Tencent’s Silent Pursuit of Global Gaming Domination

Tencent is the world’s largest games company and continuing to grow organically as well as through investments and acquisitions. As of May 10, 2021, Tencent has closed 51 video game related deals, already more than the 31 game related deals closed in the whole of 2020 and over 5x more the number of game related deals closed in 2019. Tencent has closed one deal every 2.5 days in 2021 on average, and we anticipate that by the time you read this more deals will have closed. Prior to 2020 Tencent’s game industry investments could have been characterized as somewhat conservative, favoring firms that had a proven hit game or service. In 2020 the investment strategy evolved based on market changes. One thing that did not change is that Tencent invests in a “silent” manner, meaning that they do not rebrand their portfolio companies and generally leave those companies to continue the excellence that made them attractive to Tencent in the first place. We call that Tencent’s silent pursuit of global gaming domination.

Here are 3 main factors for Tencent’s more aggressive approach to its investment strategy in 2021:

1. Alibaba and Bytedance are challenging Tencent

Tencent has faced notable competition from tech giants such as Alibaba and ByteDance over the past year. Alibaba released Three Kingdoms: Tactics, based on the Romance of the Three Kingdoms IP from Koei Tecmo, which helped it become the #4 mobile game publisher in China during 2020. Alibaba upgraded its games segment to an independent group parallel to the company’s entertainment division in September 2020 and plans to directly challenge Tencent. ByteDance has also jumped into the games industry after finding success with short video app TikTok (Known as Douyin in China). The company has hired nearly 3,000 staff to work on games and has set up various publishing labels. While it is still developing its own games, it has found success publishing Ragnarok X: Next Generation (Gravity) in Hong Kong and Chinese Taipei as well as One Piece: The Voyage (CMGE / Shueisha) in mainland China. ByteDance also acquired Moonton (Mobile Legends) and C4 Games (Red Alert OL) to strengthen its internal development capabilities.

2. Hit games by smaller game developers became hits, and threats.

Several hit games were released in 2020 from medium sized game companies, such as miHoYo, Lilith Games, and QingCi Digital. None had ties to Tencent in 2020, although we note that Tencent recently acquired a 3.33% stake in QingCi Digital for RMB 101 million. miHoYo’s Genshin Impact was a global hit, combining an open world AAA RPG experience with an anime art style, that scaled across multiple platforms. The game has grossed over $1.5 billion globally across all platforms. Lilith Games launched AFK Arena and Rise of Kingdoms in mainland China last year, both of which performed better than Tencent games in the same genres. QingCi Digital innovated in the idle and simulation genres with The Marvellous Snail, a notable title in 2020.

3. The global market beckons beyond China’s borders.

While China is the largest gaming market in the world with 33% of PC and mobile games revenue derived from mainland China gamers, Tencent wants to be a global giant. The firm stated that its target is to have half of its players overseas, but we note that only 21% of its total games revenue in 2020 was from outside China. The majority of that revenue was generated from self-developed mobile games based on licensed IP, such as PUBG Mobile and Call of Duty Mobile. While the majority of overseas growth is coming from mobile, Tencent understands that the PC and console market is worth over $70 billion outside China and that there is opportunity to grow those segments inside China too. While Tencent is incubating internal teams to develop cross platform and AAA titles, it is also looking to invest in game companies that already have expertise in this area.

A closer look at Tencent’s investments in 2021

Tencent has closed 51 game related deals as of May 10, 2021, of which 39 are domestic companies and 12 are foreign. 5 of the 12 foreign companies are based in South Korea and are primarily active in the PC and mobile game development space. We note that Tencent has not invested in a US based games company this year, which may be due to the geopolitical issues which led to the Committee on Foreign Investments in the United States (CFIUS) looking into Tencent’s current stake in Riot Games and Epic Games. While there is a low chance that Tencent will be forced to divest, the company has focused on investing in game companies based in Europe. Tencent also took a majority stake in Klei Entertainment in Canada.

Nearly half of the 51 investments in 2021 are in companies with experience developing PC and console games. Many of these are domestic. This is new for Tencent, as most domestic investment until 2020 was in mobile games companies, and the PC and console investments were done overseas. In 2021, Tencent invested in domestic game companies with PC / console game experience, such as Game Science (Black Myth: Wu Kong), Surgical Scalpels (Project Boundary), UltiZero Games (Lost Soul Aside), Dark Star (Sinner) and more. These investments will help Tencent gain footing in the domestic PC games market, which is set to rebound from 2022, as well as in the global console and PC market. Tencent aims to create and support more cross platform and AAA games that can compete in the high-end space. The foreign investments in PC and console games companies, such as Fatshark, Bohemia Interactive, Dontnod Studios, Klei is both to utilize their expertise in PC and console game development and to bring their games to China.

Tencent is diversifying gaming investments into growth segments, notably fans of anime content and female gamers. The company has invested in 14 game developers of anime style games, games tailored to women, or both. While Tencent has previously released games based on anime licenses, such as Naruto and Dragon Ball, as well as its own comic IP, the company has not been able to create original hits in the same way that NetEase has with Onmyoji or miHoYo has with Genshin Impact. As of the end of 2020, there were over 300 million ACGN (Animation, Comic, Game, and Novel) fans and over 350 million female gamers in China.

Tencent is also investing in smaller companies than it historically has, and at a much earlier stage. The company invested in six companies that were established in the past two years, a few without even a product to point to. Most of these start-ups are being led by famous game producers that left large game companies to start their own venture. For example, the producer of Love Games is Cheng Liangqi who is known for the popular Junior Three Kingdoms series. We presume that the threat of newcomers and smaller firms taking the market by surprise, as we saw with miHoYo, Lilith Games and Hypergryph, has Tencent poised in a more proactive investment stance.

Tencent is investing heavily in R&D to create new titles that can meet the exacting demands of gamers, and its aggressive investment strategy is part of this. Tencent is in no danger of losing its #1 position in the games market in the near term, but the company has to be on its toes thanks to the success of those newcomers and other companies. We fully anticipate the investment hot streak to continue, as the value of games and IP grows, while Tencent presses forth with a silent pursuit of global gaming domination.