Tencent game business faces regulatory risk

After being on a scorching growth path for many years, Chinese internet giant Tencent Holdings is currently finding itself in a somewhat difficult position as Beijing authorities tighten their oversight on the online games industry.

Early this week, Tencent was forced to pull a fantasy-themed video game “Monster Hunter: World” from its WeGame platform just days after launch, following a crackdown by regulators.

Authorities are said to have cancelled the operating license for the game as they received a lot of complaints about the new title in relation to “inappropriate” content.

It marked a major setback for Tencent, as the company now has offer refunds for all those who had paid for the game, which was reported to have drawn more a million pre-orders.

And that is not all.

On Wednesday, Tencent said it isn’t sure when it will be allowed to start charging for its mega-hit “PlayerUnknowns’ Battlegrounds” (PUBG) video game in China.

A top company executive admitted that monetization of the massive multiplayer online game, for which Tencent has the China rights, is crucial if Tencent is to return to rapid revenue growth.

Also, there is news that authorities have virtually frozen new game approvals in the market as they seek to curb online game addition among the youth, invasion of foreign culture, and violent or indecent content.

The regulatory blows could not have come at a worse time for Tencent, given that its earnings –which depend a lot on the gaming business — have already seen a significant dent.

Financial results unveiled Wednesday showed Tencent posting a 2 percent decline in profit in the three months to June compared to the same period in 2017.

It marked the company’s first quarterly profit slide since the July-September quarter of 2005, with the decline mainly attributed to weak gaming revenues.

Profit fell to 17.87 billion yuan, while revenue grew 30 percent, the slowest pace in three years, to 73.68 billion yuan.

According to Tencent’s announcement, online games revenue increased only by 6 percent from a year earlier to 25.2 billion yuan. The mild overall game revenue increase primarily reflected growth in revenues from smartphone games such as “Honour of Kings” and “QQ Speed Mobile”.

However, on a sequential basis, both mobile and PC games recorded declines in revenue in the April-June quarter.

Smartphone game revenue was up 19 percent from a year earlier, but was down 19 percent compared to the first quarter. It suggests that the smartphone game business is losing steam.

High growth in the video game business was what had driven Tencent’s share price to new highs in the recent past, but now that appears to have ended.

Tencent shares took a beating in morning trade Thursday, a reflection of investor concerns about slowing growth and the regulatory cloud on the gaming business.

China’s suspension of approvals to new online game titles would mean that Tencent and other game platforms will find it difficult to launch new titles to keep up their growth momentum.

As users generally get bored with games they had played for months, they would expect something new to play. Now, if the game platforms don’t provide new titles, they could see the platform ‘stickiness’ get eroded.

According to Questmobile, a market intelligence firm, Chinese users’ total time spending on Tencent group’s applications fell to 47.7 percent in June, from 54.3 percent a year earlier. Meanwhile, the total time spending on Bytedance’s applications rose to 10.1 percent from 3.9 percent a year ago.

Bytedance’s applications include highly popular short video app Tik Tok (known as Douyin in China) and Toutiao.

The data suggests that some people have changed their online activities, moving away from playing online games and instead choosing to entertain themselves with short videos.

Tencent blamed the weak online game revenue on non-monetization of popular tactical tournament games (such as PUBG Mobile) and timing of new game releases.

Company President Martin Lau said PUBG Mobile has built up a massive user base in China. However, the company is not yet able to monetize the game as a regulatory nod is still pending. The company can do nothing but wait and hope that it gets the green light at some point.

Meanwhile, to offset the impact of lack of new titles in China market, Tencent plans to aggressively roll out its game titles in overseas markets in order to shore up revenues.

The group aims to reinvigorate mobile game revenue growth through initiatives such as promoting deeper engagement on existing major titles and stepping up overseas business in self-developed games.

While Tencent has failed to make money from PUBG Mobile as of now, it is trying to highlight the ongoing growth in the number of daily active users playing the group’s mobile games, and believes monetization is only a matter of time.

The future of Tencent is linked with growth of the China game market. China’s gaming market grew only 5 percent in the first half of 2018 from a year earlier, according to a research report.

It marked the first single-digit growth for the sector since 2009, as per the report from Beijing-based research firm CNG and China’s official gaming association GPC.

With the industry experiencing its slowest growth in almost 10 years, gaming firms would be hoping that authorities would rethink their approach and turn more tolerant toward the gaming platforms.

However, no one is taking any bets yet. If regulators ignore the industry pleas and continue to implement new rules on game publishers, it could be a matter of life and death for some smaller players.

Tencent, given its size and wide array of activities, may ride out the difficulties but it, too, has much cause for worry.

Investors, watch out!

Originally published at www.ejinsight.com on August 16, 2018.

A columnist in political development in Greater China region, technology and gadgets, media industry, parenting and other interesting topics.

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