Tencent battens down the hatches for the quarters ahead
- With the Chinese government showing no signs of letting the video game industry out of its current bind, Tencent is slashing costs and focusing on other areas to lessen the impact of the what is now an inevitable fall in gaming revenue.
- The video games industry relies on a constant stream of new titles and updates to keep it going meaning that when a company fails to come up with new titles, real problems ensue.
- Rovio, Supercell, King Digital and Zynga have all suffered from this problem due to a lack of innovation but in China, this is being forced upon the entire industry by the regulator.
- The ban on new game licences that came into force in March 2018 was recently tightened up with the closure of a regulatory loophole called the green channel.
- The green channel was used for game testing and has been a back door to get to market while the formal licences are not being issued but this too has now been stopped.
- Hence, for the foreseeable future, Tencent will not be able to earn any revenues from new games, severely denting its ability to keep gaming revenue flat.
- In most cases, a video game makes most of its revenue in the early days following its release which is then replaced with new games as the old ones tail off.
- There are some notable exceptions to this such as Fortnite but this is the general rule by which the games companies must live.
- Tencent does make quite a fair portion of its games revenues from subscriptions but if there are no new games, users are going to start pushing for a lower subscription as a result of the lower level of service they are receiving.
- Tencent is not standing still but is slashing its spending on gaming and completely halting all marketing for games which have not received a licence.
- This makes complete sense and while margins may rise in the short-term, there is worse to come.
- This is because Tencent will still be benefitting from games that it launched prior to March 2018 as well as anything it has managed to slip through the green channel.
- However, there will be nothing to replace these revenues as the old games begin to tail-off and so I think the next year will see gaming revenues flatten out and then go into a decline.
- This is why Tencent will need to ramp up revenues on its other products in order to prevent the whole company going into negative territory.
- This will be difficult to achieve, and I think next week’s earnings and at least the next two quarters will show a very difficult picture when it comes to revenue growth.
- Tencent’s stock has come back a long way, but nearly far enough for a company that is dallying with the possibility of seeing negative revenue growth.
- Hence, there will be a time to pick-up Tencent’s stock but now is not it.
