May 28 (Bloomberg) -- Tencent Holdings Ltd. wants to conquer half a billion Chinese smartphones. The online game CrossFire shows how the company plans to do it.
Lacking enough homegrown titles to satisfy the appetites of China’s players, Tencent imported the combat survival game from South Korea in 2008. Last year, CrossFire raked in $957 million, making it the world’s top-grossing free-to-play video game, according to SuperData Research Inc. It’s one of several foreign-made games, including League of Legends and Dungeon Fighter Online, that have helped make Tencent Asia’s largest Internet company.
Now, as China’s gamers go mobile, Tencent is looking everywhere from the U.S. to Japan for content that might fend off challenges from rivals such as Alibaba Group Holding Ltd. and Baidu Inc. In recent months, Tencent agreed to buy a $500 million stake in Seoul-based mobile game developer CJ Games and purchased exclusive rights to the Chinese version of Candy Crush Saga from King Digital Entertainment Plc., of Dublin.
“The mature gaming market and similarities in consumer habits make Korea an ideal place to seek out mobile games,” said John Choi, an analyst at Daiwa Securities Group Inc. in Hong Kong who recommends buying Tencent’s stock. “It’s a pretty logical and obvious choice if Tencent looks for a tie-up in content.”
The company’s Hong Kong-traded shares rose 1.7 percent today to HK$113.30, extending their gain to 15 percent this year. The city’s benchmark Hang Seng Index is down about 1 percent.
Shenzhen-based Tencent owes much of its 60-fold increase in annual sales over the past decade to games distributed through personal computer-based services, such as the QQ instant- messaging platform.
Games accounted for slightly more than half of the company’s 60.4 billion-yuan revenue last year, helping solidify founder Ma Huateng’s status as China’s richest man, according to the Bloomberg Billionaire Index.
That growth has slowed as more people trade their PCs for smartphones. Tencent’s gaming income rose 34 percent last year, compared with an average of 80 percent during the prior four years.
The country had 500 million mobile Internet users last year, up 20 percent from 2012, according to the Chinese Internet Network Information Center.
The trend has put pressure on Tencent to offer more games through its QQ and WeChat messaging apps, which have hundreds of millions of users. The online gaming market is projected to grow to 225 billion yuan by 2017, according to the Shanghai-based IResearch Consulting Group.
Tencent faces new competition for the mobile market. In January, Alibaba, the Hangzhou, China-based e-commerce company, announced plans to offer games through its Mobile Taobao and Laiwang apps.
By agreeing to buy a 28 percent stake in CJ Games in March, Tencent returned to one of its most reliable sources of overseas hits: South Korea.
Partnerships between Tencent and Korean developers produced two of the world’s top three free-to-play video games last year, according to an annual survey by SuperData.
CrossFire, which was created by SmileGate Holdings, of Seongnam city, topped the list, while Dungeon Fighter Online -- developed by Neople Inc., a South Korean unit of Japanese game maker Nexon Co. -- ranked third with $426 million. Second was League of Legends, which was developed by Tencent’s U.S. subsidiary Riot Games Inc. and brought in $624 million.
The tie-ups have benefited the Korean developers as much as they have Tencent, which provides access to China’s vast Internet audience.
“China is a tremendously big market for us,” SmileGate Worldwide Chief Executive Officer Jay Byun said in an interview last month, adding that China represented 90 percent of the company’s revenue. “The main factor of our great success in China is that we have been continuously reflecting on the needs of Chinese users in a quick and timely manner.”
China has long had an affinity for Korean culture, from K- Pop tunes to soap operas. The situation comedy “My Love from the Star” grew so popular last winter it sparked a nationwide craze for fried chicken and beer, which one of the characters eats to celebrate the year’s first snowfall.
“Chinese people have a higher acceptance rate for Korean culture compared with others,” said Li Yujie, an analyst at RHB Research Institute Sdn in Hong Kong.
South Korean game developers have sought to cater to that cultural affinity. SmileGate has included a Hong Kong tactical police unit and a red-and-gold, dragon-adorned machine gun in CrossFire.
Tencent will roll out games of increasing complexity, including popular Japanese and Korean titles, to encourage players to spend more time gaming, Tencent Chief Strategy Officer James Mitchell said during a May 14 conference call to discuss quarterly earnings.
Another reason for the success of Korean games is accessibility. Gaming consoles were long banned in China, excluding many of the games produced for Sony Corp.’s PlayStation and Microsoft Corp.’s Xbox machines. Tencent’s games are also free to play, meaning players can enjoy some basic portion without spending money.
Hu Yi, 28, an aircraft maintenance technician who has played CrossFire for six years, said quality was the biggest reason he preferred foreign games to the ones made by China developers. South Korea’s developers have been churning out video games for years.
“Locally produced games are just not good enough,” Hu said. “Well-produced overseas games make you feel like you’re watching a movie. Chinese games make you think you’re watching roughly sketched 2-D cartoons.”
Titles produced by CJ Games, such as Taming Monster and Everybody Cha Cha Cha, have already proven popular in South Korea. Chief executive Kwon Young Sik said the company would use the Tencent investment to promote the games globally.
While overseas developers dominate China’s Internet gaming market, analysts say it is only a matter of time before domestic developers catch up.
“There’s a lot of investment in China going into mobile games these days,” Li said. “With the rising number and quality of game developers, China should be able to narrow the gap with Korea.”
Much of those new developers will be focusing on mobile games. Tencent also plans to shift more game development in- house, allowing it to keep more of the profits.
Tencent rolled out five mobile games in the first three months of this year for a total of 13, Mitchell said during the May 14 earnings call. The games attracted 120 million daily active users and brought in 1.8 billion yuan, a three-fold increase over last year.
“We think we’re actually pretty good developers of smartphone games,” Mitchell said. “We have some of the biggest, best games not only in China but globally; and consequently on those games the margin is substantially higher.”
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