Source: Singularity Finance HK
Hong Kong Singularity Finance Comprehensive Media Report. On Monday (January 29), Tencent Holdings Chairman and CEO Pony Ma said at the annual employee gathering that he intends to continue to expand overseas, and that going overseas with games is the company's greatest hope for internationalization.
While the global game market continues to grow, the domestic game market is close to saturation. In the first half of 2022, China's gaming population shrank 0.1% year-on-year to 670 million, and market revenue fell 1.8% year-on-year to 147.79 billion yuan ($21.9 billion), according to a report by the China Game Industry Research Institute. According to data from the China Audio-Video and Digital Publishing and Game Publishing Committee, the total overseas revenue of Chinese video game companies fell to US$16.36 billion in 2023, down 5.7% year-on-year, the second consecutive year of decline.
Weak overseas sales by Chinese video game studios stand in stark contrast to the booming global gaming market, which reached 1.17 trillion yuan (US$165 billion) in 2023, up 6% year-on-year. As the domestic video game market faces economic headwinds and stricter regulatory requirements, most Chinese companies are looking for new growth drivers overseas.
2018 can be regarded as a turning point for China's domestic games to go overseas. Prior to this, the export volume of domestic games accounted for only a small part of the market. Small and medium-sized producers mainly rely on the advantages and successful business models of domestic mobile games and web games. After 2018, due to the restrictions on the authorization of domestic game ISBN codes, domestic game manufacturers began to look overseas.
Chinese game companies are targeting three main types of overseas markets. The first is the nearby markets – Japan and South Korea, which are closely related to Chinese culture. They are mature, copyright-conscious, and have good payment habits. The other category is emerging markets such as India, Southeast Asia, and Russia, where the demographic dividend is large and there are many potential opportunities, but consumers' willingness to pay is low. The last category is the United States, the United Kingdom, Germany and other European and American countries. They tend to have significant cultural differences from China, but equally have a mature market and good payment habits.
Tencent is currently the world's highest-grossing video game company. According to Bloomberg, in 2023, Baldur's Gate 3 and Alan Wake 2 each received eight nominations at the Game Awards, including Game of the Year nomination. The two games don't overlap much in terms of content or tone, but they have one important thing in common – they're both backed by Chinese gaming giant Tencent.
The nomination is a testament to Tencent's pursuit of overseas gaming expansion. Globally, Tencent is best known as the owner of League of Legends developer Riot Games Inc. and an investor in Fortnite developer Epic Games Inc. In recent years, Tencent has also begun to grab a share of emerging studios, from Europe to Japan to South Korea. Such investments are usually made quietly, and Tencent usually provides technical support rather than taking complete control.
At the same time, Tencent adopts a dichotomy to operate its domestic and foreign businesses. In China, Tencent brands itself in everything it touches — while overseas, it keeps a low profile. When Tencent built a Twitch-like platform, it named it Trovo Live, omitting its own name. (Twitch is a video platform, and the content on the platform is mostly gameplay videos.) When the company hires new developers, it does so under the name of its in-house studios, Timi and Lightspeed.
On the road to internationalization, Tencent mainly implements an acquisition strategy. In 2011, Tencent acquired a 93% stake in Riot Games (Tencent had already invested in Riot Games back in 2008), which was the beginning of an investment boom that would eventually make Tencent the world's largest gaming company.
In 2013, Tencent Games acquired a 40% stake in Epic Games (US). - It has Unreal Engine, an industry-leading game development program used by game developers around the world, and has developed several popular games such as Gears of War and Fortnite.
In 2015, Tencent Games wholly acquired Riot Games (US), the developer of League of Legends, which made Tencent Games one of the world's largest gaming companies alongside Microsoft (Xbox) and Sony (PlayStation). The acquisition allowed Tencent to absorb overseas assets and also allowed Tencent to use the acquired company's franchise to develop new games.
In recent years, under the pressure of economic decoupling and deglobalization, Tencent Games has shifted from focusing on U.S. acquisitions to other regions. For example, in 2017, it acquired a 13.5% stake in Krafton (South Korea), the developer of PUBG: Battlegrounds, a hit game on par with Fortnite and League of Legends.
Europe and Asia have become the top regions for Tencent's 2019-2022 game M&A targets, during which Tencent acquired stakes in European game studios in Sweden, Finland, France, Germany, the United Kingdom and the Czech Republic.
Another company that has expanded abroad through acquisitions is TikTok parent company ByteDance, which said in 2021 that it was aiming to compete with the likes of Nintendo and Blizzard.
Over the past few years, Byte has made acquisitions of NewsRepublic in France (2017), Baca Berita in Indonesia (2018) and Jukedeck in the UK (2019), as well as acquisitions of Musica.ly (2018) and Chinese virtual reality headset maker Pico (2021).
While ByteDance's motivation for acquiring Musica.ly in 2018 was to internationalize, its 2021 acquisition of Beijing-based Pico — which helped Byte develop and integrate a metaverse ecosystem that blends social media, gaming, and virtual/mixed reality — made it inevitable that ByteDance and Meta would become rivals — Facebook (Meta's predecessor) developed a similar business with its acquisition of virtual reality company Oculus in 2014.
Of course, Byte's internationalization is not confined to the gaming industry. In 2022, ByteDance also acquired Amcare Healthcare, one of China's largest private hospital chains, for more than $1 billion (following the acquisition of One Medical by US rival Amazon), and according to research reports, Byte is also making inroads into at least six other industries.
As for NetEase, another Chinese gaming giant, it has invested in at least 10 overseas businesses. NetEase's expansion strategy is to target globally recognized intellectual property. The company has already acquired the rights to the Harry Potter series and The Lord of the Rings, and is leaning towards blockbuster projects. The results were mixed – Diablo Immortal was a huge success, but The Lord of the Rings: Rise at War and EVE Online failed to live up to expectations.
In addition, while Tencent and NetEase are making strategic investments overseas to gain stronger intellectual property (IP), we have also seen them take a long-term strategy in their global expansion, including building studios from the ground up with high-profile foreign game executives. Taking NetEase as an example, in 2022, NetEase established studios such as Jackalope Games and Jar of Sparks in the United States, and Nagoshi Studio and GPTRACK50 in Japan. All of these studios are spearheaded by well-known executives with extensive experience in prestigious IP.
The South China Morning Post cited a survey of 33 Chinese game companies with overseas operations showing that Chinese video game studios are largely unconcerned about the political situation when it comes to generating revenue from overseas markets. According to the survey results, only three companies surveyed (9.1%) said that "global political and economic turmoil" had a "large" impact on their overseas business.
Meanwhile, surveys conducted by consulting firm CNG and the China Video Game Industry Association showed that more than a third of companies said that "excessive competition" had a big impact on overseas revenues. 30.1% of respondents cited "lack of local talent" and "rising cost of acquiring online traffic" as major factors affecting overseas operations. And only 6.1% of companies believe that "lack of global operational experience" is a big problem.
It is not difficult to see that in the process of internationalization, talent is still the first. Building an investment team with local transaction experience cannot be overlooked in the early stages of a company's life cycle. At the same time, ignoring the synergies between home and host country entities could also have a detrimental effect, as may be the case with the failure of some Chinese tech giants in Silicon Valley.
After years of development, Chinese game companies have become more competitive in the global market, and in 2022, the sales of local Chinese games in overseas markets accounted for more than 10% of total game sales. In 2022, China's self-developed games occupied a place in the top 100 mobile games by revenue in markets such as Japan, South Korea, the United Kingdom and Germany, accounting for about 30% of the top 100 mobile games, according to Gamma data, a Chinese game database.
So, it's only a matter of time before China's top game developers get these things done. However, for smaller companies, breaking into the harsh international market is almost impossible. Even in the Southeast Asian market, it has reached the point where it takes millions of dollars to gain a foothold. In North America, without a minimum budget of tens of millions of dollars, it's simply not worth trying to launch a game.
Even something as simple as localization is a boggan for many developers. For example, Arabic is read from right to left, while Chinese and English are read from left to right, which means that translating into some languages requires adjusting the user interface. Regions such as Southeast Asia and Latin America are very different from the domestic environment, but most small developers do not have the resources to conduct this type of market research.