Chinese tech giant Tencent Holdings recently completed its acquisition of Riot Games, the developer behind the world’s top eSports game, League of Legends.
The game has over 100 million monthly players, which generate approximately $1.5 billion annually for the Los Angeles-based developer, according to SuperData Research.
The company acquired a majority stake (93%) of Riot Games back in February 2011 for a reported $400 million. According to Patrick Walker, analyst at research firm EEDAR, Riot was valued at $500 million back then.
“With EEDAR estimating current League of Legends revenues to be more than $1 billion per year, this means that the value of Riot is significantly higher than $1 billion and Tencent would have paid a lot of money for the remaining 7% of the company’s shares,” Walker says.
Tencent (TCEHY) had seen the potential for the multiplayer online battle arena (MOBA) game from its inception. The company signed a Chinese distribution deal for League of Legends in November 2008 and made an initial investment in Riot Games in 2009.
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Chinese gamers love League of Legends. The game has 85 million monthly active users, at least 40 million of whom are in China, according to estimates from research firm Newzoo.
“Two years ago, Tencent indirectly stated that just over half of their players were from China,” says Newzoo CEO Peter Warman. “It is by far the leading MOBA in China and, equally important, the biggest eSports franchise.”
Warman believes that Tencent has three main priorities: growing its share of the Western games market as a whole, growing the global mobile games market, and dominating eSports in China.
Different from Western publishers, Asian game publishers most often have a strategy that involves owning content as well as distribution channels.
“ESports is a key route to new revenues and company growth for the medium- to long-term future, giving Tencent a larger share of China’s booming online ad business,” Warman says. “It also allows them to build out their PC and mobile game titles into true entertainment franchises comparable to what Western publishers have done.”
While Riot Games is a key part of Tencent’s global video game strategy, it’s but one piece of the pie. Warman says Tencent controls a significant share of Glu Mobile and has at least a 10% stake in Activision Blizzard Inc.(ATVI), which recently acquired King Digital Entertainment for $5.9 billion.
“Indirectly, Tencent partially controls about a third of the revenues generated by the top 10 global companies, according to game revenues,” Warman says.
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Tencent also owns a piece of Activision Blizzard’s growing eSports business. Activision Publishing has the $3 million Call of Duty World League launching in 2016, an expansion of the publisher’s five-year commitment to eSports. And Blizzard Entertainment has active eSports leagues around StarCraft 2, Hearthstone, Heroes of the Storm, and a growing World of Warcraft audience.
While many Chinese companies, including Alibaba(BABA), have been hurt by the down economy in China, Tencent has prospered. The company had a $230 billion market valuation as of September 2015. In addition to its web business, the company has over 1 billion users of its mobile chat products WeChat and QQ. And analysts believe Tencent isn’t finished investing in the video game business.
“For a firm like Tencent, the sky’s the limit,” says SuperData CEO Joost van Dreunen. “I can imagine a scenario in which Tencent would invest in a publisher like Wargaming, for instance. Whenever Tencent sees a game they like—based on specific metrics, of course—it decides to either build it itself and improve on it, or invest and acquire the firm behind it.”