Tencent feels heat from gaming rivals Alibaba, ByteDance and Genshin Impact maker miHoYo

Josh Ye
·6-min read

Tencent Holdings, the world’s largest video games company by revenue, saw remarkable growth in 2020, but it now finds itself on the defensive, trying to tap into new gaming genres as large tech rivals and gaming upstarts chip away at its empire.

The Shenzhen-based company, which gets a third of its revenue from gaming, invested in 29 video game companies last year, three times more than in 2019. Tencent also pulled in more than US$2.6 billion from each of its two biggest mobile games, PUBG Mobile and Honour of Kings, a first for any gaming company, according to app tracking firm Sensor Tower.

However, some of the thunder for this historic run was stolen by Shanghai start-up miHoYo with the September launch of Genshin Impact, the biggest global launch ever for a Chinese game. Rivals Alibaba Group Holding and TikTok-owner ByteDance, companies not traditionally active in gaming, are also making forays into the industry traditionally dominated by Tencent and its long-standing rival NetEase, which is seeking an edge in cloud gaming with a new pact with Huawei Technologies Co.

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The success of Genshin Impact also represents a unique challenge for Tencent because miHoYo published and distributed the game itself through its website and various third-party platforms, largely bypassing Tencent’s ecosystem. The open-world action adventure game pulled in US$245 million in October and another US$148 million in November, averaging US$6 million every day, according to Sensor Tower.

“About 90 per cent of ad spend went to Bilibili and ByteDance’s platforms, and players can’t even download the game on Tencent’s MyApp store,” said Owen Soh, founder of EastLab Consulting. “The meteoric rise of smaller, non-Tencent backed studios focusing on niche genres such as miHoYo, HyperGryph and Papergames reveals that Tencent underestimated part of how the industry would evolve.”

Before Tencent’s Honour of Kings went viral, it was a desperate experiment

Tencent’s owes much of its success to its ability to monetise the users of its myriad platforms, including WeChat, China’s largest social network. Tapping into gaming early allowed the company to gain a foothold in the technological frontier of interactive media, generating troves of data used to train artificial intelligence.

Tencent has also invested widely in gaming companies across the globe, which its activities last year show is still a prominent part of the company’s strategy. The acquisition of Riot Games and a 40 per cent stake in Epic Games, the respective makers of League of Legends and Fortnite, are two of its most high-profile investments, which drew scrutiny in Washington last year.

The success of independent studios threatens this source of revenue. Tencent previously approached miHoYo for a stake in the company, but miHoYo declined despite being allowed to set the terms, according to Chinese media LatePost, an affiliate of business magazine Caijing.

“With Genshin Impact, miHoYo has set a major precedent: an independent Chinese studio can launch a global mega-hit from one day to the next, even without Tencent‘s help,” said Serkan Toto, CEO of game industry consultancy Kantan Games.

As gamers’ tastes continue to evolve, young start-ups like miHoYo, Lilith Games and HyperGryph have pushed their way up the gaming charts. In May 2018, titles from Tencent and NetEase made up eight of the top 10 games in China. By last September, the month Genshin Impact launched, that number had dropped to four.

“There are new genres of games that are becoming popular and monetisable that Tencent historically didn‘t focus on, but we can now focus on, and that represents new opportunities for us,” James Gordon Mitchell, Tencent’s chief strategy officer, said in an earnings call in November.

Genshin Impact wins best game accolade from Apple and Google

Tencent has a track record of success in competitive game genres such as multiplayer online battle arena (MOBA), first-person shooters and battle royale. But the company has yet to have a big hit in emerging genres like open-world role-playing games and anime-styled 2D games, known as erciyuan. Tencent has been trying to expand its efforts in these areas, most notably through a partnership with Archosaur Games.

While trying to adapt, Tencent has also been fending off challenges from more deep-pocketed rivals.

Alibaba’s Lingxi Interactive, headed by former NetEase COO Zhan Zhonghui, is now China’s fourth-largest game publisher, thanks in part to two hit titles last year. Alibaba also launched its own cloud gaming platform last year.

ByteDance, on the other hand, has gone on a hiring spree for gaming talent and been battling Tencent to secure top franchises. Experts have said ByteDance could be following Tencent’s playbook by leveraging its existing success in social media to push into gaming.

Tencent has already moved to counter ByteDance’s rapid expansion in gaming. “Initiatives have already been implemented such as restrictions on the appearance of Tencent’s games on Douyin,” said Chundi Zhang, a gaming analyst with Ampere Analysis. Douyin is the Chinese version of TikTok.

Tencent has also recently found itself going up against Huawei, China’s largest telecoms equipment and smartphone maker. In a dispute over revenue sharing, Huawei temporarily removed Tencent games from its app store last week. Reuters reported that Huawei was insisting on a 50 per cent cut of Tencent’s game sales on its app store, but the dispute was resolved quickly and the games were reinstated.

Thanks to its tie-up with NetEase, Huawei is also poised to become a competitor in cloud gaming.

How ByteDance is copying Tencent’s playbook to conquer gaming

The increased competition from both new and entrenched players is what led Tencent to dial up its investment activities last year, according to Daniel Ahmad, senior analyst at market research firm Niko Partners.

“As Tencent faces increasing competition in the market, primarily from large tech firms such as ByteDance and Alibaba, in addition to mid-sized firms such as Lilith Games and miHoYo, the company appears to be taking a less conservative approach to mergers and acquisitions,” Ahmad said.

The company is also now investing in smaller companies than usual, and at earlier stages, he added.

Still, analysts agree that Tencent is not in danger of being dethroned any time soon.

Amid a global gaming boom during the Covid-19 pandemic last year, third-quarter revenue from Tencent’s online games business grew 45 per cent year on year, the fastest since the third quarter of 2017.

To hold its position, Tencent may continue to rely on investing in many different gaming companies this year, according to Zhang of Ampere Analysis. “It helps to ensure that the next game or company that has the potential to be successful will have a definite relationship with Tencent,” he said.

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