Tencent’s reach is unmatched in the gaming market

In the new film Independence Day: Resurgence, a couple makes a video call to one another. When they hang up, the program they’re using tells them “Thank you for using QQ.”

That’s Tencent, the company that acquired 84 percent of Clash of Clans developer Supercell, which is now the biggest gaming company in the world.

QQ is the Chinese megaconglomerate’s chat and content portal, and I chuckled when I saw the company in one of the summer’s biggest blockbusters. Tencent is already everywhere in gaming, so why shouldn’t I see them in every facet of entertainment? Tencent is inescapable, and now that it’s getting Supercell, it is expanding its reach even further.

The Finnish developer has a handful of apps on iOS and Android that are worth nearly $1 billion per year each in revenues. These games also attract hundreds of millions of monthly active players. Both of these facts were likely key in convincing Tencent to purchase Japanese tech company Softbank’s majority stake in Supercell. When the acquisition completes in August, it gives Tencent control over 13 percent of the $99.6 billion gaming industry and should give a boost to its revenues, which were already $4.7 billion last quarter.

This is the climax of a trend I’ve talked about with Tencent since 2013. At that time, the company already owned a huge portion of Riot and Epic Games, but then it also went in with Activision chief executive Bobby Kotick to purchase the Call of Duty publisher away from French media company Vivendi. At the end of that deal, Tencent acquired a 12 percent stake in Activision. While that was only a minor footnote in the story of Activision’s breakup with Vivendi, it was a clear indication that Tencent was establishing itself as one of the biggest game companies in the world.

Now, that process is complete.

A Chinese giant

Today, Tencent dwarfs all of its competitors, and it is unquestionably a global mobile-gaming powerhouse — where, before Supercell, you’d have to talk about its domestic operations first.

“Until now, Tencent’s mobile operations have largely been limited to China, but this week’s $8.6 billion acquisition of Softbank’s majority stake in Supercell is about to change that,” SuperData Research chief executive officer and analyst Joost van Dreunen said. “Supercell’s titles consistently dominate mobile revenue rankings: Clash Royale and Clash of Clans earned a combined $193 million the past month, ranking second and third respectively.”

And unlike Tencent’s current roster of mobile games, most of that money comes from outside China. The Clash series, along with Boom Beach and Hay Day, are popular around the world on smartphones and tablets. Tencent, however, has focused primarily on its home country for mobile.

Through its QQ apps, it distributes games to a massive audience on Android. Google left China in 2011, and that means the Play store is not available on almost any handsets. Instead, Android users — which make up the bulk of the smart device owners — use dozens of distribution channels from all kinds of different companies. Tencent, however, runs the biggest of these portals directly through its QQ platform. And considering that mobile gaming in China is worth $5.5 billion, or one-sixth of the global market, that has made Tencent a behemoth.

“Online gaming continues to account for more than 55 percent of Tencent’s overall revenues and in 2015 the company generated more than $8.7 billion from games software, of which $3.2 billion was from mobile games,” analyst Daniel ZhugeEX  wrote in a blog post. “Tencent has also grown its games division by leveraging its internet services such as WeChat, which has nearly 800 million monthly active users.”

By acquiring Supercell, Tencent is making a major bet on the future of China. The fractured app-store market in that country has made it stupendously difficult for foreign games to succeed. But Tencent can now take Supercell’s polished apps and bring them into the world’s largest mobile-gaming market. With analysts at Chinese-market research firm Niko Partners predicting that gaming on iOS and Android could grow to $11.1 billion annually by 2019 in that region, Tencent stands to earn a huge return on its investment simply by exposing games like Clash Royale to its player base.

A worldwide giant

Tencent plus Supercell isn’t just about capitalizing on China. Gaming is global, and the company is growing far beyond its home country now.

“While Tencent already has international clout through its majority stake in League of Legends publisher Riot, the company is positioning itself as the dominant publisher in the [$36.8 billion] mobile market,” said van Dreunen. “The purchase is in line with Tencent’s strategy to have controlling stakes in top game companies like Epic and Riot.”

This also comes at a time when, globally speaking, mobile gaming is starting to reach a point of saturation. What was once a fast-growing, dynamic market is now a mature business. It doesn’t make a lot of sense to launch a new mobile gaming strategy to access other regions when you can just purchase one that is already up and running.

“[This is] comparable to the King acquisition by Activision Blizzard,” said van Dreunen. “Digitization triggered the evolution of the games industry into a worldwide market governed by titans. The repeated success of Supercell [in that market] makes it a perfect asset in the Tencent empire.”

Clash of Clans and now Clash Royale have huge followings in important markets like the United States, Canada, Australia, and — while it still exists — the United Kingdom. It is also popular in a number of Asian countries. Tencent will not get direct access to these players, potentially feeding them into some of its other games. But Tencent can also use Supercell to serve up content to its audiences in other markets.

“Tencent has a world-class core gaming IP with League of Legends, thanks to Riot Games, as well as a strong position in the Korean game market through a partnership with CJ Games which complements Supercell well,” App Annie vice president of marketing and communications Fabien Nicolas said.

Finally, all of this means that Tencent’s market exposure and earning potential is enormous and no longer so reliant on China. In 2015, it made around $1.3 billion from outside of China. That number could jump significantly.

“This deal is a way for Tencent to indirectly expand its presence in the West where it’s traditionally struggled with its own internal IP,” said ZhugeEX. “With Riot Games and Supercell, Tencent now own one of the biggest PC gaming companies in the West and one of the biggest mobile gaming companies in the West. Revenues generated in the West could triple as soon as this year for Tencent.”

And when that happens, we may find that — like Liam Hemsworth in Independence Day: Resurgence — Tencent is an escapable part of our lives.