May Jin was lonely and bored in Bangkok when an old high school friend told her about a new mobile game. A native of Shenyang, a city in northeastern China, Jin had moved to Thailand’s capital to enroll in a language course. She hadn’t played many mobile games before, but after her friend’s recommendation she downloaded the game, called Honor of Kings, using her WeChat account to sign in. It was January of 2016, and she was quickly drawn to the social aspect of the game. 

“When I started to play, I didn’t care about winning or losing; it was just about playing together with friends,” she says. 

In the game, two teams of five players vie to dominate a map with three lanes. Players can choose between different characters, including purchasing “power-ups” to help them compete, and can customize their characters by purchasing different “skins.” As she started to learn the game’s mechanics, Jin became more absorbed by the competition — and began spending even more of her time in the Honor of Kings world. 

“I made a new WeChat account because I didn’t want to share with my friends that I was playing this game for seven hours a day,” she says. Now that she has a baby, Jin says she’s scaled back slightly, but still can’t stop playing. “Maybe I’ll pass my account to my daughter in the future,” she jokes. 

Honor of Kings, which is made by Tencent’s internal games studio TiMi, is notable for having a large female player base. Although the power ups and cosmetic items don’t cost much on their own — the average player spends less than $6 a month — the number of dedicated players like Jin that Honor of Kings attracts translates to significant revenue.

In fact, the game is the largest money-generating mobile game of all time, and it has helped to transform the fortunes of Tencent in the process. In the three years following the game’s release, Tencent’s annual revenues rose 204 percent, from 102.86 billion yuan in 2015, to 312 billion yuan in 2018. Although the increase can’t be attributed solely to Honor of Kings, the title has been an uncontested blockbuster — the first mobile game to rake in the equivalent of $10 billion in total player revenue, according to mobile app analytics firm Sensor Tower.  

“Everyone was playing Honor of Kings — to socialize, to compete, on lunch breaks, in the metro, wherever,” says Eric Jou, a native New Yorker who was PR manager for Xbox China in 2016. Unlike previous mobile games that had been single-player, self-contained experiences, Jou notes that Honor of Kings was successful because of the social, multiplayer experience. It was an indication, he says, of “Tencent’s ambition in the mobile space.” 

Tencent, of course, is most known for its super app WeChat, which counts over 1.3 billion monthly active users and which is ubiquitous in its native China. But it is less appreciated that Tencent is now the world’s largest games company by revenue, outearning the console giants — Microsoft Xbox, Nintendo and Sony Playstation. According to Newzoo, a games market research firm based in the Netherlands, Tencent led the industry in game-related revenues in 2021, with $32.2 billion, far ahead of Sony’s $18.2 billion and Apple’s $15.3 billion.

I don’t know if anything will change the perception of Tencent on the global stage. It’s so tied to being seen as a Chinese company — and therefore tied to China and its government.

Eric Jou, PR manager for Xbox China in 2016

Indeed, the Hong Kong Stock Exchange-listed company is in a league of its own. Over the past year, the unprecedented $68.7 billion merger between Microsoft and Activision Blizzard has generated buzz, with the enormity of the deal facing antitrust scrutiny from regulators in the U.S. and UK. Microsoft, however, has argued that the deal doesn’t violate antitrust rules since Microsoft is behind Sony, the second largest player in the games industry. Sony, meanwhile, lags behind Tencent with just 56 percent of its revenues.

Tencent, which declined to comment for this article, is a relative newcomer to the gaming scene, but it became the industry leader largely because of its dominance in its domestic market: China accounts for almost half of worldwide mobile games revenue. Thanks to network effects, Tencent was able to quickly break into — and then command — China’s gaming scene. For example, in 2015, when Honor of Kings debuted, Tencent had more than half a billion WeChat users, making it easy for players to register and sign in to the online game using their existing account. The baked-in social aspect of the game, meanwhile, meant the title spread quickly over WeChat’s networks — like when May Jin’s friend suggested it to her. 

By contrast, the game never really took off in the West — none of Tencent’s homegrown titles have — which could spell trouble for the company going forward. The Chinese government recently placed considerable restrictions on the domestic gaming industry — including a temporary hiatus on issuing licenses for new games and imposing time limits on underage users — and some insiders even say there isn’t any growth potential left in China. 

“In Chinese, we say ‘it’s a red sea,’” says a business development manager at one of Tencent’s gaming studios, who spoke to the Wire China on the condition of anonymity. “We realized the Chinese gaming market has a ceiling. It’s already peaked. So we are exploring markets overseas.”

Tencent doesn’t publish a full list of its international holdings in its financial reports, but according to Daniel Ahmad, director of research and insights at Niko Partners, a California-based market research firm, the company is betting heavily on international expansion. In 2021, he says, a third of video game companies invested in or acquired by Tencent were headquartered outside China. In 2022, that number jumped to three quarters.

“International expansion has for sure accelerated [over the past couple years],” says Ahmad. “In 2019, 14.4 percent of Tencent’s online game revenue was generated outside China — it reached 28.5 percent as of Q2 2023.” 

So far, Tencent’s international expansion has been relatively smooth and quiet; industry analysts note that the company generally takes a “hands-off” approach to its overseas investments. But as the wider industry heads into a season of consolidations (see: Activision and Microsoft’s merger) as well as changing tastes, Tencent will have to adapt and evolve its style in order to stay competitive. Moreover, with geopolitics stoking concerns about data collection and influence campaigns, international expansion might become more difficult for Tencent, which is mainland China’s most valuable company by market capitalization, worth about $380 billion.

“It’s hard to say what it can do globally,” says Jou, who is now based in Taipei working for esports company ESL FaceIT. “It would have to develop a knockout game. But I don’t know if anything will change the perception of Tencent on the global stage. It’s so tied to being seen as a Chinese company — and therefore tied to China and its government.” 

TENCENT’S RIOTOUS GROWTH

China’s mammoth gaming industry grew up in spite of China’s strict regulations against gaming. From 2000 to 2015, as gamers in the West lined up to buy the latest Playstation or Xbox, Beijing banned gaming consoles. Although a gray market existed, allowing some consoles to slip through the cracks, a generation of Chinese flocked to internet cafes thick with cigarette smoke to socialize, chat online and to game.

At the time, NetEase and Shanda were the big players in China’s PC-focused games scene, but Tencent, which was founded in 1998, was eager to break in. The company was primarily known for QQ, a chat platform similar to MSN Messenger, and its early attempts in games were casual affairs — based on playing cards and board games — with mixed results. In 2004, the company decided to change its strategy. 

Under the leadership of Mark Ren, one of Tencent’s earliest employees, Tencent’s new approach leveraged QQ, which most of China’s online population was already using. Ren, a passionate programmer and gamer, improved user experience while also adding games directly to QQ’s interface. A pivotal feature was an addition to QQ that alerted a users’ friends to the games the user was playing, which enhanced interaction and instantly boosted game engagement. (Tencent added a similar function for Honor of Kings, with alerts on WeChat notifying when a users’ friends were playing the game.)

Still, many of Tencent’s early games were knock-offs of already successful games — a strategy that backfired by ensnaring the fledgling company in disputes and legal wrangles. So, in 2008, the company changed tack again and focused on licensing games from abroad. That year, it partnered with the South Korean company Smilegate to release a localized version of CrossFire as well as the South Korean company Neople to release Dungeon Fighter.

While not particularly innovative, these would prove to be astute moves. Crossfire, a first-person shooting game, became especially popular and catapulted Tencent into the desktop gaming big leagues. Between 2008 and 2009, Tencent’s online gaming revenues grew by 131 percent. 

But it was in 2009 that Tencent made what was arguably its best investment decision ever. In that year, Tencent bought 94 percent of California-based Riot Games for $400 million. 

Riot’s founders, Brandon Beck and Marc Merrill, were outliers in the West. For their game, League of Legends (LoL), they believed in the ‘free-to-play’ approach, which means players can start playing a game after downloading it or accessing it via a browser, but additional content might be locked unless the player pays for it. At the time, the dominant business model in the West was to make players pay upfront for a game, with pretty much all of the content available from the beginning. Western publishers had trouble understanding Riot’s vision and were confused about its lack of a single-player mode. 

But the business model was familiar to Tencent. In 2007, just a year after Riot was founded, David Wallerstein, one of Tencent’s earliest foreign employees, reached out to Merrill and Beck. Living in San Francisco at the time, Wallerstein helped the Chinese company look for intriguing start-ups; and after Riot raised $7 million in 2008, the American spoke with Tencent executives, including co-founder Pony Ma and company president Martin Lau, about Riot’s potential.

League of Legends launched in October 2009, and went on to amass astonishing player numbers — both abroad and in China. By 2014, according to the Wall Street Journal, the game had 27 million daily players. To put that into perspective, Activision Blizzard’s World of Warcraft, a longtime PC favorite that charges a monthly subscription fee, peaked at 12 million monthly players in 2010. 

Tencent bought Riot Games outright in 2015 as League of Legends became one of the most popular desktop games in the world. The game has since become an esports mainstay, with Chinese teams vying with Korean teams for the World Championship. The game even spawned a popular and award-winning Netflix show called Arcane.

For Tencent, the success of League of Legends in China was critical for launching Honor of Kings, one of Tencent’s first home-grown games. 

“The popularity of League of Legends helped the user base of Honor of Kings,” says Cui Chenyu, a senior games analyst based in Shanghai for tech-focused market research firm Omdia. “Honor of Kings was League of Legend for phones, but more Chinese orientated in its monetization and character designs.”

The success of League of Legends also emboldened Tencent to look overseas for more investment opportunities. In 2012, for instance, it acquired 40 percent of North Carolina-based Epic Games, the company behind the global phenomenon that is Fortnite as well as the important game creation tool Unreal Engine. In 2016, it also spent $8.6 billion for Finland’s Supercell, creator of the mobile game Clash of Clans, which made a profit of $810 million in 2017 despite not releasing any new games that year. Tencent also had stakes in the U.S.’s Activision Blizzard (creator of Call of Duty and World of Warcraft) before its recent sale to Microsoft. 

With the TikTok ban, talk of a WeChat ban, and Huawei, there could get to a point where there’s a campaign against Tencent [and its overseas acquisitions]…

Daniel Ahmad, director of research and insights at Niko Partners

Tencent’s rise, however, was not without its critics. In 2017, the government-owned People’s Daily published an opinion piece that lambasted Honor of Kings as “poison” and a “drug” harmful to teenagers. Restrictions were soon put in place to limit how much time children could play the game. In 2018, the company faced even tougher conditions as it launched the Chinese PC version of the Japanese game Monster Hunter: World. Just a week after its launch, the national regulator, the National Press and Publication Administration (NPPA), pulled the game, citing customer complaints. 

And in 2019, when Tencent developed a mobile version of the popular South Korean game PlayerUnknown’s Battlegrounds (PUBG), Beijing denied approval to sell in-game items, a key part of monetization for free-to-play games. PUBG is a battle royale game, and China has strict rules on content, such as forbidding gore (corpses or blood of any color), depictions of the country’s imperial history, and gambling and sexual content.

In order to appease the authorities, Tencent made significant changes to PUBG Mobile, including removing blood, adding a more “wholesome” dying animation, and changing the game’s name to ‘Game for Peace’ and its story to a counter-terrorism theme. After a year, Tencent finally gained approval for the rebranded game that “pays tribute to the blue sky warriors that guard [China’s] airspace.”

Still, Beijing’s hand in the gaming industry grew even heavier beginning in 2021. In March of that year, Xi Jinping himself said that China’s youth were being negatively affected by addiction to online games as well as “dirty and messy” things online. By that summer, the government instituted a licensing freeze, effectively stopping all new video game releases for nine months. China’s second-largest games company, NetEase, was only granted a license after 14 months, while Tencent had to wait 15 months to get a license, according to Reuters. 

For an industry that had been bustling and operating at break-neck speed, it was something of a shock. More than 10,000 games-related companies went bust over the period, according to Securities Daily, a state-run newspaper. 

“It took us a few months to realize what was happening,” says Zhu Jingtong, who was working at the time as a manager at XD Inc., a games publisher based in Shanghai. “There wasn’t frequent communication from the authorities. We were left in the dark.”

In September of 2021, authorities also suddenly announced new limits on the time that minors could spend playing online video games, limiting them to just one hour between 8pm and 9pm on Fridays, weekends and public holidays. Developers scrambled to update their online games’ backend to ensure they complied with the new rules, which went into effect almost immediately and affected some 110 million players — the number of gamers under the age of 18. 

The time limit restrictions, which are the strictest in the world outside of North Korea, garnered a lot of attention in the West, but industry insiders say they didn’t affect companies’ bottom lines as much as the licensing freeze did. Children, after all, are not a major source of revenue for gaming companies, and some restrictions were already in place for minors. 

The license freeze, however, left a much bigger impact. 

“It’s a problem for the whole market,” says Cui, at Omdia. “The mid-tier business [in China] has gone bust. Lots of smaller companies have been bankrupted.” With China’s economy faltering more widely, Cui notes that “the past couple years have definitely been a challenge.”

Indeed, Tencent is not the only one looking abroad for opportunities. Zhu notes that especially after the Shanghai Covid-19 lockdowns — which she describes as “pretty traumatic” — “the mood was low” at XD. The company’s CEO, Huang Yimeng, gained notoriety in the industry for being critical of China’s licensing situation and for moving to Singapore. Eventually, Zhu also ended up leaving China in August of 2022 after securing a job in the Netherlands. 

The changing environment in China represents serious curbs on Tencent’s growth. While Honor of Kings remains hugely profitable, its dominance is declining, and well-funded competitors are trying to chip away at Tencent’s lead. Both Alibaba and ByteDance (TikTok’s parent company) are increasing their acquisitions in gaming. For Tencent to remain on top, analysts and insiders believe, it not only needs to look abroad, it also needs to evolve the kinds of games it makes. 

CHANGING TASTES

The urgency of Tencent’s strategic shift was best encapsulated last month, as Apple hosted its annual Apple iPhone Event and premiered its new iPhone 15 Pro. To show off the processing power of the phone, Apple chose to showcase its gaming chops. “With the fastest chip ever, on any smartphone, we are excited for iPhone 15 Pro to change mobile gaming,” Sribalan Santhanam, Apple’s vice president for silicon technologies, said at the event.  

Leaning further into mobile gaming is a shrewd move for Apple: Mobile games accounted for half of global games revenue in 2022, according to a May report by Newzoo. With fewer barriers to entry than PC or console gaming, mobile is especially popular in emerging markets. 

“The console story is Western centric,” says Ahmad. “The real opportunity is mobile first — it’s the next battleground.”

Theoretically, Tencent should enjoy a competitive advantage in mobile games, which thrive off free-to-play models. But as the Apple Event made clear, Tencent’s mobile games aren’t exactly at the vanguard of what players now enjoy. To illustrate the new iPhone’s gaming power, Apple showed video of two games: Genshin Impact and Honkai: Star Rail, both of which are made by the Shanghai-based games company miHoYo.

Only Honor of Kings and PUBG Mobile — both Tencent titles — bring in more money overall than Genshin Impact. But Apple’s choice to showcase Genshin emphasized how the Chinese game, developed by an upstart, is a global hit whereas Tencent has never developed a truly international title — not yet at least. 

In an effort to level up, the company is developing a new game — Honor of Kings World — which is set in the world of its popular mobile battle game, but which features graphics and environments that are considerably more advanced than the original version. After watching the success of Genshin Impact, the Tencent business manager told the Wire that it was clear that “the players and market is shifting.” 

“Years before it was all about gameplay mechanics — it was kind of simple, easily replicable,” he says. “But with ‘cheap’ games it’s not easy to retain [users]. You’re fighting for timespan. Now, the game has to be deeper, richer and narrative driven. With Genshin Impact, their characters have very rich personalities, there’s a strong emotional bond. To create this game, it’s a very heavy investment and you need an experienced team. It’s not easily reproducible. But it has a longer, everlasting effect on players.”

This kind of experience, analysts say, is increasingly important as gamers become platform agnostic — bouncing around between consoles, PC and mobile. More games are now launching simultaneously across platforms, and players are interacting with each other in a game’s online space regardless of what specific hardware they’re using to access it — a feature known in the industry as cross-play. 

“The trend is not simply mobile-to-console but casual-to-hardcore,” says Omdia’s Cui, meaning the amount of time and level of engagement a player has with a game.

To keep up with this trend, the global industry is facing increased competition for talent and intellectual property, which has, in turn, driven consolidation over the past couple years. Microsoft has been the biggest spender, but Louise Woolridge, research manager at analytics firm Ampere Analysis, which specializes in media, games and sport, says consolidation is something of a self-fulfilling prophecy.  

“Large-scale M&A activity tends to increase the likelihood of further big deals,” she says. “For example, Microsoft’s intended acquisition of Activision Blizzard will cause many other large games companies to consider their options.” 

Inside China, Tencent has mostly operated with a strategy of making small investments in rival companies. But with the recent collapse of small and mid-tier companies, Tencent is looking for more aggressive deals — but its monolithic reputation can be a burden. According to industry reports, for instance, miHoYo’s management has repeatedly rejected Tencent’s offers to take a non-conditional stake in the company. 

Because of the environment in China, Woolridge notes that “it makes sense for Tencent to focus further afield,” but it could also face an unwelcoming environment in much of the West as the political environment changes. 

“With the TikTok ban, talk of a WeChat ban, and Huawei, there could get to a point where there’s a campaign against Tencent [and its overseas acquisitions],” says Ahmad, at Niko Partners. “Tencent is not Huawei — there is no national security risk — but there are still negative associations.”

Tencent Games Global, the company’s international-facing division, has tried to avoid the negativity as much as possible by dropping the ‘Tencent’ from its international publishing label, Level Infinite. It has also been careful about its corporate structure, with its Chinese operations separate from global offices in Singapore and the Netherlands. 

…none of Tencent’s games have gained a share of the Western market. If any game becomes like TikTok and influences users, then data might be a concern and could see governmental interference.

Cui Chenyu, a senior games analyst at Omdia

Still, the now ubiquitous data collection arguments could easily turn against gaming companies, especially Chinese ones. Analysts like Ahmad point out that miHoYo hasn’t faced any pushback yet for its success, but the size of Tencent, which also operates an enormous social media division, is of a different order than miHoYo. 

“It’s not really a big problem now, but none of Tencent’s games have gained a share of the Western market,” says Cui. “If any game becomes like TikTok and influences users, then data might be a concern and could see governmental interference.”

In video games, one hit can make all the difference, and Tencent will be investing as far and wide as possible to find its next cash cow. Yet, even if it finds it, the biggest challenge for the world’s most successful gaming company might just be withstanding the spotlight of the global stage.

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