Tencent is the games industry's silent giant

It's time to wheel out the financial superlatives again. It's been just over half a year since Activision Blizzard coughed up $5.9 billion for British mobile game firm King - a price tag that still seems unjustified given King's relatively anaemic portfolio of IP and the lack of any proof that it's capable of repeating the success of Candy Crush Saga. Now that enormous deal has been thoroughly eclipsed, as Finnish developed Supercell changes hands - with ownership passing from Japanese mobile network SoftBank to Chinese internet giant Tencent for a staggering $8.6 billion. The controlling stake that SoftBank is selling doesn't even account for the whole company; it owns 73% of Supercell, so the deal actually values the entire company at just shy of $10.2 billion, over twice the valuation Activision placed on King.

It's not hard to see why Supercell commands a price tag like that. It's by far the most successful developer in the mobile world, and while Clash of Clans is the tentpole of its operation, the company has created a string of well-regarded hit titles - the latest being the popular and fast-growing Clash Royale. Supercell's revenues hit around $2.4 billion last year, which actually makes a $10.2 billion valuation relatively conservative, but more importantly, the company has figured out something that almost everyone else in the mobile space has struggled with - it's learned how to bottle its lightning and produce successful titles on a regular basis.

"Contributions from Supercell will more than double Tencent's overseas income, making this the most aggressive and significant move into the international market yet"

This isn't to say that there aren't other very successful companies out there in the mobile space - quite a few companies regularly turn out games that are successful and profitable - but runaway hits on the scale of Angry Birds or Candy Crush Saga turn out to be very hard to replicate for their creators, and as their popularity inevitably wanes, it leaves a yawning gap in the firm's revenues that it's tough to fill with even a decent stable of successful but smaller titles. Supercell's real value is that it's arguably the only developer in the world which seems to have the chops to replace revenues from Clash of Clans' eventual decline with something just as successful.

Given the rapid growth and scale of the Chinese mobile market, it's probably fitting that the world's top mobile developer should belong to one of China's top Internet companies. Tencent's reasoning for this acquisition is a little opaque - the company is notably reticent to allow its executives to be interviewed or to discuss its strategy in detail - but it's fair to say that it's a two-pronged approach; Tencent sees an opportunity to boost its already huge business in China, a market in which Supercell has already had success but can expect serious growth now that it's backed by a big local player, but it also sees a chance to grow its overseas business, which is a relatively small sliver of the firm's existing operation.

In fact, contributions from Supercell will more than double Tencent's overseas income, making this the most aggressive and significant move into the international market yet. Within China, Tencent is a behemoth; following a strategy that's now being imitated to some degree by Japan's rapidly growing LINE, Tencent has built a huge games business as an effective way to monetise its dominance of the instant messaging space in China (it is the operator of both QQ and WeChat, China's top messaging platforms). It's hard to say whether the firm's lack of significant presence outside China is down to not having popular messaging platforms to leverage in other markets, or simply down to its focus being directed upon its huge and growing home market; if it's the latter, though, the Supercell acquisition is a clear sign that things are changing.

"Tencent's track record to date suggests that it's not likely that much will change day-to-day at Supercell as a consequence of the deal"

Supercell isn't Tencent's first foray into international waters; it already owns Riot Games, and is thus adding some of the world's top mobile games to a portfolio that already includes the world's most popular competitive game, League of Legends. In addition, Tencent owns a significant minority stake in Epic Games (at around 40%, not a controlling stake, but enough to be able to nominate directors to the board), a large chunk of South Korean publisher and developer CJ Games, and pretty decent slices of both Activision Blizzard and Glu Mobile. Although Tencent's business interests extend far beyond gaming - it's involved in all kinds of online entertainment and services in China - it's not unreasonable to characterise the firm, which also develops and publishes its own games, as the largest company in the games industry.

The experience of Riot Games (and to some degree, of Epic) is probably instructive with regard to what happens to Supercell next. Both companies have experienced a very hands-off management approach from Tencent; Riot and Epic have seen minimal interference in their business decisions and company cultures. Finns still traumatised by Microsoft's acquisition and subsequent gutting of the ailing Nokia mobile business can rest easy over the fate of their new tech giant; besides the eye-watering new valuation of the company, Tencent's track record to date suggests that it's not likely that much will change day-to-day at Supercell as a consequence of the deal.

That being said; neither eSports (Riot) nor game engines (Epic) was a major part of Tencent's business when it invested in those firms, while mobile games are very much its lifeblood. While it's still unlikely that any sharp objects will be allowed into the presence of a goose that lays such wonderfully golden eggs, it's not impossible to imagine some people within Tencent feeling that their approach could wring extra revenue from Supercell's games; this isn't Tencent's general approach to acquisitions, but it'll be interesting to see what structures are put in place to guarantee Supercell's independence in the future.

"I do wonder if this is the peak... What deals remain out there that could possibly top these figures? Who's worth more than Supercell, and who's able to pay more than Tencent?"

Spare a thought, as we ponder the games industry's new colossus, for the departing one. The sale of Supercell is a very profitable one for SoftBank - when it bought its stake in the company only three years ago, it was valued at around $3 billion, a quarter of its current price - but it also draws a line under the firm's once lofty ambitions in the gaming space. It comes only days after we learned that SoftBank is also selling Puzzle & Dragons developer GungHo, essentially meaning that the firm is divesting itself of two of the top companies in the mobile space at the same time. It seems that SoftBank is getting nervous about the performance of many of its aggressive acquisitions of recent years - the largest of which was US mobile carrier Sprint - and may be seeking to scale down and refocus somewhat. Either way, these developments mean it's out of the games industry entirely.

$5.9 billion for King, and now a $8.6 billion deal and a $10.2 billion valuation for Supercell; I hesitate to call it a bubble (Supercell's valuation is arguably more reasonable, in pure financial terms, than the valuation of Nintendo or any number of other stock market listed "traditional" game companies right now) but I do wonder if this is the peak, for now, of acquisition activity in this sector. What deals remain out there that could possibly top these figures? Who's worth more than Supercell, and who's able to pay more than Tencent? My guess is that the records set by this acquisition (which is more than Disney paid for Lucasfilm and Marvel combined) will stand in the games sector for some time - but as more Chinese firms seek to hedge against a domestic slowdown with overseas investments, we can expect multi-billion dollar deals to become more common.