Tencent chooses health over wealth in gaming return

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When Tencent received its first game approval in China in more than a year last week, there were neither great expectations among investors nor keen anticipation from players that another blockbuster title was on the way.

The tech giant had earlier revealed that Defence of Health was a tame educational affair compared with big moneymaking hits such as Honour of Kings, its fantasy multiplayer mobile game where players kill opponents to gain abilities and gold, and win by destroying the enemy’s towers.

Tencent said at its annual game release event in 2021 that Defence of Health, where players learn about the human body and prevent the invasion of viruses, would be part of its “social service” to “promote public health knowledge” and “explore more positive social values”.

Developed by little-known subsidiary Nanjing Wangdian Technology, controlled by Tencent executives including co-founder Pony Ma, the new mobile game was one of 73 approved by the National Press and Publication Administration, in the fifth batch of licences granted this year.

The approvals represented a gradual thawing for the industry after the country’s media watchdog froze licensing of games in August 2021, as part of a wider social and economic campaign to remake Chinese society around Communist party ideals.

Daniel Ahmad, from Asian video game analyst firm Niko Partners, said he expected more “healthy” games that align with the government’s social policy goals to be approved, even though Tencent would make little money from the likes of Defence of Health.

“We don’t expect it to be a high-level revenue generator for Tencent, and neither does Tencent,” Ahmad said.

Beijing has restricted access to games in other ways in the past year, such as banning minors from playing them for more than three hours a week. It has also enforced new anti-monopoly measures against tech companies. Along with the more recent economic downturn, this has wiped billions of dollars off the listed valuation of Tencent, although it remains China’s most valuable company by market capitalisation.

Gaming has been a massive source of profits in raising the company that position. The integration of games with its ubiquitous super app WeChat, which the vast majority of the population uses, instantly gave it access to a huge player base.

But China’s new anti-addiction measures appear to have reduced that base, at least among children. New research from Niko Partners found 77 per cent of under-18s had reduced the time they spend play each week, while the number of overall youth gamers slid from 122mn in 2020 at its peak to 82.6mn this year.

With added scrutiny of content and titles that allow players to communicate within a game, there is also a danger of hurting games’ appeal.

“It restricts the gameplay of many games through these methods,” said Ryan Li, a former game developer at Tencent. “For example, red blood cannot appear in the game, and religion cannot appear.”

With revenues from Chinese players falling, value added services, the business segment that includes gaming, made up 52 per cent of Tencent’s revenue last year, the lowest in 10 years and well below the decade high of 80 per cent in 2014.

This year, Tencent has stopped growing. The company registered its first quarter of negative growth in the three months to the end of June and said it had reduced its headcount. A management consultant advising the company, who did not wish to be named, said the consolidation of departments and cost-cutting was probably not over yet.

Delays in approvals mean the Chinese market may have moved on to new types of games, and with such uncertainties, Tencent has focused on expanding existing franchises such as Honour of Kings and League of Legends.

“Tencent’s advantage lies in its . . . existing IPs and existing approvals. It can rely on these older products to [maintain revenue] for a long time,” said Li, adding that overseas markets were the other main focus.

Tencent has increased investment in overseas gaming studios over the past two years as it chases international growth. This month, it increased its stake in French publisher Ubisoft, maker of the popular Assassin’s Creed.

With the power of its own gaming portfolio and development resources, it is unlikely that gaming will cease to be a top earner for Tencent, said Ahmad, who predicted the industry would eventually bounce back thanks to the vast numbers of Chinese gamers.

“Gaming will always be core business for the company. Even if it makes a smaller proportion of revenue, it doesn’t mean the total revenue will decrease,” he said.

For a developer such as Li, however, the joy has gone out of the business. He said he had lost his inspiration and felt his creativity had been suffocated. “The games have become more healthy, less addictive and less fun,” he said. “I feel like a machine.”

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