BusinessMarket & Companies How Tencent Was Impacted by China’s New Game Regulations in 2018 by Seamus Byrne April 13, 2019 written by Seamus Byrne April 13, 2019 One year ago, business at Tencent was booming. The numbers were dazzling at the end of its 2017 financial year. Revenue hit ¥237.7B RMB ($36.4B USD), up 56% year-over-year, with profits up 75%. But today, the company is a significantly restructured one. It has shifted focus away from gaming to overcome one big thing it can’t easily account for – Chinese government video game regulations. By exploring the past year of Tencent’s quarterly results, we paint an interesting picture of what one of the world’s biggest technology companies can and cannot control to remain master of its own destiny. Tencent is so much more than a gaming company. The company is listed on the Hong Kong stock exchange, and first gained its reputation as a dominant online media company through its QQ and WeChat social messaging platforms. In the controlled Chinese domestic market the company has not had to compete with the likes of Facebook and Twitter but it does go head-to-head on many fronts with China’s other technology juggernaut, Alibaba. It holds strategic investments in a range of technology companies around the world, including Snap, Tesla, and Spotify, but it is in gaming that its past two years have been defined through rapidly shifting fortunes in game revenue growth – and stagnation. On the games front, Tencent has been majority owner of Riot Games , maker of League of Legends , since 2011, and took 100% control of the company in 2015. Supercell , maker of Clash of Clans, is another game developer in which it holds majority ownership (84.3% since June 2016). Tencent also maintains smaller stakes in Epic Games (40%), Ubisoft (5%), and Activision Blizzard (5%), and works closely with these companies and others to act as the Chinese distribution partner for many of their games. Through 2017 the company saw its strongest ever phase of share price growth. On Dec. 23 2016 the company was valued at 179.70 HKD ($22.89), and by Jan. 26 2018 it had reached a high of 471.20 HKD ($60.03) – 162% growth in 13 months. Credit: Riot Games/lolesports But as Tencent arrived at its Q4 2017 earnings report in March of last year, investors were starting to get the impression that the bull run could be coming to an end. The PC gaming audience had plateaued, and it was uncertain whether Tencent was moving quickly enough to capitalize on the growing shift toward mobile games. In that Q4 2017 report, Tencent reported online games revenue at ¥24.4B ($3.9B USD), 37% of the company’s total revenue in the quarter and marking 41% of the company’s total revenue for all of 2017. At the time, Honor of Kings was still growing well, and the company had launched other mobile games such as Kings of Chaos and Legacy TLBB Mobile. According to its earnings report at the time, it was also focused on increasing revenue from core PC gaming audiences through increased efforts around esports. By the Q1 2018 report, investors were showing concern. Just days ahead of the official report arriving in late May, analysts predicted weak revenue caused by Tencent making big investments in esports organizer VSPN and streaming platforms Huya and Douyu TV – and the share price dropped as a result. But when the earnings report landed it told a much better story. Profits were up 65% year-over-year, up 11% over the previous quarter. Honor of Kings was growing rapidly to deliver it the precious mobile growth investors were looking for, and Tencent had a pipeline of new games that looked set to deliver growth across both PC and mobile in the Chinese market – PUBG and Fortnite . All it was waiting for was approval for release from the Chinese government. Credit: Tencent What was yet to be understood back then was that a freeze on new game licenses had already begun at that time. PUBG for PC and all versions of Fortnite would not launch in China at all during 2018, along with many other titles. By August 2018’s Q2 earnings report, the freeze was beginning to take its toll. In its Q2 2018 earnings report, total Tencent revenue was still growing (39% year-over-year), with smartphone gaming the continued strong driver across revenue and active users. But profits slipped, down 3% year-over-year – the first quarterly profit fall in almost 13 years. Another new game license it had acquired for Chinese distribution, Monster Hunter: World, was also frozen out by regulators. Just days after its attempted launch of the game, Tencent was forced to offer refunds. And while PUBG Mobile had launched in China and was fast becoming one of the company’s biggest games by active users, it did not have approval to monetize the game through in-app purchases. Other efforts to improve Tencent revenues outside China were also proving unsuccessful, with its Western version of Honor of Kings, Arena of Valor, not doing as well as hoped. Later in August 2018 it became official – Chinese regulators were cracking down on gaming. The aim was labeled an effort to reduce screen time in younger players, with suggestions too much gaming and internet use was causing increased rates of myopia. Not only were new game approvals being limited, but new rules on screen time limits were also to be introduced. “From a revenue growth perspective, gaming is a key area of weakness,” said Tencent President Martin Lau on the company’s Q2 2018 earnings call. Tencent stocks fell 5% in value at this time. Credit: Tencent Games A significant restructuring of the company began, with the announcement landing at the start of October 2018 that Tencent was reorganizing to strengthen its focus around corporate services like the cloud. On Oct. 26 2018, Tencent’s share price hit a low of $260.00 HKD ($33.12), down 45% from its January high. Being a heavily diversified company was proving a big help to its bottom line, as the Q3 2018 earnings report delivered a 24% year-over-year revenue increase. Smartphone gaming grew 7% over the same year, showing that most growth came from elsewhere in the company, and PC gaming fell 15%. But already low expectations given the regulatory situation meant the company’s share price was starting a comeback. In December 2018, new licenses were starting to be granted to game releases, but the pressure valve is far from released. There remains a backlog of games waiting to be approved, and even by the Q4 2018 report this March PUBG and Fortnite are still awaiting for final approvals. Q4 2018 managed to beat analyst expectations, but the numbers were nothing like the year earlier. Revenue was up an impressive 28%, but marking half the growth of the previous year, and games as a percentage of total company revenue had fallen – 28.5% versus 37% the year before. Credit: PUBG Corp. For the full year, games were now 33% of all revenue versus 41% in the previous year. But with the overall revenue increasing, the gross game revenue increased – ¥97.5B ($14.5B) in 2017 up to ¥103.2B ($15.4B) in 2018. Compared with Tencent’s total annual revenue growing over 31%, its games revenue grew by less than 6%. Areas of big revenue growth for Tencent came from improving its advertising revenue on WeChat, and growth of a WeChat e-wallet initiative to take on its biggest domestic competitor, Alibaba, head on in the financial space. Tencent has even put its expertize in gaming server infrastructure toward an improved corporate cloud service that saw cloud revenue double year-over-year. Its investment in live streaming services was also paying off. As for its investments in streaming services, while Douyu TV and Huya saw rapid growth in 2018, the revenues are still a fraction of Tencent’s existing games income – in the hundreds of millions of dollars per quarter, or roughly 5% of existing games revenues. Tencent believes the backlog of game approvals will continue for some time to come, so on one level it might seem that the golden era for Tencent as a gaming operation has come to an end. But one thing China has is scale, and that means even as things stand Tencent remains the biggest games publisher in the world purely in terms of revenue. Perhaps the biggest persistent threat is around the PC market and what that could mean for Riot Games as a wholly-owned subsidiary of Tencent. But while Riot Games did reduce some of its production spend around Worlds 2018, the League of Legends Pro League (LPL) in China is showing strong commercial partnership trends like the Nike apparel deal and Tencent has many other esports initiatives underway. Credit: Tencent Mobile But as the license approvals slowly filter through, it may be that Tencent mobile gaming revenues begin to climb rapidly once more. These revenues flattened but didn’t fall backwards for long during the regulatory changes, so they would seem ready to climb again once new titles start to reach the massive Chinese audience. At time of writing, Tencent shares are trading at 376.00 HKD ($47.90) – a 40% increase on the low back in October 2018. Investors seem confident the company is back on track, but that track may not be quite as laser-focused on the rapid growth of online gaming as it had been over the past five years. AlibabaAnalysisarena of valorAsiaChinaDouyu TVEpic GamesFinancialshonor of kingsHuyaleague of legendsLeague of Legends Pro LeagueLPLMMOMonster Hunter WorldPUBGPUBG MobileRiot GamessupercellTencentWeChatWorlds 2018 Source link ChinasgameImpactedRegulationsTencent 0 comment 0 FacebookTwitterPinterestEmail Seamus Byrne previous post Totino’s Sponsors 100 Thieves Fortnite Team, Announces 10-Week Content Series next post 100 Thieves expands Totino’s sponsorship to cover Fortnite Related Articles Freaks 4U Gaming acquires ProGaming Italia – ARCHIVE –... November 29, 2022 Super League Gaming partners with Trovo for Mobcrush... November 29, 2022 NRG Esports reveals first activation plans for The... November 28, 2022 FaZe Clan selects HyperX as official gaming microphone... November 28, 2022 Schalke officially sells LEC slot to Team BDS... November 26, 2022 Ford Models to participate in Esports Fashion Week... 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