October 4th, 2017
Courtesy of the Financial Times (subscription required), a look at Tencent whose ‘Honour of Kings’ is the most popular video game in the world, helping propel Tencent to become the eighth most valuable company globally
On peak days, more than 80m people in China — about the population of Germany — use their mobile phones to play Honour of Kings, battling friends’ characters in a fantasy landscape. One of them is stock analyst Alex Shi, who fights his customers.
“The sellside tries a lot of ways to please clients nowadays,” he says. “If you play the game well, and help your clients get to a higher level, that’s good for your relationships and may be helpful for deals.”
China is the world’s largest video game market, with some 600m players generating annual revenues of $26bn, according to Niko Partners, a consultancy — more than three times the country’s box-office receipts.
The undisputed champion of that market is internet conglomerate Tencent, a lesser-known brand internationally but a towering presence in the psyche of China’s gamers.
The company controls just over half the video game market in China, according to Niko. This has helped to make it the world’s most profitable video games company, and the eighth most valuable company globally by market capitalisation — worth more than ExxonMobil.
Tencent generated Rmb28.4bn ($4.3bn) from games in the second quarter of this year, with mobile income growing 54 per cent. Video games accounted for half of Tencent’s revenue in 2016.
Honour of Kings, the world’s most lucrative game which rakes in about Rmb6bn each quarter in sales, is the rocket fuel propelling Tencent’s ascent.
The social nature of battle games glues users to the platform. Friends typically band together to form teams. Software designer Leo Guo, 26, says regular Honour of Kings sessions with colleagues “can help with communication in the office”.
The game is free to download, but players pay for virtual skins to personalise their characters. “Fundamentally, these games exploit human weakness, especially vanity,” says Yuan Zeng, an industry commentator working at game company GOG.com, pointing to the way scores are automatically shared with friends on social media platforms.
“This kind of a game is an investment — you spend a lot of time upgrading your character and skills, so it’s something you can’t quit. And if you do, your friends will drag you back in,” he adds.
“There’s a huge social element around the game. Anywhere you go in China, you are going to be playing, so there’s going to be fear of missing out,” says Niko analyst Daniel Ahmad. The game is so popular in China that a minor moral panic broke out over the summer about the addictiveness of the game. State media branded the game as “poison” when a 17-year-old boy in Guangzhou suffered a stroke, after playing nonstop for 40 hours. A 13-year-old boy in Hangzhou broke his legs jumping from a third-floor window after his parents stopped him from playing, prompting the company to limit the time children could play the game.
Tencent has a hit, but its greatest advantage is ownership of China’s largest social networks, WeChat and QQZone, equivalent to WhatsApp and Facebook, which are blocked in China. About 900m people are signed up to both of the Tencent networks.
“In the West, Facebook does social media and EA does games, but in China, it can be a single company,” says Peter Warman, chief executive of games consultancy NewZoo.
By leveraging these networks, Tencent has control of one of China’s top two online payment platforms, and has the largest share of mobile app distribution. It has spent $1.8bn on sales and marketing over the past 12 months, a report by market research firm Atomico says.
“The main reason for Tencent’s success is its marketing and distribution capacity,” says Chenyu Cui, an analyst at IHS Markit. Most Chinese phones use the Android operating system, but Google’s Play store is blocked in the country, and Tencent controls the biggest Android app store.
The group seems so dominant, analysts have a hard time seeing what could knock it off its perch. For now, its biggest challenge will be to find fresh product to feed its highly committed user base.
Honour of Kings is based on League of Legends, a hit PC game by Riot, a US developer that Tencent acquired in 2015. The company last year paid $8.6bn for a majority stake in Finland’s Supercell, maker of Clash of Clans, formerly the world’s top-grossing mobile game.
“Tencent’s in-house development cannot keep up with market demand,” says Benjamin Wu, an analyst with the research group Pacific Epoch. “It will need more and more out-of-house titles from China and overseas.”
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In Chinese gaming, micro is the new macro
The success of Tencent has made it tougher for developers outside the group to crack the lucrative China market, analysts say.
Tencent’s position as a publisher and distributor means it can share other developer’s revenues in return for promoting their games. Granting a higher share of sales to Tencent can result in “more prominent promotion,” says Chenyu Cui, an analyst at IHS Markit.
That makes life difficult for start-ups. “Tencent is dominant, so it can charge a really high fee to distribute its games. Sometimes games cannot get enough revenue to pay the fee. So it’s not a good thing for small businesses,” says Johnny Zhou, an analyst at IDG.
As a result, Chinese game developers are looking overseas before tackling their home market, fuelling the emergence of “micro-multinationals” who cloak their Chinese origins to achieve success in the US and Europe. A staffer at an overseas games firm, who asked not to be named, complains: “Tencent is getting too big, and it’s terrifying, it’s like a giant monster.”
As a result, going abroad “has started to become a necessary decision for most Chinese gaming start-ups,” says Wang Xu, chief analyst at CNG, a Beijing-based industry research firm. “It’s simply because the Chinese gaming market is too competitive, leaving start-ups no room to survive,” Mr Wang adds.
Set in ancient Rome, it is hard to detect that Clash of Kings, which earned $117m from US gamers last year, is from a Beijing-based company, Elex, whose overseas revenues were 96 per cent of its total last year. The game is among the top 10 mobile titles in Brazil, Indonesia, and Malaysia, according to App Annie, a consultancy.
The overall drive seems to be bearing fruit. Overseas revenue for Chinese mobile games grew by 130 per cent in the first half of 2017 compared to the first half of 2016, according to App Annie. Such games generated $4bn in sales in the first half of this year, according to research group IDC. Chinese mobile games accounted for about 5 per cent of the 250 most-downloaded games in the US in 2016.
“Our company was born to aim overseas,” says Tiffany Lu, chief operating officer of IM30, a gaming company based in Beijing. “A lot of Japanese game companies did an amazing job abroad. If they could, why not us?”
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