Bitter gaming war between ByteDance and Tencent a windfall for independent Chinese studios

Josh Ye
·6-min read

By the time Chinese video game maker Moonton Holdings was acquired by ByteDance in March, the Shanghai-based developer had seen its valuation septuple to US$4 billion, from US$551 four months prior, but it had less to do with the merits of the games it produces than being dragged into the ongoing rivalry between the TikTok owner and Tencent Holdings.

Moonton is the latest example of an independent Chinese gaming studio whose valuation has skyrocketed on the back of a bitter bidding war between two of China’s biggest internet companies. Beijing-based ByteDance has been aggressively moving into gaming in a bid to further monetise its vast user base, horning in on a market long dominated by Shenzhen-based Tencent, which operates the world’s largest video game business by revenue.

In another high-profile acquisition last week, ByteDance acquired game studio C4 Games, the developer of Red Alert Online. Meanwhile, Tencent has already invested more in gaming studios this year than it did in all of 2020.

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However, the battle for Moonton, the developer of team-battle game Mobile Legends: Bang Bang, came at a steep price, which two sources familiar with the deal said was worth US$4 billion. Accepting ByteDance’s offer also meant breaking one with Tencent that Moonton had signed just days before, according to the sources, who asked not to be identified.

“That was a big middle finger [to Tencent],” one source said. “There are a lot of egos and dynamics involved.” He added that ByteDance offered “a lot of its own shares to Moonton”, which ultimately swayed the deal in its favour.

Moonton’s Mobile Legends: Bang Bang is one of the biggest mobile games in Southeast Asia. ByteDance’s acquisition of Moonton gives the Chinese tech giant an important foothold in the region where Tencent seeks to expand. Photo: Handout
Moonton’s Mobile Legends: Bang Bang is one of the biggest mobile games in Southeast Asia. ByteDance’s acquisition of Moonton gives the Chinese tech giant an important foothold in the region where Tencent seeks to expand. Photo: Handout

Gaming has become a top priority for ByteDance. It has proven to be an effective way of monetising social media users from other apps – a strategy used by Tencent – and a steady stream of gaming revenue works as insurance against TikTok someday falling out of fashion.

Despite a growing gaming division with more than 3,000 new hires, ByteDance’s search for a flagship game was advancing at a snail’s pace. After a few of its self-developed titles flopped last year, experts said the social media firm needed a headlining purchase to reinspire confidence, according to analysts.

“Tencent is at least 10 years ahead in terms of building out its game business,” said Serkan Toto, chief executive of game industry consultancy Kantan Games. “ByteDance is still a relative newcomer in gaming, so they have a lot of catching up to do.”

Purchasing Moonton was a much-needed shot in the arm. Speaking on condition of anonymity, a ByteDance executive said, “The moment I shared this news on social media, my inbox immediately lit up like a Christmas tree.”

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The deal has opened a lot of doors for ByteDance, which previously struggled to impress high-powered game developers as a serious investor, according to the executive. “ByteDance has money. What we lack is a demonstrable track record,” he said. “This goes to show the distance ByteDance will go to pay for a gaming company.”

Tencent, ByteDance and Moonton declined to comment for this story.

While ByteDance’s purchase of Moonton is its biggest gaming deal yet, the question of whether it was worth US$4 billion is still being debated. Although Mobile Legends: Bang Bang is hugely popular in Southeast Asia – where 44 per cent of gamers played the title in the first half of 2020, according to game consultancy Newzoo – the title is Moonton’s only hit among its three games. It is also only popular in Southeast Asia, with negligible market share elsewhere.

Liao Xuhua, a gaming analyst with Beijing-based Analysys who estimated that the deal could be worth closer to US$5 billion, said that ByteDance definitely overpaid.

“In the short term, Moonton can very effectively strengthen ByteDance’s gaming segment,” Liao said. “But this price can normally get you multiple companies with far more products and a war chest of [intellectual property].”

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According to Moonton co-founder Zhang Guanquan, the studio was valued at 3.6 billion yuan (US$551 million) last November when he sold his stake. “It is mind-boggling how it has become worth so much so quickly,” said Zhang, who added that he has filed lawsuits against Moonton in both Shanghai and Hong Kong to demand compensation.

“These smaller studios know they are coveted goods, and they know that speed in [mergers and acquisitions] is key for the likes of ByteDance and Tencent now,” Kantan’s Toto said. “This combination of cutthroat competition and super dynamic industry growth will only continue to drive up prices and valuations for potential targets for ByteDance and Tencent going forward.”

For ByteDance, matching Tencent in games is a tall order, but the gaming division has a mandate straight from company founder and CEO Zhang Yiming. The billionaire entrepreneur is known to have eschewed entertainment, including poker, while in school. In recent years, though, the 38-year-old has reportedly been playing a variety of video games, such as miHoYo’s Genshin Impact and Sony’s Ghost of Tsushima, in a bid to better understand the business.

By comparison, Tencent is already the world’s largest gaming company by revenue, which topped 156 billion yuan last year, making up a third of the company’s total revenue.

Owen Soh, founder of Eastlab Consulting, said ByteDance was willing to spend whatever it took to acquire Moonton because it could not afford to let Tencent get it.

“Yes, Mobile Legends is old, but it is the only chance for ByteDance to make a break in Southeast Asia,” Soh said. “Controlling nearly 60 per cent of the market in China, Tencent’s lead in gaming in China is almost unshakeable. So Southeast Asia remains ByteDance’s best, if not only, chance to secure a stronghold in gaming.”

After the acquisition, Moonton said it would continue to operate independently, but the deal could bring its new parent some advantages in Southeast Asia.

With Moonton on board, Soh said ByteDance would be able to more effectively distribute its upcoming games in the region by leveraging the studio’s existing network of partners, which includes esports organisers and sponsors. As an established esports title, Mobile Legends became a medal sport at the 2019 East Asian Games.

“If done successfully, the acquisition will look cheap in three to five years,” Soh said.

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