Nick Gibson analyses a firm set to be bigger than EA and Activision combined

Extraordinary game companies: The rise of Tencent

For the last decade, the competition to be the largest game publisher in the world has been a two-horse race: EA versus Activision. However, following the unveiling of its 2013 financials earlier this year, a new company not only entered the competition, but effectively reduced it to a one-horse race.

Chinese media and telecoms giant Tencent has now swept past EA and Activision and is accelerating away at a rate Western publishers can only dream of.

Gaming represents the most important part of Tencent’s overall business, generating $5.1bn of its $9.7bn 2013 sales. This compares to $4.6bn and $3.7bn for Activision and EA’s respective 2013 calendar year sales. While both the publishers’ annual sales growth has rarely exceeded 15 per cent in the last decade – and even declined in many years – Tencent’s growth has been both consistent and consistently massive. It added $1.4bn in new games revenue in 2013 alone.

Explosive growth is not uncommon in such a hits-driven market as games, but few have been able to maintain it in the long run and none at this scale. Analysts forecast that Tencent will double its revenue over the next three years, likely making the firm larger than EA and Activision combined.

Tencent’s games operations are diverse but centred around two technology platforms: online PC and mobile. On PC, Tencent operates a social network (QZone), instant messaging (QQ Messenger) and dedicated online games services (QQ Game Platform) that together reach high hundreds of millions of users.

Its casual and core games are all monetised using free-to-play microtransaction and subscription models. Its key titles are internally developed MMOGs or Korean licenses, most largely unknown in the West like Dungeon And Fighter (pictured). League of Legends has been a rare but huge Western success in China, in no small part thanks to Tencent’s local market guidance.

The company’s mobile games initiatives are more recent but also distributed within a range of dedicated mobile social, communication and commerce services. Most important of these are Mobile QQ (its QQ IM mobile service) and WeChat (its dedicated mobile messaging service). Crucially, Tencent also operates its own Android app store, which is now linked into its communication apps to keep games related purchases in-house.

A different kind of scale

Its success is built on a growth strategy that is radically different to Western game publishers. Where EA and Activision’s empires are built on games franchises, Tencent’s is built on platform and customer ownership. Games have simply been the most effective way to monetise and grow these platforms.

Tencent operates internationally but the vast majority of its business is in China where its overwhelming scale and China’s international trade barriers ensure that it remains the publisher of choice for major Western game companies – tellingly, Tencent publishes both FIFA and Call of Duty in China. It has vast cash reserves and made judicious use of acquisitions (e.g. Riot Games) and investments (e.g. CJ Internet) to tie up content for its various platforms. Tencent has, however, also faced accusations of monopolistic practices, such as its internal development teams cloning third-party games.

Its next major area of growth is mobile gaming. Overall revenues are still small compared to its PC game sales at $290m in Q1 2014, but they were up 300 per cent over Q4 2013. Much of this is down to the integration of games into its mobile communications and commerce platforms, a process that is only just starting.

WeChat is the largest mobile messaging platform in China with 396m monthly active users. Despite some government run-ins over WeChat’s openness that could yield future problems, it already controls around 50 per cent of the Chinese mobile game market and its grip on what is the fastest growing corner of the global game industry is unlikely to slip.

Given its size, Tencent’s Western game market initiatives have been fairly muted to date. The Riot Games acquisition was a major success but was primarily made to secure Chinese games rights. Its 40 per cent stake in Epic, bought for $330m, is clearly a long-term play. Tencent’s focus will continue to remain on China for the next few years at least. When its indigenous market’s growth starts to flatten, it will eventually turn its full attention to the West. By that point EA, Activision could be a distant dot in the background.

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