INTERNET: Tencent Limits Gamers, Joins with TCL

Bottom line: Tencent’s roll-out of time playing limits for teenager gamers for a popular new title looks aimed at preventing a regulatory intervention, while its new TCL tie-up could presage a spin-off of its video business.

Tencent limits teenage gamers

Internet titan Tencent (HKEx: 700) is in a couple of headlines as the US observes its Independence Day holiday, starting with word that it’s limiting teenagers from playing too much of a very popular new title. The other headline has the company teaming up with TV stalwart TCL (HKEx: 1070; Shenzhen: 000100) in a new smart TV tie-up.

The only real common thread to these headlines is that they both involve Tencent, though each does spotlight a certain pattern that’s quite typical for China’s most successful Internet company. In the first case, the game story spotlights Tencent’s strong record at developing and operating games, which are its largest source of revenue. The TCL story highlights Tencent’s fondness for making strategic minority investments, often with mixed results.

Let’s start off with Tencent’s hit title Honour of Kings, which apparently is all the rage in China as part of a broader trend that is seeing team sports becoming the latest hot trend in online gaming. The news in this case is pretty straightforward, with Tencent saying that people 12 years old and younger will be limited to playing one hour per day. (Chinese article) Those people will also be prohibited from playing after 9 p.m. each night.

A similar policy is being applied to people over 12 but less than 18, who will be limited to 2 hours of play each day. Tencent announced the policy on Sunday, and it takes effect today. That short window between probably indicates that Tencent put together this policy relatively quickly, perhaps concerned that Beijing authorities might order such a move if it wasn’t more proactive.

This particular phenomenon looks similar to one about a decade ago, though at that time the culprits were Internet cafes that were becoming a popular place for teenage gamers to hang out. A story on the Honour of Kings phenomenon looks a lot like others that came out in that earlier era, detailing the plight of one teen who jumped out of a fourth-floor window after being rebuked by his father for playing too much and another whose life became endangered from too much play. (Chinese article)

From a financial perspective, this particular development is both good and bad for Tencent. On the one hand, it shows once again how good the company is as a game operator, and in this case is staying ahead of the curve by developing the online team playing segment. But on the other hand, it also spotlights how Tencent needs to be careful to avoid negative publicity and also potential damaging actions by government regulators.

Smart TV Tie-Up

Next there’s the TCL news, which is relatively straightforward. That will see Tencent pay 450 million yuan ($66 million) for 17 percent of TCL’s Thunderbird Technology division that runs an Internet TV business. (company announcement) Tencent had a previous tie-up with TCL in the smart TV space that didn’t involve any equity exchange, so this looks like perhaps a way to solidify that relationship.

It’s a bit unclear from this announcement how Thunderbird’s business complements Tencent’s own popular online video service. I suspect that given TCL’s background as a leading TV maker, Thunderbird probably has quite good technology for Internet TVs but perhaps is more lacking in the programming department. Thus this tie-up would give it more access to a more robust platform in that regard, and perhaps Tencent might possibly be looking at an eventual injection of its online video assets into Thunderbird.

That might not be such a bad strategy, as Tencent could try to separately run and monetize the business to keep it apart from its core social networking and gaming divisions. Two of the industry’s other major players, Baidu’s (Nasdaq: BIDU) iQiyi and Alibaba’s (NYSE: BABA) Youku, are already similarly organized. Such an approach allows for better separation of these promising but still money-losing businesses from their parents’ core operations.


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