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The Next Disney Will Come from China and Its Name Is Tencent
Tencent is using its social networks, WeChat and QQ, and video games to build an entertainment juggernaut.
(via League of Legends)
Riot Games has been on a winning streak. Its League of Legendsis the most popular PC game in the world. The game’s professional leagues have media rights worth in the hundreds of millions. If you’re a gamer you’ve likely heard of Riot; if not, the LA-based game developer might be — as Inc. magazine called it — “the most exciting company you’ve never heard of.”
It is also central to the growth strategy of Tencent, the biggest Chinese internet company and Riot’s owner. Tencent is best known for building WeChat, the world’s second-largest social media network, with more than 700 million users. But Tencent has another, less-recognized identity, as the largest gaming company in the world.
Tencent owns not only Riot but also Supercell, the maker of wildly popular mobile phone games. By all appearances, messaging and gaming may seem like completely different enterprises, with totally distinct business models. But that’s where Tencent has uniquely excelled. The company has found a symbiotic way to monetize both, through the astonishingly lucrative sales of virtual goods such as avatars, skins, and other digital artifacts for personalizing your online presence. Characters and skins from Tencent’s video game empire can become stickers and other ephemera that get distributed throughout its massive messaging platforms.
Think of virtual goods as phase one for Tencent — an essential precursor to the company’s next metamorphosis. Now it’s using its game assets and its social network to bridge naturally into every other form of entertainment. Just as Disney used the characters from its signature films to sell merchandise, music, spin-off shows, games, and tickets to its theme parks, Tencent is using its video game assets to fuel a books, comics, music and film empire. Instead of first meeting Tencent’s money-making characters in a movie, as you would have with Disney, you might first control them in a game on your phone, or encounter them as a sticker sent by a friend.
It’s worth pausing to note how unusual it is that the world’s next Disney-like conglomerate is emerging from a company that began with text messaging. Yet the Tencent story makes plenty of sense, once you dig into the company’s past.
Tencent was founded in 1998, and the following year it released its first messaging app, QQ. In 2004, it went public and started an online gaming business focused on casual games, such as chess, which it added to QQ.com. In that time period, two of Tencent’s Chinese competitors, Shanda Interactive Entertainment and NetEase, began to profit handsomely off of free-to-play gaming. Under this model, you can play significant chunks of a game without handing over a dime, and only devotees pay to access more in-game content, such as extra levels or nice hats.
So Tencent switched from developing its own games, which was never its strength, to licensing already successful, more immersive games and using its massive scale to distribute them. In 2008, Tencent began licensing popular multiplayer games made in the US and South Korea — such as
CrossFire,
Dungeon & Fighter, and
League of Legends — to be published in China.
Having already become involved with
League of Legends, Tencent had every reason to pay attention to Riot. It first participated in the gaming company’s $8 million Series C round in 2009, before increasing its ownership stake from 22.34 percent to 92.78 percent for $231 million in 2011. In 2015, Tencent fully acquired Riot for an undisclosed amount. Through its acquisitions and its investments, Tencent had swiftly become far and away the most powerful global company with a stake in gaming.
The internet giant has continued its buying spree, the most notable acquisition being that of Supercell, a Helsinki-based mobile game studio, for
$7.8 billion last year. Supercell is the most profitable maker of phone games in the world, earning €845 million off of
€2.11 billion in revenue in 2015. Its
Clash of Clans is estimated to have been
the top grossing mobile game that year. In 2016, the App Store named its new game,
Clash Royale, the
iPhone Game of the Year.
To understand why Tencent was willing to shell out astronomical sums for these companies, you have to look at what they offered, and what it was that Tencent very much wanted: virtual goods.
Unlike the titans of California, Tencent hasn’t relied heavily on advertising to become profitable. In 2015 (the most recent available data), online advertising accounted for 17 percent of Tencent’s annual revenue, versus 89.9 percent for Google and 95 percent for Facebook.
Instead, Tencent found a lucrative path through the sale of virtual goods — a way for users to personalize their online experience. In products like QQ, that means buying a custom avatar and accessories to embellish that avatar. In games like
League of Legends, that means buying a skin to personalize the look of your favorite champion.
Virtual goods are also the primary way free-to-play games such as
League of Legends and
CrossFire (2014’s top-grossing online game, also distributed in China by Tencent) make money. This model works especially well in China, where years of rampant piracy weakened the traditional retail model, where customers buy games in a box in a store. In Tencent’s financial reports, revenue from online games and virtual goods are grouped together under “value-added services.” In 2015, this category accounted for a whopping 78 percent of the company’s $
15.8 billion in annual income.
But Tencent’s ability to identify selling opportunities around its content doesn’t end with avatars and skins. By 2011, it had developed something even more ambitious — its “pan entertainment” strategy.
The idea was for Tencent to leverage its intellectual property (IP), mainly from games, across multiple kinds of entertainment: live-action and animated films, books, music, and more. This pan entertainment strategy is now widely adopted by large Chinese gaming companies — in the US, by contrast, these outfits tend to focus solely on making games (with the exception of Blizzard Entertainment, which has dabbled in offshoots). Tencent began branching into these areas first with a comic and animation business in 2012, followed by a digital books publishing business — Tencent Literature — in 2013, and most recently Tencent Pictures in 2014.
In other words, Tencent was starting to
look a lot like Disney.
The core of Disney’s IP engine has long been theatrical films. Successful movies spawned music productions, home video, stage plays, TV series, theme parks and resorts, a wealth of merchandise, video games, and more. Disney paid $4 billion for Marvel in 2009 and $4 billion for Lucasfilm and the legendary
Star Wars franchise in 2012. We can all see the results of the successful commercial exploitation of those assets, many of which have become some of the highest grossing movies of all time, globally.
Like Disney, Tencent continues to gobble up valuable IP. The company announced
$20.8 billion of acquisitions and investments in 2016 alone, according to data compiled by Bloomberg. Tencent is just starting to test out what it can do with all this content. For example, three writer-producers of
The Simpsons and the animation house that created
Futurama created
Clash-a-Rama, a comedy series based off of Supercell characters. Meanwhile, Riot has experimented with
cinematics (short CG videos designed to develop back stories for characters in games), launched a full-fledged merchandise business, and created a board game.
These are all experiments leading in one direction: movies. Tencent is jockeying with Alibaba Pictures and Wanda Group for its share of China’s projected
$10.4 billion in box-office receipts, a movie market second only to the US’s. China seems to have an insatiable demand for film. In 2015, there were 5,660 cinemas with 28,000 screens, with 15 new screens open daily. By comparison, the US had 40,547 screens that year. Each screen serves roughly 46,000 people in China versus 8,000 here.
Wanda Group, which controls
15 percent of global box-office revenues, has focused on acquiring film studios, including some big American ones — buying Legendary Entertainment for $3.5 billion and Dick Clark Productions for $1 billion in 2016 alone. Tencent, consistent with its gaming strategy, continues to focus on acquiring IP.
Specifically, Tencent has gone after genres that are more natural fits for Chinese moviegoers than Americans: sci fi, comic book, and fantasy. Consider, for example, the film
Warcraft, which is based off a Blizzard video game and is also a Tencent investment. Last year it was the third highest-grossing movie in China, at $220.8 million, versus $47 million in the US, where it received a lukewarm reception. As Mark Ren, COO of Tencent, said in a
speech, “We can take the content of games or literature and recompose them into movies and TV series, and that helps us inject fresh blood in the movie industry.”
Tencent has identified at least 11 comics, games, and novels it wants to turn into movies in the near future. It’s also bought the rights to more than 300 Japanese anime properties. These assets could lead to the creation of a Marvel-like universe with an addictive common thread, along the lines of
Infinity Stones, which conceptually tie together Marvel’s cinematic universe.
What this all means is that Tencent has found a way to manufacture, at scale, tremendous cross-platform brand loyalty. After spending years within its social media ecosystem, users are loathe to leave. Gamers, who have devoted potentially thousands of hours to playing and thousands of dollars to looking cool while doing so, are slow to move on to other games. Using film to build out the universes that users learn to love in games, comics and books deepens fans’ loyalty even more.
In other words, Tencent has morphed from a straightforward tech company into a fully contemporary, internet-savvy entertainment juggernaut. It’s like Disney, but even smarter.
