Will China devour the global videogame industry?

• Companies like Tencent are on an acquisition spree
• There are serious questions about privacy and spying

 

ANOTHER month has passed with yet another acquisition by Chinese giant Tencent Holdings. This time it is the Finnish company, Supercell, the creator of Clash of Clans, for a staggering US $8.6 billion. And Tencent did not even need to burp.
 
The company was sold to Tencent by Japanese bank, SoftBank and it does not even account for the whole company; just 73 percent of it.  So the deal actually values Supercell at US $10.2 billion.
 
Even before the acquisition of Supercell, Tencent was already a major player in the global games industry. Tencent is a behemoth even outside the games industry. The company has a virtual monopoly in the instant messaging space. It is the operator of both QQ and WeChat, China's top messaging platforms.
 
Also, Supercell is hardly Tencent's first foray into the international scene. The company already owns Riot Games the creator of League of Legends. In addition, Tencent owns a minority stake in Epic Games, the creator of the Unreal Engine and Gears of War. In the global publishing pie, it owns a large chunk of South Korean publisher and developer CJ Games and huge slices of both Activision Blizzard and Glu Mobile.
 
Although Tencent's business interests extend far beyond gaming, it is also the largest company in the games industry. In 2015, Tencent posted over US $15 billion in revenue, an increase of over 20 percent from the previous year. That is over three times the revenue of the largest Western games publisher, Activision Blizzard.
 
With a market capitalisation of over US $200 billion, if it chooses to, Tencent can easily swallow the top five Western games publishers including Activision, EA and Ubisoft. And still make it to dinner.
 
Will we ever end up with Tencent or China by proxy, owning the crown jewels of the global videogame industry? It is not out of the realm of possibility.
 
As has been oft reported worldwide, the Chinese economy is experiencing a sharp slowdown in its annual growth. If you believe the official figures (and many do not), the current annual growth rate is just over 5 percent. This slowdown is resulting in a massive outflow of capital from China to the tune of tens of billions of dollars every month. In April alone, over US $25 billion left Chinese shores, most of it investments abroad by individuals and Chinese companies.
 
Are the global videogame investments by Tencent, a long term investment strategy or part of the capital outflow that we are witnessing now?
 
Outside China, the videogame industry is one of the few bright spots in a lacklustre global economic scene. Therefore, it would only be natural if investors inside China start eyeing the industry for potential investments.
 
This massive outflow of money has created some weird bubbles outside China. From Vancouver through Hong Kong to Sydney, soaring house prices have been blamed on the flood of rich Chinese investors looking for places to park their money. If this trend of external Chinese investment continues unabated, it could very well be that the growing global videogame industry would experience the next bubble.
 
To be fair, in the case of Supercell, it is not difficult to see why Tencent was willing to pay such a colossal amount. The Finnish company is the world's most successful mobile games company. Supercell's revenues hit almost US $2.4 billion last year. This actually makes a US $10.2 billion valuation relatively conservative. So at least this acquisition can hardly be called out as part of a developing bubble.
 
But the videogame market may not remain quiet for long. If other Chinese giants follow Tencent's lead, some of the most well known videogame companies in the world might end up soon in Chinese hands.
 
So will this be a problem? After all, is it not just global free market economics at work?
 
Not at all.
 
In order for a free market to work properly, it needs to be truly free at the global level. When it comes to China, that is hardly the case.
 
To begin with, the Chinese games industry is strictly controlled by the government. Until recently, game consoles were banned in China. Publishers wishing to setup a base in China are required to find a local partner and get approval from a plethora of government agencies.
 
To get a rough idea of what hoops a videogame publisher has to jump through to get publishing rights in China, see this video.
 

Recently, the Chinese State Administration of Press, Publication, Radio, Film and Television and the Ministry of Industry and Information Technology said that foreign companies or foreign joint ventures will be restricted from disseminating a wide range of content online, including text, maps, games, animation, audio and video. The new regulations would allow foreign-owned companies to cooperate with a Chinese partner, but only after previous approval by the government agencies.
 
Just like Japan in the 1970's and 1980's, Chinese giants like Tencent now enjoy a massive advantage on the global stage. In the decades gone by, Japanese companies like Sony went on a buying spree in Hollywood which included MGM and Columbia Pictures. Car manufacturers like Toyota had easy access to the Western market while their own home market was insulated from foreign competition via high import duties and tough to crack 'safety' regulations.
 
This time, the saga is repeating itself in the videogame industry with the Chinese giants replacing the Japanese.
 
While foreign games publishers looking to break the bamboo curtain are hamstrung by onerous censorship regulations, the Chinese companies moving abroad are confronted by an open savannah with rich prey. Buoyed by almost unlimited capital, the Chinese leviathans like Tencent can afford to roam around and pounce on the juiciest offerings like Supercell and Riot Games.
 
This is hardly the epitome of a free market and a level playing field.
 
So why is this a problem?
 
To begin with, if you are a true lover of the free market, this scenario would be morally repugnant. Secondly, there is the question of who wields the ultimate power in the videogame industry in future.
 
It is hardly a secret that the owner of Tencent and other billionaires are directly linked to the ruling Communist party. If rich Chinese companies end up dominating the future games industry, could we end up handing over creative control by proxy to the paranoid control freaks of the Chinese Communist party?
 
In addition to the content censorship question, there should also be worries about privacy and state-sponsored spying. Between Riot Games and Supercell alone, Tencent now has access to the PCs and smartphones of hundreds of millions of gamers around the world. As a company backed by a paranoid government with a long history of international spying and hacking, can we really trust the Chinese giant to be just a benevolent and doting father?
 
At least for the moment, that seems to be the case with both Riot Games and Supercell. Both companies are being treated as autonomous units with their Western teams firmly in control of daily operations. But can we be absolutely certain that this will be the model for the future?
 
China has already overtaken the US as the largest videogame market. So it is a golden prize which simply cannot be ignored any more by a foreign company. This also means that videogame publishers looking to enter China would be at the whims and fancies of the Chinese censors - as Apple found out recently.
 
If in future, the Chinese government passed a law requiring all Chinese companies like Tencent to host their international game servers inside China, that would immediately set alarm bells rolling worldwide. It is already the requirement for Chinese customer data.
 
It is obvious that international acquisitions in the videogame market by Chinese companies are going to continue. But this does not mean that the rest of the world has to remain silent about its concerns. To begin with, whenever Chinese companies like Tencent announce an acquisition, the relevant government agencies can step in to investigate its potential impact on data safety and the consumers' privacy.
 
This is already a routine for Chinese IT hardware manufacturers like Huawei and ZTE. For instance, both companies are banned from selling network equipment in the US and the UK due to their links with the Chinese government and fears over spying.
 
So why should the Chinese internet giants like Tencent be treated any differently? This would also start to put some pressure on the Chinese government to refrain from any future international privacy breaches using videogames as trojan horses.
 
At least as far as the videogame industry is concerned, as the Chinese saying goes, we are now guaranteed to 'live in interesting times'.
 
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