Tencent’s gameplay in a sea of troubles

For Chinese tech giant Tencent, what seemed to be a trickle of troubles in 2021 soon turned into a flood of distress. In the first quarter of 2022, the company posted its lowest revenue growth since going public in 2004. The total revenue in Q1 2022 stood at 135.5 billion yuan (US$20 billion), which fell by 6% from a quarter earlier and remained stagnant compared to the same quarter last year. This slump was much lower than what analysts had estimated.

This is the third and biggest drop in Tencent’s revenues in three consecutive quarters, and it is mainly due to Beijing’s regulations on the gaming industry. After four quarters of revenue stagnation in 2021, this decline in Q1 2022 sparks more concerns.

For Tencent, gaming is the largest revenue driver as it accounts for about 31% of its total revenue or about one third of its business. China’s domestic gaming market accounts for an estimated 74% of the company’s gaming revenues.

One regulation that hit the company hard was a freeze on licenses for new gaming titles. The ban was imposed last year by the National Press and Publication Administration, China’s regulator for licensing video games. A thawing of this eight-month freeze saw Tencent’s shares soar by over 5% last month.

Notably, none of Tencent’s new titles were on the approved list. But the company and its investors seem to be optimistic about Tencent’s games getting greenlit soon. In an investor call last week, Tencent’s chief strategy officer James Mitchell said he expected the firm to get the game licenses in the future. He added that since China will approve fewer gaming titles going forward, the company will launch fewer but bigger-budgeted games in 2023.

But Tencent’s investors may have to hold on tight for a little longer. In April, Chinese regulators banned unlicensed games from appearing on any livestreaming platform – a move that affects Tencent’s DouYu and ByteDance’s Douyin.

The government is also cracking down on unauthorized international games. Last month, Tencent shut down its gaming booster, which allowed users in China to play overseas games without a license.

Additionally, there seems to be no sign that Chinese authorities will relax the stringent time restrictions on minors that it imposed last year. These restrictions affected Tencent’s gaming business last year.

During the analyst call, Tencent’s president Martin Lau said that while China has sent supportive signals, the stricter regulations could become “normal practice.”

KO for Tencent’s China gaming business?

The stringent regulations dealt a blow to Tencent’s domestic gaming revenues in 2021. Profits slumped to just 6% to US$19 billion from a double-digit growth in previous years. In Q1 2022, this business dipped 1% to US$4.9 billion.

This isn’t good news for the tech giant as the first quarter is usually a stronger quarter for the company’s gaming business due to the Chinese New Year holidays, Shifara Samsudden, a financial analyst at LightStream Research tells Tech in Asia.

In the last four consecutive quarters, Tencent’s game revenue growth shrank on a year-on-year (YoY) basis. Analysts believe that the company will see this segment’s revenue lag even further.

Time slows down

More investment overseas?