China’s undisputed leader in games and social media Tencent paid a rich price for a controlling stake in Supercell, the Finnish maker of popular smartphone distraction Clash of Clans. The $8.6 billion deal almost doubled Supercell’s valuation to more than $10 billion in just a year. Tencent is no stranger to overseas deals, but this is its biggest. What’s important here?
1. Tencent just became a lot bigger
Already worth $200 billion on the public markets, Tencent will capture 13% of the $100 billion global games market this year thanks to Supercell and Clash of Clans, says researcher Newzoo. This should cement its global number one spot in online games.
Tencent doesn’t get the same attention as China’s other tech giants Alibaba and Baidu, in large part because it doesn’t want it. Company executives hardly ever consent to interviews. But after earning $4.5 billion on $15.8 billion in sales last year, Tencent is every bit as financially powerful as tech leader Alibaba. And its newly acquired Supercell is no slouch: the Helsinki-based company earned $780 million last year, mostly selling add-ons to its free games.
2. Tencent cares about expanding, but not necessarily abroad.
This isn’t the first time Tencent has gone shopping in the West. In 2011, it bought Riot Games, the Los Angeles-based maker of League of Legends, which is the highest-grossing PC game. But these purchases are about pleasing domestic gamers. Tencent wants to expand its domination of the China games market and needs hot foreign titles to satiate Chinese players. Clash of Clans is already well known in China, having been released on Android app stores in late 2013. The game was downloaded 200,000 times in its first month, but Tencent can expand the popularity through its platforms.
The fact that Supercell’s top four games combined have 100 million daily players internationally is a bonus. Tencent gets a little diversification into foreign markets, where it earns less than 10% of its revenues, without much effort.
3. Tencent won’t be known as a social media company anytime soon.
Online games drove more than half of Tencent’s $15 billion in sales last year. That happened even as WeChat, the company’s answer to Facebook and China’s most popular social network, grew to 700 million users. A few years ago analysts questioned how Tencent would adapt to slowing PC game revenue, then responsible for the bulk of its revenues. WeChat was emerging as the answer. But then mobile games exploded, and Tencent has gone back to doing what it does best: games.