By Juro Osawa
HONG KONG--The global videogame industry's biggest player is one whose rapid expansion has gone largely under the radar--even for the most dedicated gamers.
Tencent Holdings Ltd.-- one of Asia's most valuable technology firms, with a market capitalization of roughly $240 billion--has become the world's largest game publisher by revenue, surpassing better-known U.S. names such as Electronic Arts Inc. and Activision Blizzard Inc. by dominating China's videogames market and forging strategic alliances with foreign players.
In its overseas expansion, the Shenzhen-based company has tried unsuccessfully to export its own videogames. Instead, Tencent's global success has come mostly from its acquisitions and alliances in which it gives its foreign partners autonomy. That strategy is helping the Chinese internet titan win more videogame enthusiasts like Hunter Kurpier.
When Mr. Kurpier, 19 years old, isn't rampaging through medieval villages in "Clash of Clans" on his smartphone, he is fighting his way across battlefields in the "League of Legends" personal-computer game in his dorm room. The college student in Lynchburg, Va., traveled to New York last month to join thousands of people who watched professional gamers play live at the League of Legends World Championship at Madison Square Garden.
But he didn't know that two of his favorite games are part of Tencent's push to expand its global dominance.
Last month, Tencent made its latest foray into the global market by completing with a group of Chinese investors an $8.6 billion deal to buy Finland's Supercell Oy, which makes some of the world's most popular mobile games, such as "Clash of Clans." Tencent also owns Riot Games Inc., the Los Angeles-based maker of "League of Legends," the world's top-grossing PC game.
"Smart of them," Mr. Kurpier said. "As long as they keep the games going in the right direction, I don't care who owns them."
While expanding through acquisitions, Tencent also has tried to take its own games from China to overseas markets.
A Tencent manager in the company's gaming division said he traveled to Brazil several years ago as part of a project to export the Chinese company's PC games. His team studied the Brazilian culture and lifestyle--from common traits among popular television stars to how much a hamburger cost--to determine how to tweak the design, structure and pricing of Tencent's games for local users.
"Itwas very difficult," the manager recalled.
Chinese companies' lack of expertise in overseas marketing makes it hard for them to export their own brand and games, while cultural differences also play a part, industry executives say.
In July, Tencent brought "WeFire," its Chinese mobile-shooting game, to the U.S. in collaboration with San Francisco-based Glu Mobile Inc. Tencent, which owns a minority stake in Glu, is its biggest shareholder. But the game, released in the U.S. under the name "Rival Fire," flopped, in part because Western gamers tend to play shooting games on PCs or consoles rather than smartphones, according to analysts. "Rival Fire" is ranked below the top 500 action games on iPhones and iPads in the U.S., according to data provider App Annie. Glu declined to comment.
Games are the top source of Tencent's revenue. The company distributes games through its popular social networks such as the WeChat messaging application, which has 846 million active users, mostly in China. Its revenue from games rose 27% to 18.17 billion yuan ($2.64 billion) in the third quarter, accounting for nearly half of its overall revenue of 40.39 billion yuan.
International expansion is crucial for Tencent, said Peter Warman, chief executive of videogame market research firm Newzoo BV. "Tencent has such a large share of the Chinese market. To sustain its healthy growth rate, it has to gain market share abroad."
Despite its dominance in China, Tencent faces challenges in overseas markets where its chat apps aren't popular and users download games from Apple Inc. and Alphabet Inc. app stores. To overcome such hurdles, the company has chosen to expand through alliances.
Apart from Riot Games and Supercell, Tencent has invested in a number of other foreign videogame companies, including Activision Blizzard, Cary, N.C.-based Epic Games Inc., San Francisco-based Pocket Gems Inc., Japan's Aiming Inc. and South Korea's CJ Games Corp.
At Pocket Gems, some employees were initially worried about possible changes when Tencent bought roughly 20% of the company last year, according to a former employee. But to their relief, the Chinese giant took a hands-off approach, he said. A Pocket Gems spokeswoman declined to comment.
Epic Games Chief Executive Tim Sweeney said Tencent participates in his company"s board as a minority investor, but the Chinese company doesn't exert control. Activision Blizzard declined to comment.
When Tencent announced in June that it had agreed to buy Supercell, President Martin Lau promised to give the new partner "all the independence it wants." The deal is structured in a way that Supercell isn't consolidated in Tencent's earnings, and the Finnish firm's founders retain control over important strategic decisions.
Tencent and Supercell are exchanging knowledge abouthow to get more people to spend money on games, Mr. Lau said during a conference call with analysts this past week.
Sarah E. Needleman in New York contributed to this article.
Write to Juro Osawa at email@example.com
(END) Dow Jones Newswires
November 20, 2016 05:30 ET (10:30 GMT)
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