How Tencent is ramping up its global games business

Tencent has always been looking beyond the borders of its home market in China when it comes to growing its games empire, but the last two years have seen those plans advance significantly.

While the company continues to generate the bulk of its games revenues from domestic titles, it has been pouring more and more investment into overseas operations and partners – even opening a handful of TiMi Group studios in the West – in the hope that it can become a truly global player.

"We think a good publishing strategy is to look at the whole market and do the global version [of any game] first, not to go separately step-by-step – I don't think that's a good approach," Tencent's global games CEO Michelle Liu tells GamesIndustry.biz.

"I don't think we are only good at China and Asian markets, we explore our expertise all around the world"

She adds: "We can’t assume one version is the right fit or approach for all regions. So the next step [is] to do very detailed and customised publishing solutions for the different regions, especially some top 'tier one' areas. We [also] need to do very deep communications with all of the community. [There are] the things we have learnt from our industry partners."

She gives the example of V Rising. Tencent, via its Level Infinite publishing label, handles a lot of publishing and marketing support for the title's developer, Stunlock Services, in Asian markets. This has helped make Asia a key territory for that game. But it's building on the success of the global version.

"We need to have the global version quickly and see what's different, what are the unique regional requirements from the users, and to quickly have the second [regional] publishing solution done. It also [helps gather] quick feedback [from] the end user."

As another example, she points to PUBG Mobile, which Tencent published with Krafton (although it is no longer involved in the India version due to that government's ban on apps from Chinese companies). The biggest market for the battle royale, she reveals, is Middle East and North Africa [MENA], which demonstrates Tencent's can contribute to success beyond its domestic market.

"I don't think we are only good at China and Asian markets, we explore our expertise all around the world," Liu says. "We have all kinds of local live operations expertise and capability all of the world. Now, what we want to do is build our worldwide publishing system and... we want [our regional teams] to be the publisher, not just a local market agency."

Tencent has a very solid foundation for its global games operations, thanks to ownership of Riot Games, Funcom, Sharkmob, the Leyou Technologies group (including Digital Extremes and Splash Damage), and stakes ranging from 4% to 84% in Remedy, Epic Games, Activision Blizzard, Ubisoft, Krafton, Supercell, Frontier Developments and more.

While its activity has slowed down since its record year for M&A deals in 2020, Tencent has made some significant expansions to its global games business in the past two years – most notably with the formation of multiple Western studios as part of its Timi group.

There are now Timi studios in Los Angeles, Seattle and Montreal, alongside the Tencent-owned Team Kaiju and Lightspeed LA, and even a development team in the UK city of Liverpool. These are all primarily led by experienced AAA developers, with veterans from series such as Halo and Battlefield now within Tencent's ranks. They are working on a range of AAA games, including multiplayer shooters and Honor of Kings: World, an Unreal-powered, open-world spin-off of Tencent's flagship mobile title.

"I have been in the games industry for over 22 years, and there's always pressure in the games industry"

In the past, Tencent has taken a more 'at arm's length' approach by investing in or acquiring Western studios. Getting more directly involved in non-Chinese games developers is a definite step-change for the company – particularly branching away from mobile and into AAA for console and PC.

When asked why the tech firm is more directly developing games for international markets, Liu says Tencent "wants to find some new creative approaches to [engage] users and generate new content."

She points to the variety of teams Tencent now has at its disposal as a way to accomplish this. Tencent now owns more than 20 development studios all over the world, which Liu says are "all very unique, [with] very special DNA, all the professional production capabilities and all kinds of good talent."

Naturally, Tencent is still investing in the M&A strategy that gave it such a dominating presence in the video game space. At the start of 2022, it closed the $1.27 billion acquisition of Sumo Group, which followed shortly after the acquisition of Turtle Rock. Other recent purchases include former Improbable subsidiary Inflexion Games, and Polish outfit Fulqrum Games (formerly 1C Entertainment).

The company has also taken a mix of minority and majority stakes in (deep breath) Elden Ring developer From Software, Mordhau creator Triternion, Rime maker Tequila Works, Spec Ops: The Line studio Yager, Vancouver-based Offworld Industries, Polish startup Gruby Entertainment, New Zealand's Digital Confectioners, and increased its investment in Assassin's Creed publisher Ubisoft via a minority share in Guillemot Brothers Limited… to name but a few.

Liu says all of these partners offer a mix of good IP, great expertise in particular genres, ambition, and the potential for synergy with other titles and teams in Tencent's portfolio. "We want to build this kind of ecosystem, so we are supporting what we are good at, games-as-a-service, live-ops, data analytics, and local publishing capabilities. We are [also] aiming to have more production support.

"We need a lot of partners so we can do things together and inspire each other. That's what we are looking for."

While all this activity may be par for the course with Tencent, given its investment history, these particular deals come during a fascinating period of industry consolidation, headlined by Take-Two's acquisition of Zynga, Sony's purchase of Bungie and Microsoft's proposed takeover of Activision Blizzard. Given the moves being made by other major games players, is there pressure for Tencent to ramp up its M&A strategy before the most promising studios are off the table?

"Gamers from different parts of the world have their own unique needs, wants and interests... We need deeper insight of different users"

"I have been in the games industry for over 22 years, and there's always pressure in the games industry," Liu says. "So I think I'm used to this kind of pressure. It's in the DNA for our industry.

"I don't think there's pressure. There's some energy to encourage us to do better things. I think for the industry, it's a good thing."

In addition to creating new properties and an open-world take on Honor of Kings, Tencent is also keen to recreate its domestic successes in international territories. Back in June, it announced it would be releasing Honor of Kings globally by the end of 2022 (although no release date has been given and the fact it is already December suggests this may slip into next year).

This is a bold move for Tencent, if only for two reasons: firstly, the thriving popularity for the very similar League of Legends by Riot Games (which, as mentioned, happens to be wholly owned by Tencent), and secondly, the fact this has been tried before. In 2016, the company released Arena of Valor in the West – essentially a reskin of Honor of Kings – but the game struggled to gain traction.

It was a hard lesson in the challenge of winning over Western gamers, but Tencent has learned much in the intervening years and is confident its flagship title – as well as its Western-developed offerings – will fare better this time around.

"Gamers from different parts of the world have their own unique needs, wants and interests," Liu explains. "For us, that's the first challenge. We need to have a deeper insight of different [regions'] users. I think we have [learned a lot] from the past several years. Now we have almost nine different regional publishing teams so it helps us to be closer with the stakeholders in different regions.

"The second is that the local teams can help us do things that local people like. The third thing is we have our expertise from Tencent['s other games] – we can leverage what we are good at in the mobile live-ops and GaaS."

Given Tencent's success in mobile around the world, that bodes well for the international release of Honor of Kings. Launching AAA games for console and PC is another matter entirely, although Liu says there are still relevant learnings from mobile.

"For the future, cross-platform is the [key] direction," she says. "What we are good at is mobile and our in-house studios are good at generating [great] mobile games. What we want to explore more is to have more partner studios. They have good AAA and AA [experience] and a good production capability. If we can integrate and inspire each other together, I think that's the future."

One crucial source of further partnerships is Tencent's new publishing label, Level Infinite. Launched last year, the team is already handling the release for multiple Western-developed games.

"The [Chinese] society always faces new pressures and regulations. I don't think there's any impact to our [global] business"

Liu describes Level Infinite as a "label for high-quality, cross-platform and AAA games," adding: "We want it to be that when users see Level Infinite, they'll think that it'll be a good high-quality game."

Of course, Tencent's focus on growing its global presence is necessitated somewhat by changes in its home market. Last year, the Chinese government introduced restrictions on young people playing in an effort to address what it deemed to be 'youth addiction' to online games. Minors are now only allowed to play three hours per week (one hour on Friday, Saturday and Sunday), with spending caps also introduced.

Tencent's operations are now fully compliant with these new regulations, and the company has been pre-empting this with other measures to reduce the amount of time young people spend on its games, including a "digital lock" that requires parental consent and limits to two hours of gameplay per day, as well as facial recognition checks to ensure children are not playing late at night.

Earlier this year, the company also made changes to its widely used internet accelerator app, which now restricts Chinese users' access to foreign games.

Liu emphasises that none of this has had "any impact on [Tencent's] global business," adding that its decades of experience in China's games scene means it can "maintain all the business skills" needed to thrive in its domestic market.

"I think the [Chinese] society always faces new pressures, new regulations and new things," she adds. "I think that's a balance... I don't think there's any impact to our business."

In its most recent financial results, Tencent announced that time spent by users under 18 has dropped by 92% year-on-year. Q3 revenue from domestic games fell 7% year-on-year to RMB 11.7 billion ($1.7 billion), but still accounts for 22% of the internet giant's total revenue. By comparison, international games only account for 9%, although this has been growing in recent quarters.

"We want to build up our publishing system, not only in China's domestic market, but all over the world"

Another issue Tencent faces at home is the ongoing disruption to the approval of publishing licences. No video game can officially launch in China without such a licence, and there have been two nine-month freezes on the process while the government regulator responsible was restructured. The second lifted earlier this year, but Tencent had to wait more than a year for a new release to be approved.

With all this in mind, it's understandable why Tencent is looking to strengthen its global games business. Incidentally, its main rival NetEase is in much the same situation, having opened new studios in the West and even Japan to bolster its output for other markets.

Prior to running Tencent's global games business, Liu was focused on its domestic mobile operations and reiterates that the company's experience there will be invaluable in helping it perform better overall in other markets.

"Now, more and more, we aim to have more expertise, accumulate new capabilities for the overseas market," she concludes. "We want to build up our publishing system, not only in China's domestic market, but all over the world. That helps developers to engage the end user closely and efficiently. That's the direction that we want to [take]."