Chinese video game quirks cause Tencent to drop its first drop in revenue

The Communist Party's continuous attacks on video games and the proscription lists of banned titles make the giant Tencent lose a lot of money, which now has more than a quarter of its revenue in the games division.

If China had not repeatedly attacked video games over the years, probably most western software houses today would be in the hands of Tencent, a joint-stock company founded in 1998 and chaired by Ma Huateng, whose subsidiaries provide the most varied services in the field of entertainment, mass media, internet and mobile phones.

Since the Chinese giant entered the video game sector it has ended up dominating it: in 2021, also thanks to brands for casual gamers much loved by those who play on smartphones such as PUBG, Valorant, Brawl Stars and Clash of Clans, it has grossed 32.94 billion dollars, far surpassing the Japanese Sony, which has been active in the video game sector for about 30 years.


Perhaps, if China did not continue to demonize video games, Tencent would not own most of the Western software houses, but almost certainly the largest. For years, for example, the Chinese giant has been targeting Ubisoft, a multinational French with studios now everywhere in the world, from Milan to China, passing through Abu Dhabi, with IPs such as Prince of Persia, Rayman, Assassin's Creed, Far Cry, Rainbow Six and Just Dance, just to mention the most famous titles.

The financial results of the label French in the last period have not been excellent, so much so as to cause the slippage of several video games and a strong squeeze in the expenses of the various branches and so Tencent in recent weeks has come forward with the Guillemot family, which with 15% holds the keys to the company. According to Reuters, the Asian giant that has already bought a 5% stake in Ubisoft in 2018 has again expressed interest in increasing its shares in the company by the current value of 5.3 billion dollars, aiming to become the majority shareholder.

We do not know if the marriage with the French will ever be done, in the meantime Tencent has been "content" to shop for software houses such as Inflexion Games, a label based in Edmonton, Canada, composed of former members of BioWare, starting with CEO Aaryn Flynn, who has signed successful sagas such as: Mass Effect, Dragon Age and Star Wars:  The Old Republic and PlayTonic, which instead consists of former Rare (British software house that in the 90s signed masterpieces such as Donkey Kong Country, 007 GoldenEye, Perfect Dark, Banjo-Kazooie), reduced in talent after the purchase by Microsoft, although in recent times it has churned out the fun Sea of Thieves.

In PlayTonic we find former Rares such as Gavin Price (head of the company), Chris Sutherland (main programmer of Donkey Kong Country) and Steve Mayles.  The Chinese investment will allow the British to develop a third chapter of their Yooka-Laylee, a 3D platformer that blatantly refers to one of rare's most beloved Nintendo 64 video games: Banjo-Kazooie.


The news of the partnership between Logitech G and Tencent Games aimed at creating a portable console entirely based on cloud gaming and that will support multiple services that take advantage of this technology, including Xbox Game Pass and Nvidia GeForce Now, has been passed over in silence, since it was disclosed in mid-August.

We are delighted to partner with Logitech G to bring a cloud gaming handheld to market later this year that will combine Logitech G's expertise in hardware with Tencent Games' expertise in software services.

— Tencent Games (@TencentGames) August 2, 2022

"Logitech G and Tencent Games share a common vision of the future of gaming and are committed to ensuring that the quality of the experience comes together perfectly to deliver on the exciting promise of cloud gaming," said the two companies, which say nothing about the price and launch period of their platform.

"Cloud gaming uses data center servers to stream video games for consumers. You don't need to download or install PC or console games. Instead, games are rendered and played on remote servers, and users interact with them locally on their own devices."


In short, to spend so much money on it, Tencent must have seen in video games the proverbial hen with the golden eggs. And in fact the numbers prove her right when you consider that last year Tencent grossed 32.94 billion dollars, mainly thanks to mobile video games including PUBG, Valorant, Brawl Stars and Clash of Clans.

A disproportionate figure if you think that the veterans of the sector are much further behind. Sony stops at $24.87 billion, Microsoft at $16.28 billion and Nintendo at $15.3 billion. In short, over a quarter of Tencent's turnover derives from video games: its main rival at home, NetEase is in fifth position in the ranking of the software houses that invoice the most, with 8.37 billion collected in 2021.


Still, Tencent's second-quarter revenue fell 3% to 134 billion yuan ($19.8 billion) compared to the same period in 2021, while profits plummeted as much as 56% to 18.6 billion yuan. Tencent has already run for cover, cutting about 5,500 jobs and falling to 110,715 employees at the end of June, the first quarterly decline in the workforce since 2014.

Among the main causes, the war that the Communist Party has returned to move to video games. When last year the Economic Information Daily, a Chinese newspaper affiliated with the official Xinhua news agency, the governing house organ, compared video games to "opium of the spirit" calling them "electronic drugs" Tencent in a single day left 10.57% in Hong Kong, NetEase 15.7%.


In China, the publication of video games is not free: it is the government that establishes it through special lists. In April, Beijing began to update them again, inserting new titles, but no new Tencent games ended up on the list of allowed video games which means that the company must rely on older and now less appealing titles such as "Honor of Kings" to get revenue.

For its part, Tencent said that the Chinese video game market is facing "transition challenges", while the international market is in a "period of post-pandemic digestion", as people, being able to go out again, have resumed spending on other forms of entertainment. But the explanation does not fully satisfy, because although indeed China continues to be affected by massive local lockdowns, the West fortunately has left behind the period of restrictions for Covid from the end of 2021, so the step in sales, which undeniably there has been, has actually been felt in 2022. What the company can't say is that the Communist Party is taking away an endless market of about 1.5 billion potential gamers: the Chinese people.