Tencent posts strong Q1 2019 results despite Chinese ban

Tencent's Game for Peace
Image: Game for Peace

Despite being the largest tech conglomerate in Asia, Tencent Holdings Limited had a rough 2018. The firm’s lucrative video game segment suffered following a crackdown by the Chinese government last year. Beijing alleged the company’s games were having a deleterious effect on the nation’s young people. However, judging by its Q1 2019 results, the corporation has regained its footing.

Tencent reported grossing $12.69 billion in the first quarter, a 16 percent year-over-year (YoY) increase. As Tech Crunch noted, the company’s performance in the first three months of 2019 represents its weakest growth since going public in 2004. Still, the firm beat financial analyst predictions by generating $4 billion in net profits.

The corporation’s online gaming segment showed the lingering effects of the Chinese licensing freeze. The division brought in $4.12 billion in Q1 2019 versus 4.16 billion in Q1 2018. In the past, Tencent’s gaming business has been one of its most profitable sectors. The company’s games segment rose 26 percent in Q1 2018 YoY.

Tencent’s Regulatory Troubles

In August 2018, China’s Ministry of Education essentially punished Tencent for making games that are too good. The regulatory agency prohibited the company from releasing new online video games and demanded restrictions on children’s play time.

The organization initiated the crackdown in response to rising rates of myopia among the nation’s young people, a condition blamed on their heavy usage of mobile devices. Regulators also charged Tencent with releasing games they deemed unacceptably violent.

Beijing’s announcement cost Tencent $20 billion in market capitalization the day it was made. However, the firm’s diverse holdings and presence in international markets allowed it to persevere. The company has subsidiaries that operate in a range of fields, from social media to drones to financial services. It also owns the developer of “League of Legends” and has minority stakes in the publishers of “PlayerUnknown Battlegrounds (PUBG)” and “Fortnite.”

The conglomerate complied with the freeze and issued several updates that limited the play time of younger gamers on its existing offerings. The Chinese government began permitting the release of new games in November 2018. However, Tencent was still blacklisted.

Game for Peace (And Profitability)

In December, Beijing created a new agency called the Online Games Ethics Committee to review all new games before release. Tencent met the organization’s stringent standards and in February 2019, released its first new game in China in 10 months.

Despite its concessions to Beijing, the corporation was still encountering problems. The government refused to give the firm the go-ahead to monetize popular titles like “Fortnite” and “PUBG.” Faced with losing ground in the world’s largest video game market, the company got creative.

Earlier this month, Tencent released a new online title in China called “Game for Peace” and took down “PUBG.” Chinese gamers immediately noted that “Game for Peace” bore a striking resemblance to the older title. “Peace” features identical game dynamics to “PUBG” but has no gore and less violent character interactions. Tencent also restricted the game to players age 16 and up but was allowed to include in-game monetization.

Though replacing a popular game with a sanitized clone is a risky move, it paid off for the conglomerate. “Game for Peace” quickly became the most downloaded game on the Chinese version of the Apple App Store. Gamers have also had no problems with the title’s freemium mechanics; it made $14 million in its first three days of release. Now, the analytics firm China Renaissance predicts the game could generate $1.48 billion in revenue.

With the unprecedented success of its new game, Tencent is in for some record-breaking growth in Q2 2019.