Focus: Tencent's next level up: fewer big foreign franchise games, more in-house

NetEase

21/03/2024 05:15

By Josh Ye
       HONG KONG, March 21 (Reuters) - In a sea change at
China's Tencent  0700.HK , an easy-to-play game of cute
characters tackling obstacle courses has taken precedence over
developing a big-budget sophisticated foreign franchise for
smartphones.
    Since late last year, the world's largest video games
company has, according to sources, redeployed hundreds of people
from the team developing "Assassin's Creed Jade" for mobile - a
multi-year project with France's Ubisoft  UBIP.PA .
    They are now working on recently launched "DreamStar" -
Tencent's answer to rival NetEase's  9999.HK  hit "Eggy Party"
and the company's most high-profile attempt to date at the
so-called party game genre which offers simple gameplay,
minigames and encourages players to hang out and chat.
    As a result, "Assassin's Creed Jade" - an action-adventure
game set in ancient China that has been under development for
mobile for at least four years - will likely be released in 2025
 instead of this year, according to three sources familiar with
the matter. They were not authorised to speak to media and
declined to be identified.
    The redeployment of resources highlights the trends forcing
a strategic pivot at Tencent. Firstly, developing big-name
Western franchises for mobile phones tends to yield thin
margins.
    At the same time, rivals have had breakout hits with
ostensibly niche products that offer new takes on gaming such as
as NetEase's "Eggy Party" and miHoYo's anime-style fantasy game
"Genshin Impact". Moreover, the games were developed in-house so
their profits are all their own.
    Tencent had, for years, great success by developing for
smartphones international hits like Activision Blizzard's
shooter game "Call of Duty" and the battle royale game "PUBG" by
South Korea's Krafton  259960.KS .
    But such franchise games - called IP (intellectual property)
games - are costly to make. Royalty fees of 15% to 20% of sales
are typical, Apple's  AAPL.O  App Store takes a 30% cut while
marketing and user acquisition expenses can cost another 30% to
40%, the sources said.
    After a string of IP game setbacks, Tencent plans to be more
selective.
    "We're focusing on fewer bigger budget games. Typically,
we're seeking to make the biggest bets around games that either
iterate on a successful IP ... or games that are iterating
around proven gameplay success within a niche and taking those
to a more mass market," Tencent Chief Strategy Officer James
Mitchell told an earnings call on Wednesday.
    Tencent is now also pushing for royalty fees to fall to
under 10% of sales in some negotiations, according to one person
with direct knowledge of the matter.
    "That would have been almost unthinkable just a few years
ago. Tencent used to be far more generous," the person said.
    Tencent declined to comment on details of its strategic
shift.
        
    SETBACKS AND BAMBOO SHOOTS
    On Wednesday, Tencent reported a slight decline in
fourth-quarter gaming sales and also flagged that overall gaming
revenue this quarter would be soft compared with the same period
last year when gaming sales surged as pandemic restrictions were
lifted. 
    Pony Ma, Tencent's founder and chief executive, has been
blunt that the company's video game division - which last year
generated 180 billion yuan ($25 billion) in sales or around
30%of overall revenue - needs to do better.
    Competitors have continued to create new products, "leaving
us feeling we have achieved nothing," he told a stadium of
employees in Shenzhen at the company's annual meeting in
January, according to a separate source with direct knowledge of
the event.
    That month, Tencent also launched its "Spring Bamboo Shoots
Project", aiming to incubate in-house games with novel gameplay
and offering budgets of up to 300 million yuan ($42 million) per
game.
    While that is much less than budgets of 1 billion yuan for a
major franchise, the initiative signals Tencent is willing to
take more risks on non-conventional game design, the sources
said. 
    Some major setbacks have only increased the sense of urgency
for change.
    Last year, Electronic Arts  EA.O  discontinued "Apex Legends
Mobile", a game developed by Tencent, with executives at the
U.S. firm saying it had fallen short of expected quality.
    In December, Tencent axed development of a mobile game based
on the "Nier" franchise from Japan's Square Enix  9684.T , in
part because the Chinese firm struggled to find a compelling
monetisation model given its expensive development costs and
franchise rights, sources have said.
    "Mobile games studios have learned that IP is not the magic
bullet for user acquisition it once was," says Serkan Toto,
founder of game industry consultancy Kantan Games.
    Tencent has also seen a key in-house game bomb. "Undawn", a
zombie apocalypse shooting game that Hollywood star Will Smith
was hired to endorse, flopped spectacularly despite having a
budget of close to 1 billion yuan with more than 300 developers,
according to two of the sources.  
    Last month, one year since its launch, "Undawn" brought in
revenue of just $287,000, according to research firm Appmagic.
    Western companies have also started to shift away from
outsourcing mobile game development to Chinese companies like
Tencent. Microsoft's  MSFT.O  Activision Blizzard, for example,
has just launched "Call of Duty Warzone Mobile" which will
compete directly with Tencent's "Call of Duty Mobile".
    Adding salt to the wound, Tencent's top two games saw
revenue slide during the week-long Lunar New Year holidays in
February. "Honor of Kings" and "PUBG Mobile", which are nine and
seven years old respectively, suffered 7% and 30% drops compared
to the holiday period last year, according to one of the sources
who was briefed on the matter.
    
($1 = 7.1979 Chinese yuan)

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BREAKINGVIEWS-Tencent is running out of excuses for gaming woes 
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 (Reporting by Josh Ye; Editing by Brenda Goh and Edwina Gibbs)
 ((Josh.Ye@thomsonreuters.com;))