Who are some unknown game developers
The unknown giant: a portrait of Tencent
The numbers are, well, impressive. In Q4 2019, Tencent had total sales of the equivalent of 15.2 billion US dollars. Operating profit was a whopping $ 4.34 billion - a 35 percent increase over the previous year. Tencent is - mind you - not a pure games company. Nonetheless, games make a significant contribution to the business of the giant from Shenzhen. Online game sales grew 20 percent year over year to $ 7.42 billion. The mobile games Peacekeeper Elite, PUBG Mobile and the Supercell titles, which Tencent acquired with the purchase of the Finnish developer, were particularly profitable. In the meantime, PC client titles such as Dungeon and Fighter achieved lower revenues - although "less" still means "a lot" in China. Before we forget, Tencent made an operating profit of $ 16.4 billion for all of 2019. Uff.
Of course, with just under 1.4 billion citizens, China is the largest game market in the world. And of course Tencent has a huge lead over competitors like Netease or Yoozoo on home soil. That alone hardly explains the enormous success of the group, whose games department (Tencent Games) was founded in 2003. So what's the recipe for success? "Tencent has focused on three key areas to build a strong gaming business in China and around the world," said Daniel Ahmad, senior analyst at research firm Niko Partners. "Firstly, there are the internal developer resources, for example with self-developed titles such as Honor of Kings or Peacekeeper Elite. Tencent has succeeded in going beyond conventional MMORPGs, which have traditionally been very popular in China - and successfully opening up new genres."
Second, Tencent took advantage of the telco legislation in China: a law stipulates that foreign developers have to work with local companies if they want to bring their games to China. "This enabled Tencent to establish itself as the leading publisher of foreign games in China," said Ahmad. "On the one hand, Tencent has the necessary expertise in game development and publishing. On the other hand, it also has the large and well-known distribution channels WeChat and QQ, which are essentially social media platforms and applications."
Focus on three key areas
Ahmad mentions the global expansion of the group as the third ingredient in the recipe for success. Tencent has expanded its games pipeline through investments and acquisitions while increasing its global presence. "For example, by participating in Riot Games, Tencent suddenly became the most important publisher for PC games," said the analyst. "With the acquisition of Supercell, they became one of the largest mobile game publishers in the world." Another important expansion step was the purchase of the Norwegian studio Funcom, which is currently converting to live services.
In one fell swoop, it became the most important publisher for PC games
Frank Sliwka is also a proven expert for the Asian market. The former chairman of GDC Europe has been heading the consulting firm ibMedia, based in Singapore, for eight years now. "Tencent has consistently focused on user needs in its home market," says Sliwka, describing the gaming giant's recipe for success. "Tencent didn't just focus on games, but also on payment options, content and so on. They have created a complete ecosystem for their customers. Customers play, socialize and also pay through it." As a second success factor, Sliwka also mentions the group's expansion efforts: "Tencent left its home market very quickly - and into emerging markets, for example India and Africa. They also moved into new areas - games, payment systems, socializing." Not to forget the aforementioned investments in Western game companies. "From my point of view, it's clearly about distribution," says Sliwka. Tencent simply wants to get access to certain markets. The fact that Tencent recently invested an undisclosed amount in the Berlin studio Yager Development may indicate more far-reaching motives. "You may find The Cycle from Yager interesting and want to include it in your distribution cycle," says Sliwka. "It's a very good deal for Yager. Congratulations!"
But how does Tencent actually deal with the companies it has bought? Is it taking full control or is it holding back? "Tencent usually takes a hands-off approach," reports Daniel Ahmad. "It lets companies do what they do best. Tencent is generally looking for investments and acquisitions that are in line with its own values and priorities." At Supercell, for example, Tencent took precisely this hands-off approach. "You only choose hands-on if you want to bring the games in question to China or if you want to use the experience of the developer to create your own games based on that IP," says Daniel Ahmad. Frank Sliwka reports that Tencent also tends to remain in the background at Epic Games: "At Epic, according to the management, Tencent has no influence on the operational and strategic business."
The collaboration between Tencent and Riot Games is now bearing fruit: "Tencent has the necessary expertise for the local market, which is why League of Legends has grown strongly in China this year," said Ahmad. "E-sports are also an important part of the business. League of Legends has been promoted successfully and is now doing better than last year." Frank Sliwka confirms that Tencent attaches great importance to e-sports, even if the group does not appear as a tournament organizer itself. Tencent has several hot irons in the fire in e-sports. For example: "Five of the seven games in the 2019 Asian Games were from Tencent." Mobile is the dominant games platform in China anyway, according to Sliwka. In contrast, consoles are still a fringe business. "The turnover with mobile games in China is 18.5 billion US dollars," Daniel Ahmad quoted market figures from Niko Partners. The PC is still a strong platform with annual sales of around 15 billion US dollars. "But mobile is stronger and growing faster." Consoles make up less than one percent of the market, according to Ahmad. "As a result, Tencent doesn't focus that much on consoles - unless it's about acquisitions abroad."
Console manufacturers have been trying to capture more market share in China for some time - but so far this has not really been crowned with success. "This is essentially a niche market that has its own justification," says Ahmad. However, Nintendo is now working with Tencent to establish the Switch on the Chinese market. From Ahmad's point of view, this could well work because, as a hybrid console, it is similar to mobile platforms, is comparatively cheap and is also very family-friendly. "At the moment the Switch is - if you include the gray market - the console that sells the fastest in China," says Ahmad. "We expect Tencent to port some of its own games to the Switch in the future to make the console more attractive." Incidentally, Ubisoft is also looking for a strong partnership with Tencent to gain access to the Asian market. "As a distribution partner, Tencent is number one in Asia," says Sliwka.
E-sports are also an important part of the business
According to Sliwka, the corona crisis will not have a major impact on Tencent's core business for the time being: "Digital services will not be severely affected in the short term. The question of course remains how purchasing power will develop in Asian countries." Sliwka believes that Tencent will continue its expansion course unmoved: "The way I see Tencent, they will look for further distribution platforms for their games and services in Europe - and then expand them. They are not interested in culturally valuable productions. It works for them just about sales and marketing. " (Achim Fehrenbach)
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