Speaking with Bloomberg today, Franklin Technology’s Jonathan Curtiss predicts that while the temporary block of licenses issued to video games entering the Chinese market is likely to pass, the future of the region’s largest distributor of games, Tencent, is likely to reduce its reliance on gaming in the coming years.
Following a crash in Tencent’s market value to the sum of $150 billion, owed largely to a decline in games revenue, earlier this week Chinese regulatory agencies froze game licensing (update: game licenses in fact been issued in China since March of this year, but the freeze was not made official until earlier this week), further piling pressure on the company. As China clamps down on vetting video games, analysts remain confident the situation will eventually stabilize and Tencent will remain a hugely profitable enterprise. Games, however, won’t necessarily be the principal thrust of its business in the future.
The most notable western and Japanese games distributed in China are licensed by Tencent, but stricter regulations that make monetizing the games in China more and more difficult are likely to off-put the company from further heavy investment in the sector. If the world’s biggest gaming market slows down its spending, you can expect a knock-on effect for game publishers everywhere. EA, Activision Blizzard, Capcom, and Konami all have licensed games distributed by Tencent, comprising a substantial portion of their yearly revenue.
As we reported yesterday, Nexon dropped 5.9%, Capcom 2.7%, and Konami Holdings Corp. 4.2% (its lowest close in more than a year). Tencent itself also slid by 3.9% to an all-time low this year.
Tencent has already begun shifting its business away from games, which comprised a third of its revenue in the past quarter, down from 56% over the same period in 2014. Analysts expect to see an acceleration in their investment in other enterprises such as their WeChat social media platform and dozens of tech start-ups after this most recent quarter’s poor results.
Ultimately, though games like Fortnite and PUBG are proving exceptionally popular, Tencent isn’t making any money from them as of right now. It’s little wonder, then, that revenue forecasts for the quarter were missed, and it’s understandable that the company wants to move away from an industry that’s showing signs of slowing in growth.
Of course, that then brings into question what sort of implications this might potentially lead to for game development on a global scale.
Earlier this week, a report surfaced in which employees at Riot Games, developers of the hugely popular MOBA League of Legends now owned and published by Tencent, spoke of company-wide layoffs after Tencent opted to chase revenue for more popular battle royale games. What might the result be if Tencent observes a downturn in revenue across the board for gaming moving forward?