Video games give Tencent a break from reality

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HONG KONG (Reuters Breakingviews) - Tencent is immersing itself in video games. Mobile blockbusters powered quarterly sales of $21 billion. Upcoming titles should give boss Pony Ma some cover from regulatory threats and fierce competition from ByteDance. The respite, though, may only be temporary.

    The quarterly financial results reported on Thursday confirm that Tencent's pandemic bonanza is over. Revenue in the three months to March increased by a quarter from the same span in 2020, but growth in online games slowed markedly to 17% as life in China broadly returned to normal. Even so, titles like “Honour of Kings” and “PUBG Mobile” helped rake in a respectable $6.8 billion in sales for the period.

    Ma also has a pipeline of over 40 games to buoy his $750 billion company's bottom line for the near term. That should provide a much-needed distraction for investors. ByteDance, the owner of viral video apps TikTok and Douyin, is emerging as a formidable rival. Earlier this year, it spent a mooted $4 billion to buy a developer as part of a big push to bulk up its gaming division. 

Moreover, Chinese trustbusters are gearing up to levy a fine on Tencent that could exceed 10 billion yuan, or $1.6 billion, Reuters reported in April. That will be manageable, given that the business generated operating cash of roughly five times that sum in the latest quarter. Regulators are also scrutinising Tencent’s prolific deal-making, however. Its Spotify-like subsidiary, for example, may be forced to sell assets and surrender exclusive music rights. Tencent shares have slumped by roughly a fifth from this year's peak, erasing nearly $200 billion of equity value.

    For years, the company has kept its vast entertainment and social media operations separate. There are signs that a more cohesive strategy is slowing emerging. Alongside its earnings results, Tencent said it would combine its Netflix-like business with another video app. It is also moving to offer the roughly 600 million mobile monthly active users on its QQ messaging service more games to "better integrate social and content consumption experiences". Recently, Tencent installed a former QQ executive as head of its music-streaming service. Tencent should have multiple lives beyond games. 

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- China's Tencent on May 20 reported revenue of 135 billion yuan ($21 billion) in the three months to March, a 25% increase from the same period a year earlier.

    - Adjusted earnings, after excluding non-recurring fair value gains on investments and other items, grew 22% year-on-year to 33.1 billion yuan.

- For previous columns by the author, Reuters customers can click on [MAK/]

(SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS | Editing by Jeffrey Goldfarb and Katrina Hamlin)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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