Tencent, China’s top game developer, is expanding overseas for long-term growth amid a stagnating home market, seeking more foreign players for its own games alongside heavy investment in other intellectual properties.
The risks of the company’s reliance on its home market were underscored in an unusual trial on August 12 in Shenzhen, revolving around Tencent’s Honor of Kings, the world’s top-grossing mobile game. Launched in 2015, Honor of Kings is still going strong, bringing in roughly USD 1 billion between January and June, according to US-based AppMagic.
In the game, players are matched up together to battle opponents. The plaintiff claimed that this service is manipulated to pair people on winning streaks with weaker players, and demanded that Tencent disclose the algorithm. The company refused, citing the risk that the information could be abused.
Tencent’s game business generates about 30% of its revenue, with around two-thirds of that coming from China, thanks to titles like Honor of Kings. If the court rules that the matchmaking algorithm was manipulated to break winning streaks, and fans shun the game, it would deal a heavy blow.
Long-running games like Honor of Kings are a major driver of April-June earnings released on August 13, which showed group revenue growing 15% on the year to RMB 184.5 billion (USD 25.8 billion) and net profit rising 17% to RMB 55.6 billion (USD 7.8 billion).
Though the company has been coming out with a slew of new games, it still has yet to find a successor to Honor of Kings, a key challenge to ensure sustainable growth.
Sensor Tower’s June mobile game revenue ranking for China was led by Honor of Kings, followed by PUBG Mobile, also published by Tencent. Dungeon & Fighter Mobile and Delta Force, which came out last year, ranked eighth and ninth, respectively.
Chinese research firm Gamma Data has noted a rise in new releases. Chinese regulators approved the release of about 810 games in the first half of this year, around 20% more than a year earlier, in what may be a bid to revitalize the market.
The total number of gamers, however, sits at about 679 million, not much changed from a few years ago. Tencent executives have said for some time that they want more than half their game revenue to come from outside China.
So far, Tencent has prioritized acquiring big IPs overseas and launching them in China, where it can leverage its established base. That strategy was supported by a fast-growing domestic market. Now that it is becoming saturated, the company aims to use popular IP to expand globally.
In March, Tencent reached a deal to take a 25% stake in a new subsidiary of French publisher Ubisoft for popular franchises such as Assassin’s Creed and Far Cry. In June, speculation resurfaced about a possible acquisition of Japan’s Nexon, which produced Dungeon & Fighter Mobile.
In addition to this aggressive investment strategy, Tencent is also working on making games tailored to local markets, which do not incur the licensing fees that come with tapping the IPs of its investees.
Its Level Infinite brand, based in Singapore and the Netherlands, handles global publishing of games produced by Tencent-affiliated developers. The company is working to localize its games to make them more appealing to particular markets.
Competition overseas is intense. Sensor Tower’s list of the 10 top-grossing mobile games in Japan in June included Whiteout Survival from China-based Century Games. Games from Chinese developer Mihoyo, best known for Genshin Impact, also ranked high, but no Tencent titles were present.
Mihoyo’s strategy has focused on the global market since it was established in 2012. The company earns more than half its revenue outside China, according to Chinese media, compared with around 30% for Tencent.
Dealing with concerns about IP rights will be a must for Tencent to succeed abroad. Sony Group recently sued the company, alleging that a game it was developing imitated Sony’s Horizon series.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.