Tencent chooses health over wealth in gaming returns

When Tencent received its first game approval in China in over a year last week, there were no great expectations from investors, nor a keen expectation from players that a new blockbuster title was on the way.

The tech giant admitted: Defense of health is a tame educational affair compared to big money making hits like: Honor of Kings. Tencent said at its annual game release event in 2021 that the game would be part of its “social service,” and would use it to “promote public health knowledge” and “explore more positive social values.”

Developed by the unknown subsidiary Nanjing Wangdian Technology, controlled by Tencent executives including co-founder Pony Ma, the new mobile game was one of 73 approved by the National Press and Publication Administration, in the fifth batch of licenses granted this year. .

The approvals represented a gradual thaw for the industry after the country’s media watchdog froze games licenses in August 2021, as part of a wider social and economic campaign to reshape Chinese society around the communist party’s ideals.

Daniel Ahmad, of Niko Partners, an Asian video game analyst, said he expected more “healthy” games to be approved that align with the government’s social policy goals, even though Tencent would make little money from companies like Defense of health.

“We don’t expect it to be a high-level revenue generator for Tencent, and neither does Tencent,” Ahmed said.

Beijing has restricted access to games in other ways over the past year, such as banning minors from playing them for more than three hours a week. It has also enforced new anti-monopoly measures against tech companies. Along with the more recent economic downturn, this has wiped out billions of dollars from Tencent’s publicly traded valuation, though it remains China’s most valuable company by market capitalization.

Gaming has been a huge source of profit in raising the company to that position. The integration of games with its ubiquitous super app WeChat, which the vast majority of the population uses, gave it immediate access to a huge player base.

But China’s new anti-addiction measures appear to have reduced that base, at least among children. New research from Niko Partners found that 77 percent of under-18s had reduced the time they spend gaming each week, while the number of youth players overall fell from 122 million in 2020 at its peak to 82.6 million this year. year.

Column chart of year-over-year change in quarterly sales (%) showing Tencent's sales growth slowing in 2022

With extra scrutiny of content and titles that allow players to interact within a game, there’s also the risk that the appeal of games will be compromised.

“It limits the gameplay of many games by these methods,” said Ryan Li, a former game developer at Tencent. “For example, red blood cannot appear in the game and religion cannot appear.”

With declining revenues from Chinese players, value-added services, the business segment that includes gaming accounted for 52 percent of Tencent’s revenue last year, the lowest in 10 years and well below the ten-year high of 80 percent in 2014.

Tencent has stopped growing this year. The company recorded its first quarter of negative growth in the three months to the end of June and said it had reduced its workforce. A management consultant who advised the company, who declined to be named, said departmental consolidation and cost-cutting were likely not over.

Delays in approvals mean the Chinese market may have moved on to new types of games, and with such uncertainties, Tencent has focused on expanding existing franchises such as Honor of Kings and League of Legends.

“The advantage of Tencent lies in its . . . existing IPs and existing approvals. It can rely on these older products to: [maintain revenue] for a long time,” said Li, adding that overseas markets were the other main focus.

Tencent has invested more in game studios abroad over the past two years as it pursues international growth. This month, it increased its stake in French publisher Ubisoft, creator of the popular Assassin’s Creed.

With the strength of its own gaming portfolio and development resources, it’s unlikely that gaming will cease to be a top earner for Tencent, said Ahmad, predicting the industry would eventually recover thanks to the large number of Chinese gamers.

“Gaming will always be the company’s core business. Even if it brings in a smaller portion of sales, it doesn’t mean total sales will decline,” he said.

However, for developer like Li, the joy has gone out of business. He said he had lost his inspiration and felt his creativity had been stifled. “The games have become healthier, less addictive and less fun,” he said. “I feel like a machine.”

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