Tencent's Game Plan to Retain its Mobile Gaming Crown

By staff reporter Liu Xiaojing and Qu Yunxu

(Beijing) – Internet giant Tencent is betting on its US$ 8.6 billion deal to buy a controlling stake in Finnish mobile game developer Supercell Oy to cement its position as the leader in the sizzling market for smartphone and tablet games in China.

Tencent led a group that bought an 84.3 percent stake in the Helsinki-based maker of "Clash of Clans" – one of the world's highest-grossing mobile games– from SoftBank Group Corporation of Japan and other shareholders in late June. SoftBank had a 73 percent stake in Supercell and was the company's largest shareholder since October 2013.

With Supercell on board, Tencent, which is already the biggest player in the US$ 100 billion global gaming market, will also see its share grow to over 13 percent, Newzoo, a gaming analytics company based in Amsterdam, said.

After the deal, the Finnish game developer was valued at US$ 10.2 billion by market analysts, more than three-times what it was worth three years ago. Supercell had 1.79 billion euros in total assets by the end of 2015, according to company documents. This shows that Tencent shelled out a premium of over a 1,000 percent after a heated battle with several other Chinese firms that were eyeing the stakes, including Yunfeng Capital, backed by Alibaba founder Jack Ma.

Tencent said in late June that the consortium will pay up to US$ 4 billion in cash and the rest, which will be paid in three batches over the next three years or so, will come from bank loans. Tencent will maintain a voting interest of 50 percent in the consortium to ensure its control of Supercell, the company said.

Tencent was in talks with potential investors to join its investment group including China's sovereign-wealth fund and a Canadian pension fund, the Wall Street Journal reported on July 6.

Tencent's latest attempt to expand its footprint globally is also the biggest overseas purchase by a Chinese Internet company to date. Over the past decade, it spent US$ 2.7 billion to buy stakes in 34 online game developers worldwide, including Riot Games in Los Angeles, which develops the hit game League of Legends, company documents showed.

The global shopping spree was at the heart of Tencent's money-making strategy. The company, which owns China's most popular social-networking app WeChat, has relied on revenue from games to make a bulk of its profits. Income from online games accounted for more than half of its US$ 15.8 billion revenue in 2015, the company's financial report showed. In the first quarter of this year, it reported a 28 percent year on year growth in online game revenue to US$ 2.5 billion, again accounting for over half of its US$ 4.8 billion revenue for the period.

The marriage with Supercell will add to Tencent's strengths in gaming. Mobile app industry analyst firm App Annie says the Finnish developer's flagship game, Clash of Clans, which was released earlier this year, has become the world's most profitable mobile game, raking in over US$ 100 million so far.

Established in 2010, Supercell has developed three other hit games – Hay Day, Boom Beach and Clash Royale – and all its games together have attracted over 1 billion users worldwide, and the number of daily active players have reached 100 million as of March 7, the company said. These games are free to download, but Supercell earns money by selling virtual goods to players eager to progress quickly.

In 2015, Supercell's revenue rose 31 percent to over US$ 2 billion, and net profit rose 63 percent to US$ 964 million, its financial report showed.

When news of the deal was first announced players expressed concerns about the future of their favorite games online, and questioned the level of creative independence the Finnish game developer would be allowed. Supercell CEO Ilkka Paananen said in a statement that the company will continue to operate independently after the deal. Paananen said he expects the partnership will make their games more accessible to users in China through Tencent's gaming and social networking services.

The Chinese Internet giant will help Supercell market and operate games it has developed for devices using Google's Android system in China, while the company's existing partnership with Kunlun Tech, another game developer, will continue, sources with knowledge told Caixin.

The latest deal comes at a time when Tencent is feeling the heat from domestic rivals in an overcrowded gaming market. The company launched 120 mobile games between 2012 and 2015, ahead of its major rival NetEase Inc., which released 70 new games in the same period, data from online game market analyst DataEy showed. But two of NetEase's games designed for Apple Inc's iOS system have remained best sellers in the second half of last year, helping NetEase race past Tencent to become the world's largest game developer for Apple devices in terms of revenue in November, data from App Annie showed.

(Rewritten by Han Wei)

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