Beijing slams the door to Tencent’s video game empire

GUANGZHOU – Tencent Holdings is under further scrutiny by Chinese authorities, hampering the company’s efforts to solidify its position as China’s top game developer and giving rivals an opening to encroach on market share.

The latest state action came this weekend when the Chinese antitrust watchdog said it would block the merger of video game streaming sites Tencent Huya and DouYu, using unusually blunt language to explain the reasoning. behind this decision.

The planned merger would grant Tencent isolated management of upstream and downstream markets, the State Administration for Market Regulation said on Saturday.

Chinese brokerage firm Tianfeng Securities noted regulators’ recent crackdown on the tech industry in a report on Monday, stating that “the model in which the industry was driven by capital is likely to face new standards.”

Tencent initially invested in DouYu in 2016, followed by Huya in 2018. In terms of voting rights, Tencent controls around 40% and 70% respectively in the two companies.

Live game streaming is expected to be a major growth area. Tencent had let DouYu and Huya compete to perfect their services.

Huya controls more than 40% of the Chinese video game streaming market while DouYu’s share exceeds 30%, SAMR noted, signaling concerns with an entity believed to hold a share greater than 70%.

Tencent has sought to prevent the two rising stars from cannibalizing users and improving the group’s operational efficiency. But SAMR’s coercive action turned these merger plans upside down.

Tencent responded on Saturday with a statement saying it would respect the decision. The company has not disclosed how it would handle DouYu and Huya, but withdrawing funding from one of the two is an option to resolve intra-group friction.

The rejected merger gives rivals a chance to break through Tencent’s stronghold. ByteDance, the developer of TikTok, hosts live video game broadcasts on the Chinese version of the video app, Douyin, among other platforms. In March, ByteDance agreed to invest in Shanghai game studio Moonton, Reuters reported.

Although ByteDance’s approach stretches more downstream to upstream, the company’s quest to establish a vertical stronghold in the gaming industry resembles Tencent’s strategy. The intense rivalry between the two sides in the social media sphere will extend to video games.

With Tencent being stalked by regulators and competitors, concerns about the company aren’t limited to game streaming. SAMR noted on Saturday that Tencent’s market share in online games exceeded 40%. This suggests that the watchdog is paying attention to the core game development segment of the company as well.

Tencent’s gaming business generated 156.1 billion yuan ($ 24.1 billion) in revenue last year, accounting for over 30% of overall sales and ranking as the leading segment. The company has invested heavily in securities capable of in-game purchases, a high-margin business.

In recent months, Tencent bought shares in CMGE Technology, a company that offers a China-exclusive mobile game based on the “Dragon Ball” franchise. The Internet powerhouse also acquired a stake in the Zhejiang Century Huatong group, which itself bought online game developer Shengyue Network, a former rival of Tencent.

Tencent invested in 46 targets within the video game industry, mostly developers, during the first half of this year, Chinese analytics firm IT Juzi said. The number exceeds 31 transactions for all of 2020, setting Tencent at a record pace.

Headwinds against the gaming industry cast a shadow over the group’s strategy. In 2018, the release of all new games was stalled for months as Chinese authorities screened titles for any potential “bad influence” on minors. Tencent’s profit growth slowed during this period.

But at the time, the restrictions affected the industry as a whole. Development of the game was halted at Tencent and its rivals.

If regulatory actions focus on Tencent this time around, the crackdown could benefit ByteDance and NetEase, China’s second-largest game developer.

Tencent has moved closer to the gaming industry in Japan. In 2019, it partnered with Nintendo to sell the Japanese company’s Switch console in China. Last year, Tencent funded Marvelous Entertainment, the developer of the “Story of Seasons” farm role-playing series.

Riot Games in the United States and Supercell in Finland also received support from Tencent.

Tencent’s leadership position in the Chinese market, as well as its deep pockets, make the company an attractive partner. If Tencent’s position is compromised during the standoff with regulators, international game companies may begin to consider other options.