Tencent's influence in Gaming
Summarizing the Chinese tech giant's amassing and impressive portfolio of investments
This piece will examine the influential empire Tencent (腾讯) has cultivated through holdings and investments in gaming technology companies, and hot takes I personally have regarding the company and industry outlook.
In past weeks, I’ve read headlines about Tencent’s major investment in Czech Game Studio Bohemia Interactive, their promise to invest $70 billion in 'new infrastructure' within 5 years, and their interest in purchasing a $200M stake in Warner Music Group ahead of the IPO. The company’s massive appetite for investments is not new, but has been flying under the radar for years. The internet giant is one of the world’s largest game publishers - and the gaming field is one where the Chinese company has emerged as king.
As a precursor, Tencent has accumulated an omnipresence in nearly every vertical of the digital economy. As noted by Technode, it is unlikely that a user of the mobile internet anywhere in the world could go a week (or even a day), without using a product or service backed or created by this company. Outside of gaming, Tencent has claimed stakes of companies in ride-sharing (Uber, Ola, Lyft, Gojek), music (Spotify, China Music Corp), social (Snapchat, Reddit), EV (Tesla), e-commerce (Flipkart) and others. Needless to mention, profiling every single investment would be impossible. As reported by Tencent, their global investment portfolio value amounts to over $59 billion as of Q2 2019. I have selected to analyze, specifically, Tencent’s substantial portfolio in the gaming space given its leading influence and uninterrupted presence.
Prior to Tencent’s early investments in gaming, the company owned two social media platforms: QQ (1999) and WeChat (2011). WeChat is now the single most-used application in China, and the preferred method of communication for the 1.4 billion population. The super app has surpassed over 1 billion in monthly active users. I covered WeChat in more detail, in a piece here.
2011 marked the start of Tencent forming its formidable influence in the industry with its bold acquisition of a 93% stake in developer Riot Games. Riot is largely known for its incredibly popular video game, League of Legends. Tencent believed that the $400 million it shelled out for the majority investment was well worth it, and shortly increased its equity to 100% a few years later, assuming full control of Riot Games. Based on data from SuperData, the game alone brought in an estimated $1.5 billion in revenue for Tencent in 2019. Arguably one of the best deals inked by Tencent, League of Legends remain as the number one played PC game internationally even today, drawing in approximately 8 million daily players.
This Tencent-Riot deal continues to reveal unearthed potential. On June 2nd 2020, Riot Games officially released VALORANT, a free-to-play first-person shooter game that’s poised to become the next worldwide sensation, following in close footsteps of Fortnite. The closed beta of VALORANT reportedly pulled in close to 3 million daily players, signalling a promising and exciting future for the highly-anticipated game. Nonetheless, VALORANT faces steep competition from other popular first-person shooter games like Call of Duty. I look forward to see if Riot can validate its claim of re-creating the hype and global community as they did surrounding League of Legends, with VALORANT.
If we speak of first-person shooter games, we cannot go without mentioning Fortnite. Tencent also holds a significant stake of 40% in Epic Games, the game developer of Fortnite.
8 years ago, Tencent invested $330 million in Epic Games to trigger one of the most important and radical shifts in the video gaming business model. As Harvard Business School’s professor Andy Wu discussed in Harvard Business Review’s podcast on Epic Games, Tencent’s partnership with Epic was instrumental in introducing a new monetization model, where players access the game for free, with in-game purchases available. In 2017, Epic Games dropped Fortnite Battle Royale and the game became an instant phenomenon. Compared to the traditional business model, Fortnite eliminated the barrier for new and amateur gamers to access the game without breaking the bank or committing before they can test the experience.
Fortnite Battle Royale raked in over 10 million players within the first two weeks of its release and brought in $2.4 billion in 2019, according to GamesIndustry. With Fortnite and League of Legends under its belt, Tencent unbelievably counts the world’s two highest-earning games in its portfolio.
As I mentioned above, Fortnite’s role in pioneering a new form of gaming model has set its brand apart from other video game titles. Since 2017, the game has been referenced to represent youth culture, appearing constantly on digital social platforms outside of typical Gaming ones. Its identity and community certainly differs from other titles that may be geared towards hardcore or professional gamers, and I believe this is a strong factor that blankets Fortnite from external threats or new entrants in the first-person shooter gaming space.
In 2017, Tencent kicked off its first investment in Bluehole, a South Korean game developer, when it acquired a 1.5% stake. Bloomberg reported that Bluehole had a valuation of $4.6 billion in 2017. Less than a year later, Tencent upped that stake to 10%. Although there were rumours of Tencent’s interest in acquiring Bluehole in 2018, similar to their deal with Riot, it was never confirmed if the deal went through.
Bluehole is the creator of the wildly-successful mobile game, PlayerUnknown's Battlegrounds (or better known as PUBG). Tencent holds the exclusive rights of publishing the Chinese-version of PUBG in China - which yes, competes with Tencent’s own games aforementioned. Excluding the game’s numbers in China, PUBG has been downloaded over 400 million times, and boasts over 50 million daily players worldwide. These high figures translate just as well to monetization. PUBG and its Chinese counterpart (Peacekeeper Elite) earned a chart-topping $232 million in March 2020, making it the top-grossing mobile game for 7 months in a row, according to GamesIndustry.
It is interesting to witness the spike in demand for mobile gaming despite the global pandemic. It’s also worthwhile to note that restrictions around transport and stay-at-home orders have eased in China, compared to North America. Throughout the pandemic, the Chinese market still contributed a consistent 60% of PUBG’s revenue. In this piece, I analyze the (mobile) gaming space and question if trends will outlast the virus.
Tencent also holds stakes in other notable publishers that were once at risk of a hostile takeover from Vivendi, a Paris-based media conglomerate. In 2012, Tencent purchased 5% of Activision Blizzard. In 2018, Tencent purchased 5% of Ubisoft. The latter, however, fostered a more strategic than commercial partnership for Tencent, where the Chinese company gained the right to publish Ubisoft games exclusively in their home country. In 2020, GamesIndustry analyst Joost van Dreunen predicts that Tencent will jump at the opportunity to overtake Ubisoft. It makes financial sense on the heels of a disappointing Ubisoft game release, and the fact that Tencent is already the one extending Ubisoft’s arm into China. Dreunen estimates that Tencent will only need to pay around $10 billion to add Ubisoft’s logo into its wealthy shopping cart of game companies.
As one of the biggest ever gaming deals at that time, Tencent acquired 81.4% of Supercell, Finnish mobile developer, for a staggering $8.6 billion in 2016. In 2019, Tencent upped its stake in a Luxembourg consortium, which was reportedly formed specifically to acquire Supercell, and increased its shares in the consortium to a majority at 51.2%. Data from PC Gamer indicate that around 60% of Tencent's $19.13 billion gaming revenue in 2018 derived from mobile games, thus justifying the Chinese giant’s continuous and substantial investment in the area. Supercell's enduring hits include Clash of Clans, Boom Beach, Clash Royale, and Brawl Stars. Sensor Tower reported that Supercell made $1.4 billion in revenue in 2018. This, amongst a sea of other Tencent deals, underline the company’s hunger to not only expand into international markets, but to dominate them.
As part of Tencent’s European shopping spree, the company picked up Czech Game Studio Bohemia Interactive with a $260 million investment in exchange for a stake between 70% to 80%. So far, Tencent has purchased stakes in gaming companies at an extraordinary rate this year. As reported by The Information - Tencent bought Norway’s Funcom in January, creator of the multiplayer online role-playing game Anarchy Online, in a deal valuing that game studio at around $140 million. In February, Tencent took an undisclosed minority stake in Germany’s Yager, which is working on a first-person shooter called The Cycle. Now in June, Bohemia Interactive. Both of Bohemia’s games, Ylands and DayZ, share similarities to Minecraft and Fortnite, respectively. Tencent is well aware that games of this sort and genre would not be approved by Chinese government regulators given its spotlight on blood galore. If Tencent has an interest to port these titles to China, it would need to customize a country-specific app, like it did with PUBG, that is a light-weight version of its global counterpart in blood and gore, dramatically toning down the violence. In the case that Tencent does do so, DayZ would not only enter an already fierce market but directly compete with Tencent’s other games. If not, however, these deals could very likely be a replica of the early Tencent-Riot deal, where Tencent gradually increases its stake to eventually a complete ownership, whilst still allowing these companies to operate independently. The head of Tencent’s cloud business in Europe had stated that the team plans to invest $10 billion in the region this year.
What else is in Tencent’s portfolio:
Grinding Gear Games. Tencent scooped up a 80% stake in 2018 of the New Zealand-based Path of Exile maker.
latinum Games: Tencent acquired an undisclosed investment early 2020.
Sea: Tencent owns 20% of this South-East Asia e-sports and publishing company.
Frontier Development: Tencent snatched up 9% of the developer of Elite Dangerous and Planet Zoo in 2017. This was yet another strategic partnership to capitalize on Chinese consumer’s increased interest in space and "theme park" games at the time.
Kakao: Tencent owns 13.5% of South Korean tech giant Kakao, whose services and products parallel WeChat’s in China. The gaming subsidiary of the company produced mega-hit Black Desert Online, and also publishes PUBG in South Korea.
Paradox Interactive: In 2016, Tencent bought 5% of the Swedish grand strategy publisher Paradox through the public markets.
Fatshark: In 2019, Tencent purchased 36% of Swedish developer Fatshark for an estimated $56 million.
Discord: A sister of the gaming community, Tencent was one of the investors that funded a total of $158 million in Discord in 2018.
Sharkmob: Tencent owns 100% of this studio. We have yet to see its first game yet.
It’s true that Tencent has its numerous smart and well-timed investments to thank for generating almost half a billion dollars a month in revenue across global markets. However, its own publishing company, Tencent Games, has published titles that are individually forces to be reckon with. This juggernaut-sized organization is also behind the blockbuster mobile game Honour of Kings. Earning over $112 million in monthly revenue, Honour of Kings’s overseas version is ranked as the second-highest grossing game - second only to, that’s right you guessed it, another Tencent game called PUBG.
Tencent is currently the number one gaming company in the world, by revenue, and fervently extending its lead ahead of competitors everyday. Tencent is a remarkably ambitious company that’s never comfortable (even with the first place trophy, even when its own content is competing with each other), with its dominant market position. Its need to command (also holds true to industries outside of gaming) on a global scale is exhibited through its vigorous purchasing and investment behaviour.
Tencent is a relentless and key leader in ushering new trends, models and consumer behaviours to the gaming industry. Soon enough, Tencent will not solely be named as an “internet” or “gaming” company alone, but one of the world’s most powerful companies with influence across borders and virtually infinite resources. What began as a humble startup known for its quirky penguin trademark, Tencent now wields an inexplicable amount of influence on the direction of the entire gaming industry, and I am beyond excited to see what the company does with future releases, and coins from its astronomical wallet.
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All figures in USD ($).