Tencent’s video game boom comes back down to earth

May 21, 2021, 10:58 AM UTC

The pandemic was good to gaming companies. Few benefited more than China’s Tencent, owner of blockbuster hits like Honour of Kings and League of Legends.

Tencent’s gaming sales soared beginning in early 2020, as users, stuck at home, turned to digital games and entertainment.

As 2020 progressed, Tencent’s gaming revenue climbed—31% in Q1, 40% in Q2, 45% in Q3—before inching down to 29% for the fourth quarter. For the whole year, gaming revenue surged 36%, compared to 10% for all of 2019.

But now it seems Tencent’s gaming boom is coming back down to earth. In the first quarter of 2021, gaming revenue still grew an impressive 17% to $6.7 billion, but didn’t match the sky-high rates of 2020.

Overall, Tencent’s first-quarter revenue increased 25% to $21 billion, beating analyst estimates, and profits grew by 65% year-on-year to roughly $7.4 billion.

Tencent may not be able to replicate the growth it reported in a once-in-a-generation pandemic, but it’s now going after more international users and trying to capitalize on ‘next generation’ game experiences to maintain its title of world’s largest gaming company amid tougher competition.

In the latest quarter, Tencent released its biggest-ever update to its top-downloaded mobile game, Honour of Kings. The improved graphics and new in-game avatars led to a record number of paid users in February, according to the company.

Tencent’s success in the pandemic reflect its “silent pursuit of global gaming domination,” says Daniel Ahmad, senior analyst at gaming research firm Niko Partners. One key to Tencent’s gaming success, Ahman said, has been its decision to maintain the brands it acquires. For instance, Tencent fully acquired Riot Games, publisher of League of Legends, in 2015, and it controls a 40% stake in Epic Games, developer of Fortnite. Never rebranding games allows the titles to thrive under the names that lured fans in the first place, says Ahmad.

In 2020, Tencent ramped up its deal-making, closing 31 game deals compared to 10 in 2019.

Now Tencent must contend with a world that’s slowly opening back up and growing more competitive.

Tencent controls 43% of China’s gaming marketplace, but faces competition from tech giants—Alibaba, ByteDance—and gaming-focused companies—NetEase, 37 Interactive Entertainment—alike.

Alibaba became China’s fourth-largest mobile games publisher in 2020 due to the success of Three Kingdoms: Tactics, which is based on Japanese game developer Koei Tecmo’s popular Romance of the Three Kingdoms, first released in 1985. Meanwhile, ByteDance is planning to expand further into gaming; it’s hired 3,000 new employees to ramp up its in-house development capabilities, Ahmad says.

Tencent says it will increase investments in game development, focusing on large-scale and high-production value games that can garner a global appeal. Tencent’s international game revenue almost doubled in 2020 to $1.5 billion.

It also will pour more money into new games that target niche audiences. Such “emerging genres,” as the company calls them, go beyond mainstream audiences, such as ‘daily life’ games like Komori Life and Walnut Diary.

Tencent also plans to invest in advanced technologies for next-generation gaming experiences, such as cloud-based games.

Connie Gu, analyst at BOCOM International, says Tencent’s “strong game pipeline in the near-term and tech-driven growth in the long-term” puts it in “a solid growth position.” However, “margin should come under pressure in the rest of this year [given] its investment strategy, involving increases in R&D input for games and business services,” she says.

Gu estimates Tencent’s overall revenue in the second quarter will grow 25% to $22.4 billion, with gaming business growth at 13%. Ahmad, meanwhile, anticipates Tencent’s hot streak in games investment to continue, as the value of games and related IP grows.

Like its Chinese tech peers, Tencent has endured stricter regulatory enforcement from Beijing. China’s State Administration for Market Regulation in April hit the company with a $77,500 penalty for anti-monopoly law breaches.

Tencent President Martin Lau said in its May 20 earnings call that the company’s compliance and cooperation with Chinese regulators is “actually relatively manageable.”

The April fine is pocket change for the tech behemoth, but China’s second-largest Internet firm has felt the pain of the on-going, unpredictable crackdown in other ways. Its market cap, now at $600 billion, is down 25% since January.

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