GUANGZHOU, China — Chinese authorities have increased their supervision of Tencent Holdings, hampereding the company’s efforts to consolidate its position as China’s leading gaming developer and allowing competitors to encroach on market share. The most recent government action occurred over the weekend, when China’s antitrust authority said that the merger of Tencent video game streaming sites Huya and DouYu will be blocked, using unusually frank language to explain the decision. According to the State Administration for Market Regulation, the planned merger would provide Tencent isolated management of upstream and downstream markets. In a research released Monday, Chinese brokerage Tianfeng Securities stated that “the model in which the industry was propelled by money will certainly confront new rules,” referring to regulators’ recent crackdown on the tech industry. Tencent made the first investment in DouYu in 2016, and Huya followed in 2018. Tencent owns around 40% and 70% of the voting rights in the two companies, respectively. Live game streaming is expected to be a significant growth area. Tencent has set up a competition for DouYu and Huya to polish their skills. Huya controls over 40% of China’s game-streaming market, while DouYu has a 30% stake, according to SAMR, raising concerns about a company with a market share of more than 70%. Tencent wanted to avoid the two emerging stars cannibalizing each other’s users while also improving the company’s efficiency. However, SAMR’s enforcement action threw those merger plans into disarray. Tencent issued a statement on Saturday stating that it will follow the ruling. The corporation does not say how it plans to deal with DouYu and Huya, but withholding money from one of the two could help resolve intragroup strife.
Tencent Games’ “Eastward Legend: the Empyrean” pavilion at a 2019 Shanghai expo:
Last year, Tencent’s gaming division brought nearly $24 billion in sales. According to Reuters
Tencent’s dominance will be weakened as a result of the rejected deal. ByteDance, the creator of TikTok, broadcasts video game livestreams on Douyin, the Chinese version of the video app. According to Reuters, ByteDance agreed to invest in Shanghai gaming company Moonton in March. Though ByteDance’s strategy differs from Tencent’s in that it focuses on upstream rather than downstream, the company’s goal to construct a vertical fiefdom in the game sector is similar. The two sides’ fierce animosity on social media will spill over into video games. Tencent’s problems aren’t confined to game streaming, as the corporation is being pursued by regulators and competitors. Tencent has a market share of more than 40% in online games, according to SAMR. This shows that the watchdog is also concerned about the company’s mainstay game creation business. Last year, Tencent’s gaming division brought in 156.1 billion yuan ($24.1 billion), accounting for almost 30% of total sales and ranking as the leading segment. The company put a lot of money into games with in-game purchases, which is a high-margin business. Tencent has just purchased shares in CMGE Technology, a company that develops a mobile game based on the “Dragon Ball” property that is only available in China. The internet behemoth also bought a stake in Zhejiang Century Huatong Group, which had bought online game creator Shengyue Network, a former Tencent competitor. During the first half of this year, Tencent invested in 46 video game targets, mostly creators, according to Chinese analytics firm IT Juzi. Tencent is on track to break its previous high of 31 deals in 2020. The gaming industry’s challenges have cast a pall over the group’s approach. All new games were halted for months in 2018 as Chinese officials examined them for any potential “bad influence” on children. During this time, Tencent’s earnings growth stalled. However, the limits had an impact on the entire industry at the time. Tencent’s and rivals’ game development was stymied. If regulatory action is concentrated on Tencent this time, ByteDance and NetEase, China’s second-largest game producer, may benefit. Tencent has been more involved in the Japanese gaming business. In 2019, it formed a partnership with Nintendo to market the Switch system in China. Tencent invested in Marvelous Entertainment, the creator of the farm role-playing game “Story of Seasons,” last year. Tencent also backed Riot Games in the United States and Supercell in Finland. Tencent’s dominant position in the Chinese market, as well as its substantial financial resources, making it an appealing partner. If Tencent’s position is weakened as a result of the regulatory battle, international gaming companies may consider other choices./n
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