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June 2015 | Vol. XIV - No. 6
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Tencent follows Sun Tzu and his Art of War is their bible


There are two retailers that clearly dominate the video game space – Tencent and GameStop. One is skyrocketing and the other stagnating. One has all its business online, the other virtually all in own brick-and-mortar stores. One is virtually all in Asia, the other totally in the U.S. and Europe.

Both differences work for Tencent. Online video game sales are growing like gangbusters all around the world and Tencent is top dog in this space whereas Gamestop is still virtually totally invested in the declining brick-and-mortar universe. Also, China is the fastest growing video game market in the world whereas the U.S. and Europe, Gamestop’s strength, are much slower in comparison.

However, Tencent is not only the world’s largest video game retailer – the company is also the world’s largest game publisher:


However, Tencent is fully aware that there is one chink in its armour – its total dependence on the Chinese market. Yes, the company has a relatively small percentage of its video game sales outside the mainland – mainly in South East Asia and India – but clearly not enough to represent a credible diversification avenue. That is why the company decided to broaden its reach into North America and Europe.

Tencent started to implement this strategy in 2011 and has made a number of acquisitions since then, four of them this year alone.

The first was the acquisition of Riot Games on 3/28/2011, a company located in Los Angeles, CA. Riot is known for League of Legends, the World’s most popular PC game played by 67 million European and North American gamers every month. Tencent first licensed the game for release in China and then subsequently bought 92.8% of the company.

The second acquisition took place two years later, on 5/11/2013,  when Tencent bought not quite 50% of Epic Games located in Cary, NC. Epic Games was [and is] famous for two games – one is Gears of War which was sold to Microsoft in 2014; the other Unreal Engine, a suite of game development tools used by game developers mainly in Europe and the United States and which powers big games  from companies like Sony (HellBlade), Bandai Namco (Tekken 7) and Deep Silver (Dead Island 2).

A few months later, on 7/26/2013, Tencent acquired 12% of Activision, the world’s largest video game publisher. As a consequence, Tencent has the exclusive license to operate Call of Duty Online in mainland China. The public, open beta for the PC game became live this Spring exclusively in China and specifically for Chinese gamers.

On 2/18/2015, Tencent acquired a majority stake in Miniclip, a Swiss-based mobile and online publisher.  Miniclip  has an audience in 195 countries and six continents with 70 million active users per month.  It has published 45 mobile games, including Soccer Stars and Rail Rush.

A minority stake was bought on 2/27/2015 in Robot Entertainment, based in Plano, TX.  Robot is known for three games – Orcs Must Die first released on 10/5/2011, Hero Academy released on 1/11/2012, and Echo Prime released on 1/28/2014.

On 4/29/15 Tencent purchased a 14.6% stake in Glu Mobile, the San Francisco game developer best known for the hit app Kim Kardashian, Hollywood. The company went public on December 20, 2006, and its 2014 Annual Report showed revenues of $223 million [up from $105 million in 2013] and a net profit after taxes of $8 million [up from a $20 million loss in 2013]. Glu Mobile is currently developing a new mobile game with singer Katy Perry and plans to launch it late 2015 on Apple and Android devices. Sales this year are projected to reach $280 million.

Finally, on 5/13/2015, the company bought 20% of Pocket Games Inc., Rockaway, NY. Its first game, IdolHands, was released for the digital download market on 2/18/2015, and is expected to go mobile this Summer.

While it is clear that Tencent is going somewhere with all its acquisitions, the endpoint is so far very elusive. Here they are, with a whole bunch of relatively small companies – if you exclude Activision where they have a minority share and where they have pledged a hands-off posture – all of which appear to be doing very well but there appears to be no overall strategy which exploits obvious potential synergies. Unlike their main market, China, where QQ is the vehicle for all its games, there appears nothing of the sort on the horizon, either in North America or in Europe.

To get a sense of what Tencent’s overall strategy for North America and Europe might be, I talked to some of my Chinese contacts, owners of factories who produce on a third-party basis for leading video game companies. Their response was that the answer was to be found in the nature of Tencent’s owner, Mr. Ma Huateng, also known as Pony Ma.

Mr. Pony Ma is a keen student of Sun Tzu’s writings and apparently runs his empire very much on the basis of Sun Tzu’s precepts. Sun Tzu was a Chinese military general, strategist, and philosopher who lived in China in the fifth century B.C. and who is best known for his treatise "The Art of War".
 
 For instance, in keeping with Sun Tzu’s instruction "Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt" Pony Ma does not believe in always letting the right hand know what the left hand is doing.  To give an example of this – in 2010 he created two teams of engineers: one in Shenzhen  and a second in Guangzhou, with the brief of developing new products.  Unbeknownst to them, both were given the same instructions and pitted against each other. After two months,  the Guangzhou team emerged with an app for text messaging and group chat. Pony Ma liked it and they had thus won the contest. The app in question got the name of Weixin [meaning "small message"], now better known as WeChat. It was released in January 2011 as a mobile text and voice messaging communication service and now, at the end of March this year, had 549 million monthly active users.

My Chinese contacts believe that Mr. Ma is pursuing a dual strategy as far as his North American and European investments are concerned. On one hand, there is Activision which for Mr. Ma would be the perfect provider of console games for China now that the Authorities have lifted their long time ban on video game consoles, allowing them to be manufactured in the Shanghai Free Trade Zone for sale on the mainland. On the other hand, there are the remaining six acquisitions and it is probable that they will over time be integrated into a coherent whole, possibly in collaboration with Activsion, in order to challenge Electronic Arts and Ubisoft in the U.S. and European online video game markets. At the same time, this new entity would probably be instrumental in stopping Gamestop’s current hesitant progress towards a viable online business. The time table for this is obviously unknown but it is probable that leadership for this new entity will be handed to the management team that has proven itself, to Mr. Ma’s satisfaction, as being the most creative and innovative of the six.

Or, as Sun Tzu said: "He who is prudent and lies in wait for an enemy who is not, will be victorious".



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Lutz MullerWriter's Bio: Lutz Muller is a Swiss who has lived on five continents. In  the United States, he was the CEO for four manufacturing companies, including two in the toy industry. Since 2002, he has provided competitive intelligence on the toy and video game market to manufacturers and financial institutions coast-to-coast. He gets his information from his retailer panel, from big-box buyers and his many friends in the industry. If anything happens, he is usually the first to know. Read more on his website at www.klosterstrading.com. Read more articles by this author

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