Tencent Needs to Get a Life Beyond Gaming

Tencent Holdings

TCEHY -4.17%

’ all-important gaming business has found a new life, but it will struggle to match the high scores of yesteryear. The Chinese tech giant may need to find growth elsewhere as well.

Tencent said Wednesday it made 26% more revenue from smartphone games in the quarter through June than the year before. That marks the fastest growth for the world’s largest gaming company since March last year, when China started a nine-month freeze on new-game approvals.

Revenue from games, including those on PCs, made up 38% of Tencent’s total sales but likely more than half of its profits. Tencent’s overall sales grew 21% year-over-year—slightly lower than estimates on S&P Global Market Intelligence—but its operating profit came in higher than expected thanks to cost savings in sales and marketing.

China’s resumption of new-game approvals in December is the major reason for the recovery. Games in China need the nod from regulators to sell virtual goods, which are the main source of revenue since most mobile games are free to download. One particular game—“Game for Peace,” also known as “Peacekeeper Elite”—has likely been the key driver of Tencent’s results since its May launch.

The game is a sanitized version—more overt patriotism, less violence—of the popular shooting game “PlayerUnknown’s Battlegrounds (PUBG)”, which never got the regulator’s blessing to sell in-game items in China. According to data company Sensor Tower, Game For Peace/PUBG raked in $342 million last quarter, 17 times what it made one year ago. The actual revenue is likely much higher since many Chinese players downloaded games from third-party Android app stores, which aren’t included in this estimate.

The game also has proved popular outside of China. Among those released by Chinese publishers, PUBG was the top earner overseas in the first half, according to data company App Annie.

Tencent’s shares have risen 13% since last December’s news that games would again be approved. But China’s economic slowdown may put brakes on the stock, which is still 28% below its peak in January last year. A weaker economy could take a toll on spending on games as well as advertising, another revenue source. Tencent’s ad revenue grew only 16% last quarter, the slowest since 2009. Partly that was due to competition from short-video apps like ByteDance’s TikTok, known as Douyin in China. The company expects the advertising market to remain challenging in the second half.

Tencent owns China’s most popular messaging app as well as stakes in myriad startups. To get to the next level, the tech giant may need to find a life outside of gaming.

Write to Jacky Wong at JACKY.WONG@wsj.com

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