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Tencent's next step up: less large foreign franchise titles, more in-house

"DreamStar", a mobile game from Tencent, is displayed on a mobile phone next to a logo of Tencent Games, in this illustration photo taken March 19, 2024

HONG KONG, March 21 (mod1s) - In a major shift at China's Tencent (0700.HK), opens new tab, an easy-to-play game with charming characters overcoming obstacle courses has taken preference over building a big-budget complex international property for smartphones. 

Since late last year, the world's biggest video games firm has, according to sources, redeployed hundreds of staff from the team producing "Assassin's Creed Jade" for mobile - a multi-year project with France's Ubisoft (UBIP.PA), opens new tab.

They are now working on recently launched "DreamStar" - Tencent's answer to rival NetEase's (9999.HK), opens new tab hit "Eggy Party" and the company's most high-profile attempt to date at the so-called party game genre which offers simple gameplay, minigames and encourages players to hang out and chat. 

As a consequence, "Assassin's Creed Jade" - an action-adventure game set in ancient China that has been in development for mobile for at least four years - will likely be launched in 2025 instead of this year, according to three persons familiar with the subject. They were not permitted to talk to media and refused to be named.

The realignment of resources underlines the tendencies pushing a strategic turnaround at Tencent. Firstly, building big-name Western brands for mobile phones tends to offer low margins. 

At the same time, competitors have had breakthrough successes with seemingly niche goods that provide novel ideas on gaming such as as NetEase's "Eggy Party" and miHoYo's anime-style fantasy game "Genshin Impact". Moreover, the games were created in-house thus their revenues are entirely their own.

Tencent has, for years, remarkable success by producing for smartphones worldwide successes like Activision Blizzard's shooting game "Call of Duty" and the battle royale game "PUBG" by South Korea's Krafton (259960.KS), opens new tab. 

But such franchise games - dubbed IP (intellectual property) games - are pricey to develop. Royalty payments of 15% to 20% of sales are standard, Apple's (AAPL.O), opens new tab App Store gets a 30% share while marketing and user acquisition efforts might cost another 30% to 40%, the sources added.
After a run of IP gaming disappointments, Tencent aims to be more choosy. 

"We're focused on fewer larger budget games. Typically, we're seeking to make the biggest bets around games that either iterate on a successful IP ... or games that are iterating around proven gameplay success within a niche and taking those to a more mass market," Tencent Chief Strategy Officer James Mitchell told an earnings call on Wednesday. 

Tencent is now also pressing for royalty rates to fall to under 10% of sales in certain agreements, according to one source with firsthand knowledge of the situation. 

"That would have been practically inconceivable only a few years ago. Tencent used to be lot more charitable," the insider stated. 

Tencent refused to comment on specifics of its strategy move. 


On Wednesday, Tencent revealed a modest dip in fourth-quarter gaming sales and also indicated that total gaming revenue this quarter will be weaker compared with the same time last year when gaming sales skyrocketed as epidemic restrictions were relaxed. 

Pony Ma, Tencent's founder and chief executive, has been forthright that the company's video game segment - which last year produced 180 billion yuan ($25 billion) in sales or approximately 30%of total income - has to perform better. 

Competitors have continued to manufacture new items, "leaving us feeling we have achieved nothing," he told a stadium of workers in Shenzhen at the company's annual meeting in January, according to a different source with firsthand knowledge of the event. 

That month, Tencent also announced its "Spring Bamboo Shoots Project", intending to develop in-house games with new gameplay and giving budgets of up to 300 million yuan ($42 million) each game. 

While it is significantly smaller than budgets of 1 billion yuan for a big franchise, the project suggests Tencent is prepared to take greater chances on non-conventional game creation, the sources added.
Some important defeats have only enhanced the feeling of urgency for change. 

Last year, Electronic Arts (EA.O), opens new tab terminated "Apex Legends Mobile", a game produced by Tencent, with officials at the U.S. business stating it had fallen short of desired quality. 

In December, Tencent stopped production of a mobile game based on the "Nier" series from Japan's Square Enix (9684.T), opens new tab, in part because the Chinese business failed to establish a viable monetisation strategy given its hefty development expenses and intellectual rights, insiders have said.
"Mobile games studios have learned that IP is not the magic bullet for user acquisition it once was," says Serkan Toto, founder of game industry consultant Kantan Games. 

Tencent has also seen a significant in-house game explode. "Undawn", a zombie apocalypse shooting game that Hollywood celebrity Will Smith was recruited to promote, crashed horribly despite having a budget of close to 1 billion yuan with more than 300 creators, according to two of the sources. 

Last month, one year following its introduction, "Undawn" raked in income of only $287,000, according to research company Appmagic. 

Western corporations have also begun to migrate away from outsourcing mobile game development to Chinese giants like Tencent. Microsoft's (MSFT.O), opens new tab Activision Blizzard, for example, has recently announced "Call of Duty Warzone Mobile" which will compete directly with Tencent's "Call of Duty Mobile". 

Adding salt to the wound, Tencent's top two games saw revenue dip over the week-long Lunar New Year vacations in February. "Honor of Kings" and "PUBG Mobile", which are nine and seven years old respectively, experienced 7% and 30% decreases compared to the holiday season last year, according to one of the people who was informed on the topic. 

($1 = 7.1979 Chinese yuan)


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