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Tencent gambles on mobile gaming

14 August 2013, 14:11

Beijing - Tencent Holdings is betting that one-upmanship between friends playing addictive mobile games will boost revenue from WeChat, a social messaging app used by over half of all Chinese smartphone users.

The company released an update to WeChat, or Weixin, hoping the addition of games, paid-for emoticons, or stickers, and a mobile payment system will help it cash in on a client base of more than 300 million people.

Tencent doesn't charge users to download and play WeChat's "freemium" games such as Tiantian Ai Xiaochu, which is similar to Candy Crush Saga, the world's top grossing app, according to Think Gaming.

Instead, WeChat's social networking features encourage friendly competition between players and their contacts by sharing scores. By paying for in-game upgrades - such as buying extra lives - users temporarily get one-up on their friends, and Tencent gets their money.

In looking to monetise its mobile platform, Tencent is following the likes of South Korean firm Kakao's KakaoTalk and Japan's NHN's Line. Three months after Kakao released Kakao Game last August, its monthly revenue soared nine-fold to $35.3m. Tencent has a 13.8% stake in Kakao.


To achieve similar success Tencent needs games, and is willing to pay top dollar to bring in talent, not just in China, but globally.

"We're going to buy into high-end game developers and start developing free-to-play content for developing markets," said Steve Gray, the executive in charge of game development at Tencent.

Investors in Tencent, which is more than 30% owned by South African media group Naspers, hope WeChat's hook into game players will boost revenue. The company's shares have risen around 48% so far this year, the best performer on the Hang Seng index, valuing Tencent at around $88bn.

The company on Tuesday denied a newspaper report that it plans to list WeChat as a spin-off company in Singapore.

The fastest way for Tencent to fill its game development pipeline is to buy existing developers, but that's not cheap, said Gray, noting some target firms can be priced at 50 - 60 times their annual revenue - far more than the 20 - 30 times companies typically pay for web browser game developers.

The potential profits from mobile games can make these high valuations worthwhile, but not always. "[A company can] have a breakout hit and everybody's like 'Whoah, they can do this!' Then it turns out they just got lucky," said Gray.

Other companies eager to push into the very profitable mobile arena are taking a more cautious approach.


"We're looking to buy smaller studios," said Jazy Zhang, chief financial officer at Chinese video game company Giant Interactive Group, adding the company's strategy is to start with a minority stake then scale up if the games do well.

Like Gray, Zhang expressed dismay at the high multiples being asked for mobile games developers, which she compared with Giant's single-digit multiple valuation.

Developers from overseas, meanwhile, are looking to tap China's developer talent pool and lower costs to break into the rapidly growing market.

"There's a lot of great engineering talent here," said Michael Li, general manager of Kabam, a US-based mobile games developer with rights to games for popular franchises like The Hobbit and Fast and Furious.

- Reuters


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