Two Chinese proverbs best optimize China’s strategy in the Video Games market
At the time of writing this blog (October 2020) all eyes are on the new consoles coming from Sony and Microsoft. Right now, there is a wave of heightened anticipation and excitement as we enter a new console generation, but something else just as seismic has been happening to the game industry for some time now. China has eyes on console gaming.
China’s waiting game is epitomised by Tencent
Today the video game industry is estimated to be worth over $160B per annum. That is bigger than Hollywood box office and music receipts combined. That industry had, until recently, been confined to the US, Western and Japanese markets. Video gaming is now a global business and China, believe it or not, is its biggest player.
Just the Chinese online gaming market alone is expected to be worth over $40B by 2021 with half a billion online gamers. The bulk of that is from mobile gaming but Chinese console gamers are beginning to grow both in numbers and in spending. We could be seeing a reverse trend in China compared to that in the West. The US, Europe and Japan have a rich and historic legacy when it comes to console and PC gaming and those gamers have in the last decade embraced mobile gaming in a big way. In contrast, many Chinese gamers are coming from mobile gaming and are now embracing console gaming. This most likely occurred thanks to a growing and aspiring middle class in China and when Chinese authorities gave sale licenses to the PS4 in 2015 and the Switch in 2019.
Where PC gaming has led, console gaming will soon follow. For example in the 2019 Steam hardware and software survey, it found that 37% of total Steam users spoke Chinese as their primary language, the second largest language spoken after English on the platform, which has 100 million active accounts, with around 40 million Chinese Steam users. Some of the most popular games on Steam are for the Chinese market, titles that include Chinese Parents, Ring of Elysium and The Scroll of Taiwu.
This demographic trend has attracted inward investment. Recently Green Man Gaming, a UK based digital reseller, partnered with the Hanzhou Shun Wang Technology to install its platform onto China’s internet café gaming PCs. An ambitious and clever move when one considers that internet café gaming makes up for 80% of China’s gaming habits. China is now Green Man Gaming’s second biggest territorial client and is strategic in the company’s growth plan.
Growth in console gaming in China
That growth in Chinese console gaming is not just in one direction. During the Shanghai 2020 International Game Business Conference, the Chinese government announced a nationwide support for exporting Chinese games under the banner “The Thousand Sales Plan”. A Chinese company called Game Science released a 13-minute gameplay trailer back in August for a new game called Black Myth: Wukong which took Twitter and YouTube by storm for its imaginative gameplay mechanics and visualization. Some people have heralded the game as the possible beginning of the Chinese move into AAA game development. Interestingly Game Science broke away from Tencent over a disagreement over the vision of making a narrative-based game as opposed to the more traditional Chinese preferred game of an open world MMO. Tencent will obviously be interested in seeing what kind of sell through numbers Black Myth: Wukong will do in Western markets. If the game sells well Tencent could easily change strategy to making narrative-based games if that is what gamers want. So, although China may be late to the video games party, its investment is serious and something we should take note of.
The fact is Chinese gamers are not starved from accessing Western consoles and games. There is a healthy grey market where Chinese gamers use sites based in Hong Kong and Taiwan to purchase games that have yet to receive the blessing of the Chinese government. The growth in illegal exports in consoles and games to Chinese consumers will only increase as more Chinese gamers demand content that they are otherwise denied by the authorities.
This conflict between the insatiable appetite for video games and the priorities of the Chinese authorities is not likely to dissipate anytime soon. The time it takes for games and consoles to get officially approved can take years after they have been released. The Chinese authorities concerned that too much gaming could be damaging to the young have clamped down on the numbers of hours gamers can play online and forced gamers to use their real names as opposed to made up names for their avatars, policies that also occur in South Korea.
This conflict between the insatiable appetite for video games and the priorities of the Chinese authorities is not likely to dissipate anytime soon.
None of these policies could have dampened demand among Chinese games, especially when you consider the impact of Covid-19 and the lockdowns. The increase in spending on games was not endemic to US or European markets, it has also gripped China. Chinese gamers today want the same games and systems as their counterparts in the West. The huge demand for the new systems this November is an example of this new reality. Therefore, games such as Black Myth: Wukong will probably spell the beginning of new game development. Made in China, sold to the West. One day in the future do not be surprised to see a Chinese console made specifically to break into Western markets.
Expansion plan
In China, the economy is often viewed as an extension of the state. The state can take an active role in the running of successful Chinese companies, from aggressive subsidies to placing party members on management boards. Such business partnerships, when a company’s objectives align with those of the state, may allow individual companies to gain preferential treatment at the direct expense of competitors, especially foreign ones.
The strategy is simple. China will financially and strategically help its companies’ partner with other international companies to flex its global economic muscle. Tencent, currently the largest gaming company in the world, is one such company.
Tencent Holding Ltd was founded in 1998 and in the space of 22 years its market capital is valued at over $660B. It is the seventh richest company in the world, bigger than Facebook and has investments in over 300 companies. Its three primary sources of revenue come from social media apps like WeChat and QQ (an instant messaging service); music and streaming services; and from mobile, console and PC gaming. Gaming makes up most of its revenue and some of that revenue comes directly from the West.
When it comes specifically to the console and PC market Tencent’s portfolio is nothing short of impressive. It completely owns Riot Games who make the immensely popular League of Legends. It also owns 40% of Epic Games, 11% of Bluehole who make Player Unknown Battlegrounds (PUBG), 5% of Ubisoft, 5% of Activision Blizzard and 5% of Paradox Interactive Entertainment. These are just some of the companies you may have heard of. Tencent also owns stakes in smaller publishers such as Yager, Platinum Games, Grinder Gear, Frontier and the Roblox Corporation, the makers of Roblox, a game that has caught the zeitgeist of children around the world with its open world gaming. In the last several weeks before the publication of this blog Tencent bought a minority stake in the Swedish company, 10 Chambers, who make the online multiplayer shooter, GTFO. In the mobile sphere Tencent owns the license to Call of Duty Mobile in China, a game that has attracted over 300 million downloads. In sum, Tencent has been investing in both reach and influence.
A music lesson
These minority stakes help to illustrate Tencent’s strategy for video games because it has done something similar in music. By investing in both Universal Music and Warner (WMG), two major Western music labels, Tencent offers both streaming services and rights permission. This is unusual because these two activities are catered for by differing companies here in the West. Tencent, however, see it as a pragmatic decision to increase its market power.
Moreover, Tencent has gained from China’s state blessing. In some cases when Western companies want to trade in China, they must do so with Chinese “partner” companies. Attaining a license to trade in China can be met with numerous barriers, so partnering with an established Chinese company can save time and money. Tencent’s wide ranging portfolio also allows the company to build bridges with Western companies when they seek to expand into Eastern markets. It also allows for fewer investment exposures. This all leads to understanding as to why Tencent has expanded so rapidly and so widely. Tencent strategy to invest in numerous companies that are competing against each other also reduces the risk of revenue cannibalism when one game sells well at the expense of another. If Tencent owns stakes in both companies that make the games, it minimizes loss. It can win either way.
The whole point of Tencent developing a suite of music, games, video, messaging, and live streaming services is to build a global digital entertainment behemoth to compete with Apple, Amazon and Alphabet. Tencent has managed to do this, thus far, by building equity stakes in Western companies.
Those two Chinese proverbs
This brings us nicely to two Chinese proverbs that best sums up China’s entry into the console market. The first is “Be not afraid of growing slowly, be afraid of standing still”, and the video games industry can never be accused of standing still. For example, when Tencent acquired 40% of Epic Games back in 2012 it did so with $330M. The company today is projected to be worth over $17B. That is a growth in value of more than 2000% in just 8 years. When Tencent bought 5% of Ubisoft back in 2018 it did so when the share price was €66, today Ubisoft share is worth €77 (at the time of writing). Tencent owns 5% of Activision since 2017 when the share price stood at around the $40 mark, it now sells for $80 (at the time of writing). These are just examples of Tencent picking winners and understanding the video games market.
The second Chinese proverb goes like this, “A little impatience will spoil great plans”. Although the current geopolitical tensions do not bode well for Chinese expansionism into the video game market in the West, China has repeatedly shown it has little concern about the short term.
Have little doubt, Tencent does have great plans and is in no hurry to get there.