Tencent is not only the world’s largest game company; it also controls large shares of important markets in China such as music, social media, and films. Since April 2021, Tencent’s stock has seen a slow downward trend, falling from its highest closing price of HKD 757.00 on 14/2/2021 to HKD 266.40 as of 9/30/2022. This has been driven by anti-monopoly laws recently published by China, video game regulations, and a rising number of competitors. Despite facing multiple challenges, Tencent is slowly undergoing a transformation to not only be further involved in the Chinese market, but to expand its global influence.

Tencent grows primarily through its messenger apps – Wechat and QQ. These are the largest messenger apps in China, and through them Tencent has created an ecosystem with Wechat and QQ as the central platform. In Tencent’s 2021 Interim Report, the company reported that it had almost 1.3 billion monthly active users of Wechat and QQ, nearly 90% of China’s population. Tencent does not produce these services – rather, they invest in emerging companies. For example, JD.com, an e-commerce platform that Tencent has invested in, appears on the mini-programs page of Wechat.

Mini-programs are a feature that allows users to access other platforms without leaving Wechat itself. In order to promote services that Tencent has invested in and those owned by rivals, Tencent can utilize its massive user base. Taobao, an e-commerce platform owned by Alibaba and that works in a similar fashion to JD.com, has its item sharing links blocked from being opened in Wechat. This means that in order to access Taobao, users would have to download separate applications. To many users, this is more complicated than simply accessing JD.com in the mini programs list. Using such methods, Tencent can place its products higher than those of rivals.

In its interim report, 52% of Tencent’s revenue was from VAS (Value Added Services), which are generated from in-game purchases and entertainment memberships (music and films). Currently, Tencent is focused towards the Chinese market, with games such as Honor of Kings being one of the most profitable games in the world only through their Chinese customer base. On a global scale, Valorant, developed by Riot Games, one of its subsidiaries, achieved “14 million MAU (Monthly Active Users) on its first anniversary”. When compared to 2020, games revenue had increased by 12%.

However, China has recently issued a series of policies that has directly affected Tencent. Since September 2021, minors are only allowed one hour of gaming time at 8 to 9 on Fridays, Saturdays and Sundays. Thus, Tencent’s games would have substantially decreased MAUs since a large portion of these games’ fan base are made of minors. The anti-monopoly bill amendments, released in October, made some changes that directly impacted Tencent’s business model. The newly added article 10 states that companies “cannot abuse data, algorithmic, technological or capitalist advantages and platform rules to remove or limit competition”. Tencent, who often uses platform advantages to limit other companies, such as the removal of Taobao’s mini program, is severely limited through this legislation. The government’s focus on anti-monopoly legislation has naturally targeted Tencent. This can be seen through its reactions towards the company’s attempts to further expand, and its new regulations on Tencent. In July 24, 2021, Tencent Music Entertainment received notices from the State Administration for Market Regulation that its attempts to purchase shares of CMC (China Music Corporation) is deemed illegal by the anti-monopoly legislations. The SAMR also required Tencent to give up its current exclusive copyrights of music, and that it is kept under strict supervision and reviewed every three years. The Chinese market has become increasingly strict, yet that is not the only issue Tencent faces.

In just a year, Genshin Impact, the new game made by rising Chinese game maker MiHoYo, has generated $2.0 billion in revenue – quickly catching up to PUBG and Honor of Kings, both of which are either owned by Tencent or released by Tencent in China. MiHoYo singlehandedly demonstrates that developing game companies with innovative business models are able to compete with large firms like Tencent in the games industry.

So what does the future hold for Tencent? Will it choose to continue focusing on China, or will it choose to expand into the Western market? Some believe that the increasingly tighter regulations on video games will detrimentally affect Tencent’s video game earnings and future progressions, but as Tencent reported in its 2021 interim report, players under 16 only accounts for 2.6% of all game revenues during the second quarter. This means that although Tencent’s games would have decreased MAU, their revenue from games wouldn’t suffer significantly. Signs show that Tencent is trying to expand outwards. In July 2021, Tencent acquired Sumo group, a game developer that produces AAA games. As analyst Daniel Ahmad states, “Tencent is acquiring Sumo Digital for its breadth of experiencing developing and operating AAA games and live service games, the majority of which are developed for clients such as Sony, Microsoft, Sega and others.” However, it will take time for Tencent to complete this step as its portfolio of games scarcely touch the boundaries of AAA games. Although the digital industry is already a saturated market, Tencent would still be investing in both private equity and listed companies, waiting for the right time to strike.