Folks new to China tech are often incredibly impressed by Tencent (ie here). However, a recurring theme in Chinese internet is the demise of Tencent’s Gaming business. It seems to happen with regularity every year, and with ByteDance stepping up its attacks, that narrative is coming back in full force. It’s popular to cheer on the underdog, I suppose? Anyway, as much as I am a fan of ByteDance, I’m keenly aware of its many deficiencies, and I don’t think it has much of a chance against Tencent in the next let’s call it 5 years in gaming specifically. Ex-SinoLink analyst Pei Pei did a super long deep dive (in Chinese) into Gaming that I thought was worth surfacing. Below is my summary translation, and I welcome comments!
3 Fallacies around Gaming
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It is either / or. In 2017, with battle royale (PUBG, Fortnite etc.) games taking over the world, everyone knew Tencent was working on its own mobile version. However, instead of the (eventually renamed) Game for Peace cannibalizing Tencent’s MOBA revenue from Honor of Kings, both games managed to be hits.
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There is no more growth to be had. By 2018, investors were already saying that gaming in China had already peaked, and with no new technologies or platforms (ie AR/VR), there was nothing to look forward to. How many more users can you get? And yet over the next two years growth surged with new genres (anime, female oriented games) becoming more popular. Even “old and tired” genres saw blockbuster new entries like Genshin Impact.
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Traffic is everything. If traffic were everything, then TapTap and Bilibili with their puny user bases wouldn’t get much love. Especially Taptap, where users spend just a few minutes a day. Yet they get exclusive releases all the time. Traffic might still be important, but it can’t be everything.
It should be obvious that gaming is a content business, not subject to the “typical laws” of the internet where being able to aggregate traffic cheaply and openly is the winning strategy. But, a lot of people get confused because of Tencent’s singular success. Tencent is the only one who has been as successful in its platform business as it has been in gaming.
The road is littered with the carcasses of those who have failed in gaming: Sina and Baidu have completely exited, with Qihoo, iQiyi, Momo all basically failed, Alibaba and Bilibili each having some success in a specific category, and ByteDance and Kuaishou are up and coming, but the former, despite its splashy deals, has no real success to speak of.
Gaming consists of 3 parts:
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R&D or production, which in Tencent would be a TiMi studio
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Publishing or marketing and operations which are the aforementioned teams in Tencent
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Channel or distribution, ie how players get the game, an example would be QQ Game Center, excluding advertising platforms
Tencent is the only one who is strong in all three. No one else has their capabilities, ie NetEase is weak in Channel, and ByteDance is mediocre in the first two and unknown in the third. But it is likely precisely because ByteDance is winning so hard on the advertising front (Pei estimates it to have 25% of the industry’s revenues) that it then wrongly believes it cam also succeed in gaming. But remember again from the beginning of this post, we already explained that traffic doesn’t have much to do with success in gaming!
Historical Reasons for Tencent’s Success:
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Tencent’s success as a platform + gaming company was by no means guaranteed. They had to get lucky. In 2007-8, CrossFire and a few other hot games really provided a good foundation. Prior to that, their efforts had been lackluster. In 2011, the investment in Riot Games also really helped. Even so, by 2015, NetEase was still a strong foe. It wasn’t until Tencent had Honor of Kings in 2016 that it began to really outgrow the competition.
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Also, the last few years has seen a lot of companies re-launch old PC-based IP as mobile games. It’s been really easy money, especially for nostalgic millennials who played these growing up. But that’s probably coming to an end due to player fatigue. The next batch of success are going to come from completely new IP, and especially in new categories (ie open world like Genshin). Tencent does need to watch out in this area, but newcomers have no advantage either.
Things Tencent Does Well:
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Is Tencent’s success vs. NetEase in the last few years purely due to the different types of games they’ve gone after? High DAU / Low ARPU esports for Tencent, and Low DAU / High ARPU MMO and RPGs for NetEase. But then that ignores the fact that Tencent has created an independent “gaming operations” team that spans across all the titles and is supposedly much better than NetEase’s. The operations (responsible for promotions, events, campaigns, etc.) are what accounts for a game’s longevity after its initial success.
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Also, Tencent has a “gaming account system,” as do TapTap and Bilibili. ByteDance does not. They can build it, but it will take a while, and unfortunately, that’s what gamers use to connect and play with each other.
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Of course, that’s not to say that Tencent’s own culture — multiple teams competing — and dismal advertising business, which made gaming more urgent, didn’t help. But it really wasn’t until 2016 or so that its self-developed games became really good. Prior to that, the bulk of its hits were not self-developed.
Things Preventing Competitors From Catching Up Easily:
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A bit of an innovator’s dilemma: Should everyone be going after gaming? Yes, it looks very attractive, with gaming companies being some of the biggest advertisers on all the platforms, in China or internationally. But is that the best ROI? Douyin has spent a lot of its traffic on ByteDance’s owned or operated games, all of which have done poorly. It probably could have made more money just selling the advertising.
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Today, it is not so easy to get good games purely as a publisher, unless you are Tencent. We’ve seen Alibaba try this. The best games require the most investment and even the independent studios would rather just distribute their best titles themselves, which means that only crappier titles are available for the new publisher hopefuls like ByteDance, Kuaishou, etc. ByteDance has an international market it can compete in … as for Kuaishou and Bilibili, then the picture is not so rosy.
Things that Are Often Mistaken for Tencent’s Advantages:
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What about turning e-literature into gaming IP? That’s actually been extraordinarily difficult because most “content” isn’t really suitable for adapting into gaming. They might have great storylines, but not the kind of numerical “playing” systems. The exception would be a few of the top, top IP like One Piece, but these are extraordinarily expensive to procure. That being said, I think there is a very clear case to be made that e-literature makes for great video content.
Looking Towards the Future:
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There are more and more users spending for “love” versus “winning.” Older players are used to paying for items that allow them dominate in game … newer players are more likely to spend for emotional and story reasons.
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For Chinese players, it’s pointless to talk about more 3A game titles. That shouldn’t be a measure of the success of the industry. Those players simply don’t exist. A primarily mobile, casual gaming population is going to want games that look more like whatever indie title is popular on Steam, and that is indeed what Chinese gaming companies are doing, copying just those titles.
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As for what’s coming next? Cloud gaming will surely be a paradigm shift. The Metaverse is also another concept that has caught on. (BTW, Pei believes that it’s pretty clear that Tencent wants QQ to become the Metaverse, by installing the ex TiMi head there).
Tencent will need to capitalize on these new opportunities, but they’re still ahead by such a large margin that many missteps will have to happen before they will lose their crown. And before then, there’s NetEase in the way too!
Conclusion:
Tencent is truly in a league of its own, having both a gaming as well as non-gaming platform business that are best-in-class. Everyone else is either far better at gaming than its other businesses (like NetEase), or has a great platform business but a very immature gaming biz (ByteDance), and there are those who are trying hard to break out (Bilibili, Alibaba). In fact, its singular (but independent) success in both gaming and non-gaming are confusing new entrants that having large platforms necessarily means they can build up a gaming business. Ahem, ByteDance.
I checked with multiple gaming friends to see if they agree. Surprisingly, a lot of people did. I disagree with Pei on many things but he is a gamer, and seems to have a good grasp of this industry. What do you think, does ByteDance have a chance, or is Tencent’s reign not ending for a long while?
