Tencent isn’t just Ubisoft’s savior — it’s the world’s biggest gaming company

If you live in North America or Europe, you might think that Activision, Ubisoft or Riot Games are in the running for the title of “World’s Biggest Video Game Company.” You’d be wrong, but each of these does have a connection to the company wearing the crown.

Tencent is the world’s largest gaming company, and it owns pieces of Activision, Riot and more. Over the past seven years, the Chinese giant has been buying up bits and pieces of video game companies, expanding its influence throughout the Western world. Tencent has been in the news again lately thanks to helping Ubisoft stave off a hostile takeover by French entertainment giant Vivendi.

The deal keeps control of Ubisoft with CEO Yves Guillemot and his family, while giving the publisher an established channel for bringing its biggest games into the world’s largest gaming market. Prior to Tencent’s purchase of a 5 percent stake in Ubisoft, the duo teamed up to release the successful Might & Magic Heroes: Era of Chaos mobile game, designed for a Chinese audience.

The minority stake doesn’t give Tencent sway over the French company. “It is more like a piece of the action and a view into Ubisoft, the chance to publish Ubi’s games, and a better listening post in Western Europe,” says Niko Partners analyst Daniel Ahmad.

Ubisoft has already released a number of other titles in China, including HD entries in the Far Cry and Rainbow Six franchises as well as original and localized mobile games in the Assassin’s Creed and Rabbids series. Tencent recently polled Chinese gamers to gauge interest in a localized version of Rainbow Six Siege. Ubisoft is staying mum on its plans, though.

Ubisoft Montreal/Ubisoft

The Chinese territory represents more than a quarter of the $109 billion global video game market, but it isn’t easy to access. “Western developers need a Chinese partner to publish their games in China,” Ahmad says. “Each game is approved individually before going on sale in the country. Tencent is a strong partner due to its experience in video game development and publishing, a long history of working with partners, experience from overseas companies via investments, and thanks to its huge social network presence via WeChat and QQ.”

WeChat boasts more than 1 billion monthly active users as of February 2018. That’s about half as much traffic as Facebook, the market leader, and three times the traffic of Twitter.

Tencent’s social media platform has delivered the company a captive audience for a variety of other services, including a payment gateway called TenPay. As of December 2016, TenPay’s 600 million monthly active users generated 600 million transactions each day. According to a JPMorgan estimate, Tencent’s cut from all that money changing hands is $1.3 billion each year.

That same massive WeChat user base is ripe for conversion to other products, including games. Tencent’s online gaming operations are experiencing rapid growth, and in 2017, they were responsible for more than 41 percent of the company’s total revenue of $36.39 billion.

Tencent owns the social media network used to promote its games, as well as a massive payment platform to monetize free-to-play titles. The company also partners with — or has a stake in — many developers that publish in China. Tencent has its hands on every link in the chain. It’s a fluid, cash-generating ecosystem.

Ubisoft Shanghai/Ubisoft

Ubisoft and Tencent seem to have been on a path toward partnership for the past 20 years. The French publisher established itself in China in 1996 with the founding of its Shanghai studio, which made 2004’s Splinter Cell: Pandora Tomorrow. In order to understand recent developments between the two companies, though, we need to go back to the beginning.

Founded in 1998, Tencent grew rapidly in China but was relatively unknown in the West until 2011. Back then, MOBAs were hitting their stride. Riot Games already had plans to launch League of Legends in China thanks to a partnership it had struck with Tencent in 2009, while the game was still in its pre-alpha phase.

Tencent upped its involvement in 2011, buying a 70 percent share of Riot with a $400 million investment. Just a few months after the deal was signed, Riot announced that League of Legends had an audience of 15 million active players, with 1.4 million daily active users. The game hadn’t yet launched in China. Once it did, those numbers more than doubled to 32 million active users, with 3 million playing each day. Tencent sealed its ownership in 2015, buying up the rest of Riot for an undisclosed amount.

Tencent has a history of prescient investment, coming onto the scene as companies are entering periods of significant change. In 2012, the company bought a 48.4 percent stake of Unreal Engine developer Epic Games, currently riding high on a tidal wave of Fortnite popularity. Epic announced that just months after Tencent invested. Six years later, the bet is paying off thanks to the popularity of battle royale games.

As far as Tencent is concerned, it really doesn’t matter if Chinese gamers are playing Fortnite or PUBG — Tencent handles publishing duties for PUBG in China.

Activision also benefited from Tencent’s appetite for Western acquisitions. In 2013, the Call of Duty publisher had its own problems with Vivendi, which was Activision Blizzard’s parent at the time. The French entertainment company saw the mega-publisher as the answer to its dire financial problems.

Threatened with a special dividend that would have bled its cash reserves, Activision pulled together $8.17 billion to buy its freedom. Tencent invested heavily in the investment group that now owns nearly 25 percent of the company, which publishes games like Call of Duty, Overwatch and Destiny.

Activision Shanghai, Raven Software/Tencent Games

Again, the investment followed a successful partnership. In 2013, Tencent and Activision announced plans to release a Call of Duty game in the Chinese market. The closest competition at the time was Korean developer Smilegate’s CrossFire. Tencent, which publishes CrossFire in China, was hedging its bet — just like it has with Fortnite and PUBG.

Tencent hasn’t ignored Western mobile development. Clash of Clans, which has been imitated and iterated upon by developers large and small, rocketed Finnish developer Supercell to a $5.2 billion valuation in 2015. A year later, Tencent offered $8.6 billion for an 84 percent share of the company, boosting Supercell’s valuation to $10.2 billion. Clash of Clans was already 4 years old when Tencent made its move, and its two immediate follow-ups (Boom Beach and Hay Day) didn’t yield the same success. The Chinese giant wasn’t late to the party, though. Just a few months prior, Supercell had released Clash Royale. It raked in $1 billion in its first year.

Tencent has pursued nearly ubiquitous investment, expanding its reach through partnership and ownership in a large number of companies. Unlike many conglomerates, though, Tencent tends to let companies in which it has a significant financial interest continue on their own paths, even if it seeks representation on the board of directors.

“Riot has remained Riot, Supercell has remained Supercell,” Ahmad says. “[Tencent takes] care of their ‘family,’ but from a distance it appears that they allow the acquired or invested companies to remain autonomous for the most part.“

In the case of Ubisoft, the deal was negotiated to ensure that Tencent wouldn’t increase its investment or sell off its shares. This isn’t terribly common, but given Ubisoft’s worries about Vivendi and its hostile takeover, including those provisions is a security blanket the French publisher clearly wanted.

Riot Games

Tencent is a goliath, but it isn’t invulnerable. In the week following the investment in Ubisoft, Tencent’s largest shareholder sold 2 percent of its 33.2 percent stake in the company. The move cost Tencent $51 billion in valuation as the markets reacted.

The shareholder, newspaper publisher-turned-tech investor Naspers, simply needed the cash. “It is not driven by any view on Tencent and the opportunities we see going forward,” Naspers group chief financial officer Basil Sgourdos told Reuters. “It’s really driven by increased confidence in our e-commerce segment and the returns it is delivering, so we need capital to grow that business.”

Naspers doesn’t have any reason to feel poorly about its financial relationship with Tencent. It bought its $167 billion interest in 2001 for $32 million. The morsel it sold off this week was worth $10 billion.

Tencent has made Naspers a global powerhouse. Few companies can boast that kind of coattail effect. And despite the hit to its valuation, Tencent is still the fifth-largest company in the world, with only Apple, Alphabet, Amazon and Microsoft ahead.

Recently, Tencent has taken steps to secure its gaming foothold in China with a Windows 10-powered console called the TGP Box. It’s also started looking outside its home territory, sharing plans to export services and experiences to the rest of the world. In May 2017, the company announced a rebrand for its game distribution service. The WeGame platform (formerly Tencent Games Platform) dumped its web and mobile offerings in favor of catering to core PC players. Additionally, the company revealed that it planned to take on Valve’s Steam platform outside of China.

Tencent has also exported its first game to the West, targeting iOS and Android users. Arena of Valor is a localized version of the MOBA Honor of Kings. Tencent isn’t simply bringing the game over wholesale; it has worked to tweak Arena of Valor for each territory in which it’ll be releasing it. Notably, Tencent has teamed up with Nintendo for a Switch version of the game. With Western icons like Batman and Wonder Woman already peppered into the lineup, it wouldn’t be absurd to see Nintendo’s stable of heroes and villains included.

Tencent has nearly clinched dominance on its home field. Now, it’s turning its attention to the rest of the world. Ubisoft is simply the latest seed it has planted.

Even with acquisitions like Riot and Supercell and massive investments like Epic and Activision, Tencent isn’t a household name — and it might never be in the West. Tencent has shown no appetite for glory. To do so might breed fear of an aggressive takeover and sweeping changes in organizational culture.

Ubisoft saw Tencent as a company that would enter quietly and allow existing leadership to continue its trajectory of success. Vivendi was threatening Ubisoft’s managerial and operational culture, while Tencent’s history of hands-off investment gave Ubisoft confidence and security.

Tencent seems unstoppable. Pundits joke that if the company doesn’t already have a piece of an another publisher’s action, it will soon. The Chinese giant has used the restrictive nature of its home market to become an intimidating force. Unlike with Vivendi, though, Tencent partnership and investment has, so far, brought opportunity and prosperity.