Free Fantasy Online," "MT4," and "Saint Seiya" ranked within the top 10 in China's iOS grossing chart during the quarter. We have 15 games with monetization approved in our China pipeline, including many role-playing and action games associated with established intellectual properties.
For international markets, according to App Annie, our "PUBG MOBILE" game has the second highest ex-China monthly active user count of any smartphone game globally, and its revenue tripled quarter-on-quarter, reflecting a full quarter of monetization and increasing subscriptions for its Royale Pass. "Arena of Valor" ran a widely watched World Cup finale esports event, driving its global DAU to a record high. For PC client games, revenue was RMB 12.4 billion, down 15% year-on-year and down 4% quarter-on-quarter. The year-on-year revenue decline reflects the ongoing trend of users shifting time to smartphone games. While our reported revenue declined quarter-on-quarter, our cash sales before deferrals increased, benefiting from positive seasonality and the resilience of our leading titles. In China, "CrossFire" and "DNF" released successful updates in the quarter.
In November, our esports audience reached a record high in China when Invictus Gaming became the first Mainland China team to win the "League of Legends" World Championships. Internationally, we launched a tactical tournament game, "Ring of Elysium" on Steam, which ranked among the platform's top 10 games by peak concurrent users following its launch. We are implementing several initiatives to foster healthy gameplay. In September, we upgraded our healthy gameplay system to protect players aged 12 years old and below from spending excessive time on games. We identify these players by Real ID verification confirmed with facial recognition technology, and we oppose a one-hour game timing up per day and prevent logins between 9:00 P.M. and 8:00 A.M. for these users. We implemented the upgraded system in "Honor of Kings" on a city-by-city basis and are expanding the system nationwide and across our other games.
Via our parental guidance platform, we are providing parents with tools to engage with their children and track their in-game activities, and we are developing functional games intended to assist learning or improve dexterity. Two months since the implementation of our healthy gameplay system, we believe some children are indeed significantly reducing their gaming time, and we have seen millions of parents sign up for the parental guidance platform. We believe these initiatives should position the industry for sustainable and healthy long-term growth. Shifting to advertising, our online advertising revenue was RMB 16.2 billion, up 47% year-on-year and up 15% quarter-on-quarter. Our media advertising revenue was RMB 5.1 billion, up 23% year-on-year and up 8% quarter-on-quarter, within which our video ad revenue was up 34% year-on-year and up 13% quarter-on-quarter.
Our news ad revenue increased year-on-year as we expanded the advertiser base following the completion of our ad system revamp, declined quarter-on-quarter due to the end of the NBA season. Our social and others advertising revenue was RMB 11.1 billion, up 61% year-on-year and up 19% quarter-on-quarter. Increased traffic and inventory in Weixin Moments, Mini Programs, and QQ Kandian, and more impressions in our mobile ad network drove the year-on-year growth. Increased impressions and click-through for Mini Program and for Weixin Moments contribute most to the quarter-on-quarter growth. We have expanded our long-tail advertiser base for Weixin Moments through cooperation with local ad agencies and through converting Weixin Pay merchants into advertisers on our platforms. Moving to our payments and fintech services, we maintained our leadership in China's mobile payment market, measured by MAU and DAU.
Our average daily transaction volume increased over 50% year-on-year, within which our offline daily commercial payment transactions grew 200% year-on-year. We are adding new payment services such as cross-border mobile payments, allowing WeChat Pay HK users to conduct RMB-denominated transactions in Mainland China. Our payment processing and settlement are smoothly transiting to the NetsUnion centralized clearing system. We are also expanding our fintech services in areas such as wealth management, microloans, and insurance. LiCaiTong's aggregated customer assets surpassed RMB 500 billion at quarter end. WeBank originated Weilidai loan balances grew rapidly and sustained industry-leading healthy non-performing loan rates. WeSure, our insurance service within Weixin, partnered with insurance companies such as Taikang and MetLife to customize products for Weixin users. With that, I will pass to John to go through the financials.
Hi, everyone. For the third quarter of 2018, our total revenue was RMB 80.6 billion, up 24% year-on-year or 9% quarter-on-quarter. Cost of revenues increased by 35% year-on-year to RMB 45.1 billion. The increased primary reflected greater cost of payment-related services, higher content and channel costs. Gross profit was RMB 35.5 billion, up 12% year-on-year or 3% quarter-on-quarter. Net other gains were RMB 8.8 billion for the third quarter of 2018. It represented increases in valuations of certain investee companies, including a fair value gain from Meituan-Dianping upon its IPO. We made impairment provisions for certain investee companies in verticals such as online games, entertainment, and e-commerce. Share of profit of associates and JV was RMB 264 million in the quarter versus that of RMB 1.5 billion for the same quarter of 2018. A quarter-on-quarter decrease was mainly due to one-off share-based compensation expense of an associate.
On a non-GAAP basis, share profit of associates and JV was RMB 2.8 billion for the third quarter, which is pretty much at the same level as the second quarter. Income tax expense was approximately RMB 3.2 billion, down 35% year-on-year or 10% quarter-on-quarter. The year-on-year decrease was mainly due to lower taxable income and withholding tax. The effective tax rate in the period was 12.1%. Net profit to shareholders was RMB 23.3 billion, up 30% year-on-year or 31% quarter-on-quarter. I will walk you through our non-GAAP financial numbers. For the third quarter and after adjustments to non-GAAP, operating profit for the quarter was RMB 22.6 billion, up 4% year-on-year or 1% quarter-on-quarter. Operating margin was 28%, down 5.1 percentage points year-on-year or 2.2 percentage points quarter-on-quarter. Net profit to shareholders was RMB 19.7 billion, up 15% year-on-year or flat quarter-on-quarter. Net margin was 25.3%, down one percentage point year-on-year or 2.5 percentage points quarter-on-quarter.
Let's turn to segment gross margin. Gross margin for value-added services was 56.5%, down 3.4 percentage points year-on-year or 2.5 percentage points quarter-on-quarter. This decrease is mainly reflected mix shift towards lower margin smartphone games, higher proportion of revenues from licensed titles within PC games, and higher content cost of video streaming subscriptions. Gross margin for online advertising was 36.7%, broadly stable year-on-year and quarter-on-quarter. Gross margin for others was 22.8%, up 2.5 percentage points year-on-year or down 2.1 percentage points quarter-on-quarter. The year-on-year increase was mainly due to growth in fee charge from credit card repayment, revenues from microloan business, and interest income related to restricted custodian deposits. On the other hand, the quarter-on-quarter decrease was mainly due to higher proportion of revenue from our lower margin products. Moving on to operating expenses. Selling and marketing expenses were RMB 6.6 billion, up 37% year-on-year or 3% quarter-on-quarter.
The year-on-year increase mainly reflected greater marketing spend on our products and platforms such as payment-related services, online video, and smartphone games. The sequential increase was driven by high marketing spend on online video business and payment-related services. As a percentage of revenue, selling and marketing expenses was 8.2% for the third quarter. G&A expenses, excluding R&D, were RMB 4.6 billion, up 10% year-on-year or 12% quarter-on-quarter. Under G&A, R&D expenses were RMB 6.3 billion, up 30% year-on-year or 9% quarter-on-quarter. Both year-on-year and quarter-on-quarter increase of G&A expenses were mainly due to greater R&D expenses and staff costs. As a percentage of revenue, total G&A was 13.5% and R&D was 7.8%. At the end of quarter three, we had over 52,600 employees. The year-on-year increase of 21% was mainly due to our expanded business group, in particular, cloud and payment-related services. Let's go through margin ratios for the third quarter.
Gross margin was 44%, down 4.6 percentage points year-on-year or 2.8 percentage points quarter-on-quarter, mainly reflecting the revenue mix changes among segments and reduced gross margin of VAS as mentioned previously. Non-GAAP operating margin was 28%, down 5.1 percentage points year-on-year or 2.2 percentage points quarter-on-quarter, primarily due to lower gross margin. Non-GAAP net margin was 25.3%, down one percentage point year-on-year or 2.5 percentage points sequentially. The year-on-year decrease was mainly due to lower operating margin, partially offset by the margin picked up from share of profit of associates and income tax expense. Finally, let me share with you some key financial metrics before rounding up this presentation. For the third quarter, the total CapEx was RMB 6 billion, up 71% year-on-year or down 16% quarter-on-quarter. Operating CapEx was RMB 5.2 billion, down 21% quarter-on-quarter, mainly reflecting less spending on service for cloud businesses following pre-stocking in previous quarter.
Non-operating CapEx was RMB 782 million. Free cash flow was RMB 26.4 billion, down 4% year-on-year or up 71% quarter-on-quarter.
The quarter-on-quarter increase was driven by growth in grossing of online games as a result of positive seasonality in third quarter. At the end of September, our net debt position was RMB 29.2 billion compared to net debt of RMB 35 billion last quarter. The sequential decrease in net indebtedness was mainly due to free cash flow generation and proceeds from disposal of certain investee companies, which was partially offset by payments for media content and M&A initiatives. The fair market value of our listed investee companies, excluding subsidiaries, of course, were approximately RMB 273 billion, or $39.7 billion at quarter end, up from RMB 171 billion a year ago. During the period from 7th of September to 12th of October 2018, we repurchased 2.8 million shares with an aggregate cost of about $113 million. This concludes our presentation.
Thank you. We shall now open the floor for questions. Operator, we will take one question each time. We'll invite the first question now.
Thank you. If you wish to ask a question, please press star one on telephone and wait for your name to be announced. If you wish to cancel a request, please press the pound or hash key. Our first question comes from the line of Wendy Huang from Macquarie. Please ask your question.
Thank you, management. Congratulations on the solid results. I just have two quick questions. First, you mentioned that you still have 15 titles in the pipeline with the game approval. I recall that last quarter you also mentioned that you had 15 titles. However, in between the two quarters, you actually launched several new titles. I just wonder how did you actually get approval for the new games that you released between the two quarters that we can make up this math. Second, on the Mini Programs, can you give us update on the competition and ecosystem as your monetization plan? We noticed that several other companies here also launched a similar type of lite program or the quick app, et cetera. Also you mentioned in your prepared remarks earlier that you already start to generate the advertising revenue from the Mini Program.
If you can shed some color on those things, that would be great. Thank you.
To start with the question about the games in the pipeline, there are several moving parts that impact the number of new games we have with monetization approval in our pipeline at any point in time. One obviously is that as we publish games, there are fewer games left in the pipeline. On the other hand, there are ways that we can add games to the pipeline. For example, there might be an independent studio that was working on creating a game 12 months ago and secured their Ban Hao approval, their monetization approval 12 months ago. In the most recent quarter, we were able to persuade them to allow Tencent to be the publisher of that game. That game would become a Tencent pipeline game with monetization approval. I'll pass to Martin for the question about Mini Programs.
In terms of Mini Programs, I think it's innovative programming framework for usage within the WeChat ecosystem. We have invented this framework, and we're actually very happy to see that this framework has been adopted by many different other players in the market, which means that this framework is actually very, very valuable. We do believe that the fact that there are more people endorsing this new programming framework, it means that there will be more developers coming into the market, which is good. At the same time, I think we do have a unique advantages within our own ecosystem. That includes, we have a very large DAU app, which is supporting our own Mini Program framework. We have very frequent usage among our users of the app, i.e., WeChat.
We have social recommendation, which is a very important way through which Mini Programs are spread across different users. We have a pretty complete ecosystem, including WeChat Payment, which helps the Mini Programs to get paid. At the same time, we also have developed this QR code, which allows offline merchants and offline operators to promote their Mini Programs using our application and our framework. All in all, I think by having a lot of people coming in, that's great for helping to cultivate a large developer base. Among all the different offerers of Mini Programs, I think we have a very strong value proposition. Overall, I think we have seen a pretty quick adoption of Mini Programs. The monetization right now is still pretty much associated with Mini Games, which is a branch within Mini Programs.
At the same time, we also see a growth of very diversified applications within Mini Programs, in particular with a lot of retailers. They are quite eager to develop Mini Programs so that they can have their own channel of selling products to their customers, and also serve their customers. We are actually quite excited about the future prospect of Mini Programs.
Thank you. The next question please.
Our next question from the line of Alicia Yap from Citigroup. Please ask the question.
Hi, can you hear me? Good evening, management. Thanks for taking my questions. I have a questions regarding the more stringent implementations of the playing times for the minors, also enforcing the Real ID verifications on Honor of Kings and also other games. Has this process affecting the user time spent, not the minors, but what I mean is the user that is higher than 18 years old, where their time spent and engagement activities actually also being impacted. Should we also worry if there's any impact on the revenue growth? Any color, that would be great. Second, regarding the Tencent latest initiative of moving into this industrial internet. Understand it is still in the very early process of this transformation. Is that mean there will be more investment spend in the coming years?
Ultimately, will this industrial internet opportunity be perceived as strong recurring revenue stream, but at a lower margin profile than the consumer internet that we enjoy in the past? Thank you.
Good evening, Alicia. In terms of the healthy gameplay system, as we mentioned in the prepared remarks, the system is impacting the amount of time spent by minors playing our games, which is the intention. We don't expect it to impact the time spent by older users. We'll obviously need to track the progress. Shifting from time spent to revenue, currently minors contribute an insignificant portion of our revenue for our mobile games. Obviously, depending on how efficiently we execute this, there could be some spillover impact to non-minor spending. Again, that's not the intention. If we can focus it on minors, that shouldn't have a substantial impact on our business because the vast majority of our game revenue comes from older users.
Okay, in terms of the industrial internet, I think the initial revenue opportunity is around the cloud business. As you can see, we have a fast-growing cloud business, it has been gaining market share. The nature of the cloud business is that it does require quite a bit of capital expenditure because we need to build the IDC as well as to buy the service. Over time, earn recurring revenue on the cloud service fees. This business, at the same time, is low margin, because it's only staying at the infrastructure level. The way we look at it is that, we look at it as a long-term investment for the future. We felt that over time, new business opportunities can actually come out of our cloud and associated industrial internet opportunities.
That would include when we move from IaaS, infrastructure, to PaaS, platform as a service, and SaaS. We can actually start generating higher margin revenue. At the same time, we also believe that we could have new business model and value-added services built from our connection with the industries. For example, when we talk about the transportation industry. If we could actually establish a CRM for OEMs to reach customers, there will be associated marketing revenue that will be associated value-added services revenue, including referral fees on auto insurance, auto loans. Those will be new business models which will be of higher margin. At the same time, we believe that by engaging in the industrial internet, we can actually bring benefits to our ancillary businesses, for example, our payment business, as well as our advertising business. We look at it in a holistic approach.
Just like how we approach consumer internet. In the very beginning, nobody really generate any revenue from consumer internet. We start with providing a product which we know that will generate value for the users. Over time, we start to develop different kinds of business model from that value-based service. I think for industrial internet, it's the same philosophy. If we see that we can actually add value to a particular industry, and to the partners that we sign up, and we know that by bringing technology, by bringing data insights, and by bringing connection for them to connect with users, we can actually create value for the users, we can create value for these industrial partners, and we can actually facilitate the upgrade of the industry, then we know that we will be creating tremendous value.
We will be pretty confident that over time, we will generate business opportunities and revenue from that value add
Thank you. The next question, please.
Our next question comes line of Thomas Chong from Credit Suisse. Please ask your question.
Hi, good morning. Thanks, management, for taking my questions. I have a question on the online gaming business. Can management provide the quarterly ARPU for MMO, advanced casual and smartphone games? My follow-up question is about the PC games. How should we think about the trend in Q4 or 2019? My quick follow-up is about the trend in terms of the operating expenses. Can management give us some color about how we should think about the trend going forward? Should we expect we need to incur higher OpEx for new initiatives? Thank you.
Hi, Thomas. We'll keep you to questions so that other people have room to ask questions about operating margins or whatever the topic is as well. Just focusing on your two questions, John will speak to the ARPU, but with regard to the PC game business, it's obviously a challenging segment of the industry given the ongoing user time shift migration from PC games to smartphone games. We are aggressively looking for new PC games to publish in China, particularly new PC games that can create new market segments which didn't previously exist in the China market that might have existed in overseas markets. To the extent we're successful in doing that, then we can improve the trends for our PC game business. I would also say that the comparisons for our PC game business in the current and recent quarters are particularly difficult.
Overall, the PC game outlook is a fairly conservative outlook given the mega trend of users shifting time to smartphone games.
In terms of the ARPU, the MMOG, it's RMB 530-RMB 730, ACG is RMB 160-RMB 670, Smartphone games is from RMB 180-RMB 190.
Thank you. Next question, please.
Our next question comes line of Winnie Wong from HSBC. Please ask your question.
Thank you, management, for taking my questions. My question is on the impact of the macro headwinds. We saw that in the press release we talk about the increase in advertising revenue were mainly reflected by more advertising inventories in Weixin Moments and also the new advertising formats such as the Mini Programs. I just want to see the reasons and also the rationale behind that we are still able to increase the advertising inventories amid the macro headwinds. Thank you.
We believe that we deliver above-industry return on investment from our advertising. Historically, to a great extent, our advertising has been supply constraint rather than demand constraint. As we grow our traffic and as we add new inventory within our traffic, for example, in the last 2 quarters, we've made inventory available in Mini Programs, which was the biggest contributor to the quarter-on-quarter ad revenue growth this quarter. I think it's natural that we see a flow through into stronger advertising revenue. On the flip side, there are certain advertiser categories in China that have been hit hard by regulatory measures, and generally speaking, our advertising business is underweight those categories due to conscious decisions on our part. Looking forward, if the macro environment deteriorates sharply, that will naturally have a negative impact on our advertising revenue growth rates.
We believe, given our superior performance, that we should continue to outperform the industry based on the better than industry returns on investment we deliver to our advertisers.
Thank you. Next question, please.
Our next question, top line of John Choi from Daiwa Capital. Please ask your question.
Thank you. I have a question about your margin trend. I can see this quarter operating margin is at 28%, constantly coming down. Obviously, game growth, which has a high margin, as you guys earlier mentioned, advertising, digital content, payment, and cloud are now the majority of the business. Going forward in the future, should we be expecting this is going to be the new norm or we should be expecting our margins to stabilize or even expand? Secondly, just quickly on the game, I just want to follow up how, in terms of assuming that the regulatory situation normalizes, where do you see the upside potential on the smartphone game growth? Is it going to be further ARPU expansion or any types of any growth drivers that you guys see? Thank you.
In terms of margin, I think we should probably not take overly simplistic view of an overall margin, but instead look at the different businesses. Our revenue is a collection of businesses of very different natures. For example, gaming, obviously it has a higher margin, but there is also a big difference between self-developed games and licensed games. Then if you look at some of the new businesses. Advertising has got a very high margin. But if you look at video, obviously it has a low margin. When you look at payment, which is a pretty large business segment for us, we run it as an infrastructure service, so it has a relatively low margin. Cloud business at this point in time is also all very low margin. I think we should probably look at each one of the business segment and analyze the margin accordingly.
The overall margin of the company would be essentially a weighted average of all the margins of the respective segments. If there's more gaming revenue in the future, I think the margin will probably go up more. I think even for some of the advertising, for example, if it grows more, then it would have a positive impact on the overall margin of the company. For the businesses which are right now in investment mode and generates very low margin, I think some of them will probably stay like that for a while. Over a longer period of time, we think as we can actually generate some value-added services out of those revenue streams, then we may be able to get up to a higher margin over a longer term.
In terms of the opportunities to enhance our smartphone games revenue, I think one can look at it along three dimensions, the ARPU, the paying user ratio, and the total number of users. Our ARPU has substantial upside relative to the industry. Part of the reason why we were able to eke out a little bit of growth for our smartphone game revenue in the third quarter was because we released some relatively high ARPU role-playing games, which demonstrated that effect. Our paying user ratio also has substantial upside relative to the industry. It's to some extent been frozen by the regulatory measures, particularly as some of our new games that have very substantial user bases currently have a 0% paying user ratio. Our overall game user base, smartphone game user base, is already at a very substantial number.
On the other hand, the success of the Mini Games within Weixin illustrates that there's still a substantial audience of new players, particularly female players, who historically were not actively playing smartphone games, but are now beginning to do so. We think that in a more benign regulatory environment, there's upside to all three metrics, the ARPU, the paying user ratio, and the total number of game players.
Thank you. The next question, please.
Our next question comes from line of Han Joon Kim from Deutsche Bank. Please ask your question.
Great. Thank you for the chance to ask a question. For your advertising business, I noticed that we've seen an acceleration of year-over-year growth, and I recognize that it's part of the ad inventory that we've talked about. How should we think about the possibility of maybe continuing this acceleration, particularly as we redefine the business with the advertising and marketing services unit and trying to integrate the various components of ad inventory together to maybe create better ROAS? Thank you.
Well, I would say we run the advertising business on a consistent and long-term basis. I think what we have seen today is actually the result of a pretty long data and consistent effort in improving our ad system. We have always been very disciplined in terms of making sure that our advertising quality is high. We have been running at below industry level of ad load because we want to have the right balance between user experience and advertising. In order to keep on delivering higher ROI to the advertisers and also to make the advertising experience better for the users, we have been investing heavily into building an ad system with targeted technology. I think what we have seen today is just a result of all these efforts in the past. Going forward, we continue these philosophies.
We believe over time, we'll continue to generate more and more revenue from the advertising business. At the same time, I think we do not want to hurry ourselves, and we do not want to do things that generates revenue for the short term but harm the user experience or harm the advertisers over the longer term. I think in terms of the AMS, it is a good development, obviously. It helps us to now face the advertisers with a single voice. It would help us to serve these advertisers better. I think it would be a positive development overall for our service level for advertisers.
Thank you. The next question, please.
Our next question comes in of Grace Chan from Morgan Stanley. Please ask a question.
Hi. Thank you for taking my question. Can you share with us your view about the 2019 outlook by the different business segments, such as gaming, social network, online marketing, payment, and cloud business? Apart from the To B initiatives, what are the other key strategic differences in 2019 versus this year? I remember earlier this year, we talked about heightened investments this year. If you can share your strategic focus next year, that would be great. Also, can you update us with the latest development of the government game approval process? Thank you.
I think in terms of 2019, we have already done a very big strategic organizational upgrade, which is indicative of our focus for the future, right? Obviously our existing businesses will continue to put a lot of effort in, and at the same time in two particular areas, in the form of a Cloud and Smart Industries Group and in our Platform and Contents Group, we will have a redoubling effort in those areas to build better products and better services to serve our users and our customers. I think for Tencent, we have always been very consistent in terms of pushing ahead with our execution. As you can see from our organization, we will continue to push along those lines of businesses. In terms of regulatory approval, I think at this point in time, there's not a lot of update.
We're waiting for the government to start the approval process for our games and when that's announced, then we'll have the update for the market.
Thank you. The next question, please.
Our next question comes from the line of Natalie Wu from CICC. Please ask your question.
Hi. Good evening. Thanks for taking my question. Just curious, is there any change regarding the revenue sharing ratio with the WeBank recently, for example, the micro loan business of Weilidai? Also, could you quantify the impact from the PBOC's regulation on your interest income in the last quarter? Just wondering how should we see the future trend of the GP margin for the other revenue line. Thank you.
Yeah. For the first one, I don't think we will comment on specific commercial transactions. On the second part of your question, I think it's more important to look at what is still in there because as we previously communicated, by the beginning of next year, all the interest will be gone. I think what we can speak to that is that there is a high single-digit number of our current others revenue, which is interest from the deposit. That would basically disappear by the first quarter next year.
The next question, please.
Our next question comes from the line of Alex Yao from JPMorgan. Please ask your question.
Hi. Good evening, everyone. Thank you for taking my question. I have a question on the mobile gaming monetization strategy side. Given the uncertainty around new game monetization approval, would you consider change the existing game monetization or operation strategy, for example, would you consider to increase the existing game title lifecycle by temporarily lowering their monetization? Then, in terms of the key initiatives and the future development direction, such as the cloud, industrial, et cetera. Given the uncertainty around gaming monetization, would you consider to tweak the investment strategy in terms of the budget spend next year on the back of uncertainties around new game monetization? Thank you.
Alex, on the first question, we believe the way that we monetize our games is entirely compatible and commensurate with great longevity. I think the fact that a game like "Dungeon & Fighter" is arguably the highest revenue China PC game now after 10 years in our operation. The fact that "League of Legends" is arguably the most popular PC game in China after many years of our operation speak to the reality that we're able to both monetize games appropriately and also maximize their life cycles. No, I think the concept of us reducing the revenue for our existing games because of some kind of expected trade-off with game longevity wouldn't make a lot of sense to us, because we think our existing monetization levels are very healthy and long-term sustainable.
Yeah. In terms of the investment for the industrial internet businesses, as well as some of the longer-term projects. I think our philosophy has never been short-term financial number driven. Our philosophy has always been long-term value driven, right? If we can actually create value for the long run, we will do the right things, i.e., make the investment, we will not be swayed by short-term financial considerations.
Thank you. The next question, please. Operator, may we take the last question? The next question comes in of Jason from New Street. Please ask the question.
How are you doing, guys? Just a quick follow-up on kind of advertising in general. You guys talked about how advertising was, especially on the AMS side, driven by kind of new ad loads and new inventory. Can you just also talk about kind of CPC, CPM pricing trends among the bigger AMS advertising businesses? Perhaps, can you kind of rank them in order in terms of revenue contribution? Thanks.
In terms of revenue contribution, we don't go into great detail, Weixin Moments is the single largest contributor, Weixin Official Accounts, Weixin Mini Programs are also substantial contributors. Outside Weixin, our mobile ad network has become a very substantial revenue contributor, and our mobile browser is also a meaningful contributor. We're in the process of ramping up our news feeds revenue, which is an area where we believe we have traffic equal to or superior than most of our peers. Our revenue is still much lower than our peers, and we're in the process of rectifying that discrepancy. In terms of CPC and CPM, there's enormous variation by property.
For example, Weixin Moments commands a premium CPM relative to almost every other medium in China because it is uniquely effective at targeting a nationwide, like, broader audience in a attractive and engaging and localized way. As we've been increasing the ad load on Weixin Moments, the focus is more around preserving the CPM within a same-city basis rather than seeking to drive to grow the premium further. A property like video property would be a medium CPM that's increasing over time due to growing advertiser demand at a moderate rate. Something like our mobile ad network, which historically had a very low CPM, but as we apply more technology and as advertisers get more comfortable with our systems and the quality of the clicks we deliver, the CPM and CPC for our mobile ad network would be increasing particularly quickly.
Thank you, we are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our company website. The replay of the webcast will also be available soon. Thank you, see you next quarter.