Chinese internet company Tencent Holdings Ltd. needs to find alternative sources of revenue growth following the ban of its leading mobile games in India, experts told S&P Global Market Intelligence.
After banning 59 Chinese apps in June, India on Sept. 2 banned a further 118 apps that were either based in or linked to China, including Tencent's popular online multiplayer games "PlayerUnknown's Battlegrounds Mobile," or PUBG Mobile, and "Arena of Valor." Tencent said it would engage with authorities in India to "ensure the continued availability of its apps in India."
"We do not expect a significant material impact on [Tencent] revenue as India only accounted for 3% of the PUBG Mobile's [overseas] revenue in the past year," Lisa Hanson, president of market research firm Niko Partners said in an email to S&P Global Market Intelligence.
PUBG Mobile was the world's most lucrative gaming app as of July 2, with sales of more than US$3 billion globally. China contributed 52% of total revenues with local iteration "Game for Peace," according to data from Sensor Tower. The U.S. ranked second with 14% of the revenue, and Japan was the third with a 5.6% share.
"However, the lost potential from further growth and esports tournaments is immeasurable," Hanson said of the app ban in India.
India topped all-time downloads of PUBG Mobile globally (excluding China), accounting for 40% of total installs, according to Niko Partners. Meanwhile, about 40% of Indian esports prize money came from PUBG Mobile tournaments.
Tencent Game needs its markets outside of China to drive growth as domestic growth has slowed, the experts said. China had about 529 million mobile game players as of March 31, compared to 468 million players as of June 30, 2019, and 459 million as of Dec. 31, 2018, according to China-based market research company Qianzhan.
The internet company previously said it aims to derive half of its online gaming revenues from overseas markets. Between April and June about 23% of its online gaming revenues came from outside of China.
President Donald Trump signed an executive order Aug. 6 to prohibit U.S. companies from doing transactions with Tencent's WeChat. "We do not expect any of Tencent's existing investment in U.S. companies to be impacted," Hanson said. "We do note there is some risk for Chinese game developers operating games in the country."
Tencent's partnerships with local game studios could help the company stem potential losses from country bans, according to an August research note by Chelsey Tam, a senior equity analyst at Morningstar.
Examples of these partnerships include Tencent's co-development of "Call of Duty Mobile" with Activision Blizzard Inc. and a split of distribution rights between the two companies in different regions.
"This would create more considerations of local business interests and reduce the probability for foreign governments to take action against Tencent in our view," she wrote in the note. India did not include "Call of Duty Mobile" in its lists of banned apps, or Supercell Oy's "Brawl Stars," which is also 100% owned by Tencent.
To continue to expand, Tencent needs to rethink its global strategy, the experts said.
Tencent is expected to reduce its global game distribution and operation activities and let overseas investors to do the work instead, Niko Partners senior analyst Zeng Xiaofeng said.
Meanwhile, "Tencent will be more careful when it comes to expanding in the U.S.' gaming sector, especially in terms of purchasing U.S. game-related companies," Tam said.
Pursuing alternative markets is also an option for Tencent, the experts said.
Chinese internet companies like Tencent could expand into the Middle East. That is a region where several markets are characterized by high demand for online entertainment, high power consumption per capita and solid mobile network coverage, Shawn Yang, deputy head of research at Blue Lotus, a China-based investment bank, said.
Southeast Asia, South Korea and Japan are also good targets due to the existing mobile game penetration and cultural similarities, Yang said.
"We should not panic about the regulatory activities in India and the U.S.," he said. "In the short term, [Tencent] definitely needs to slow down. But in the long term, it still has a chance to go overseas and grow in multiple markets," he added.
