Can Tencent rebound? Perhaps, with a little help from its friend…
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Can Tencent rebound? Perhaps, with a little help from its friend…

Chinese internet giant Tencent needs a magic pill to reverse its recent woes – and, in Fortnite, it might just have one. Up until a few months ago, Tencent was Asia’s most valuable company, and looked set to continue on what was, frankly, a trajectory of almost mythic proportions. Then, something happened that no one saw coming: inexplicably, the Chinese government decided to freeze the approval of new video games.

In no other major market do new video games need government approval – but China, which has become the biggest in the world, with around $38 billion in estimated revenue – dances to its own tune. And Tencent, the country’s premier gaming company, was hit hard by the decision.

Tencent’s share price has risen incredibly over the last five years – but the last couple of months have not been a bright spot!

graph 2808 tencent

SOURCE: Yahoo Finance

Fortnite, the creation of Tencent-backed Epic Games, could be a solution to this most unexpected (and unexplained, as the Chinese government have not bothered to explain their decision) problem. If you have a child between the ages of 6 and 26, you probably already know what Fortnite is – a “battle royale” style shoot-‘em-up game where players compete to be last man standing. In the west, it was the hit of the summer, and there’s every indication that it could go down just as well in China: 10 million people have already pre-registered to get it.

Thus far, no one is sure how Tencent will monetize Fortnite in China – but there’s no doubt that it’s possible: Tencent are experts at squeezing revenue from online games, and Chinese gamers have made a strong commitment to Fortnite before it’s even reached their shores. A more salient question is when the Communist Party will “un-freeze” games approvals – and what kind of relationship they plan to have with the fast-growing media in the future.

Greg Pilarowski, former general counsel for a Chinese games company, said: “The Party has been very, very focused on maintaining control over the internet, and all the regulations for the internet happen to catch games. Even though games are arguably not as risky or controversial from a party security perspective as, say, books, movies or news, it falls into the same exact regulatory framework.”

One thing is for sure: when the Party decides its time to thaw, Tencent’s story hasn’t changed – it has everything it needs to recapture its former trajectory except the permission.

Disclosure

Dominion holds Tencent in its Global Trends Ecommerce Fund.


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