If you’ve read TechNode for any length of time, you’d know that Tencent, one of the world’s ten largest companies, has a massive video game empire. It owns stakes in the following game publishers and developers:
- 100% of Riot Games
- 100% of Sharkmob
- 84% of Supercell
- 80% of Grinding Gear Games
- 40% of Epic Games
- 36% of Fatshark
- 29% of Funcom
- 20% of Sea
- 15% of Glu Mobile
- 14% of Kakao
- 12% of Bluehole
- 9% of Frontier Developments
- 5% of Activision Blizzard
- 5% of Ubisoft
That’s impressive. But, by my reckoning, the most notable aspect of Tencent’s video game empire is that it’s invested in assets across the entire video game value chain.
Michael Norris is a TechNode contributor and Research and Strategy lead at AgencyChina. He holds no position on the stocks mentioned in this article.
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You see, Tencent’s the only video game company that has ownership of developers that make games, the channels where games get distributed and the digital entertainment platforms where gamers watch gameplay. This means Tencent has deep moats to defend its game empire against present and emerging competitors, especially ambitious domestic rivals Netease and Bytedance.
There’s a lot to unpack here, so let’s start with the video game value chain.
The video game value chain
The gaming value chain describes how gaming content is created, distributed and marketed to gamers. Different gaming formats, such as PC, console or smartphone, will lead to varied value chains. However, we can generalize and say the gaming value chain looks something like this:
The intellectual property is licensed to a publisher, who then finds or green-lights studios to make compelling games. The distributor delivers the finished game physically or digitally, so it ends up in the hands of consumers. Consumers play the game, talk about the game and watch others play the game. Money changes hands along the value chain in different ways—royalties, advances, sales revenues, marketing campaigns, digital item revenues, and gifts for video game streamers.
Vertical integration means operating across multiple layers in the value chain. Some gaming companies are already active in one or two spots along the value chain. Take-Two Interactive, for instance, is a publisher and developer. Valve, another diversified gaming business, is a publisher, developer and digital distributor.
However, Tencent’s presence across the value chain goes much, much further than Take-Two Interactive, Valve, or any other competitor. As you can see from the table below, it directly owns or has invested in assets across the entire value chain in and outside China.
It’s difficult to not overstate how impressive this is. Just like the British Empire, the sun never sets on Tencent’s gaming empire—at any time of the day, anywhere in the world, gamers are engaging with video games Tencent has some level of ownership in.
Moats create safe distance from ambitious domestic competitors
Tencent’s investments across the value chain highlights two important points.
First, Tencent isn’t the largest gaming company in the world by accident. Tencent knows that it’s not enough to have a few erratic hits—you have to have the infrastructure in place to turn games into multi-year interactive franchises, and that means some level of control over intellectual property, distribution channels and streaming portals.
Second, Tencent has a good eye for companies that span a couple of layers in the value chain. It was early money into Epic Games, which was in the early stages of developing smash hit Fortnite. Epic Games owns the Unreal Engine (a commercially available game engine which also powers their internally developed video games) and the Epic Games Store, a game distribution platform. The potential of both the Unreal Engine and Epic Games store is so (wait for it…) epic that a well-respected indie investor has a six-part essay on it.
Taken together, we can conclude Tencent has the cash and investment approach to select and pick winning assets inside and outside China. Tencent can further use these strategic investments and partnerships with game developers to choke the access Netease and Bytedance have to leading intellectual property and game titles.
- Tencent can cross-pollinate domestic and overseas gaming titles by bringing hit overseas titles to China and taking hit domestic titles overseas.
- Tencent’s investment team doesn’t stop scouring the globe for promising gaming companies
- Outside investments, Tencent can leverage its distribution channels to strike opportunistic partnership deals with companies it hasn’t invested in, like a 2018 deal with Square Enix Group.
- Even if Netease or Bytedance titles enjoy some success, they may be locked out of featuring on Tencent-invested streaming platforms Huya and Douyu (which have three-quarters of China’s game streaming market).
These moats are particularly important in a context where Netease has raised $2.7 billion from a secondary listing in Hong Kong and juggernaut Bytedance is looking to step up its nascent gaming business.
Netease and Bytedance may have Tencent’s hefty gaming revenues in their sights, but they’re essentially playing on a chess board that Tencent’s designed and has firmly in its grasp. They’ll have to flip the chessboard if they’re to unseat the emperor penguin from its throne.