INTERNET: Tencent Slumps Under Government Wrist-Slap

Bottom line: Tencent’s sudden pulling of a popular game just days after its release shows no one is exempt from Beijing’s recent online entertainment clampdown, which could weigh on stocks of related company for the next few months.

Tencent gets wrist slapped by regulator

A new statement from leading online game operator Tencent (HKEx: 700) is dripping with contrition, following the sudden yanking of a new hit game from its platform that apparently didn’t pass muster with the regulator. This latest Tencent news, combined with some downbeat earnings from live broadcasting specialist Huya (Nasdaq: HUYA) and its parent YY (Nasdaq: YY), have cast a chill over Chinese gaming and video stocks, which took a beating in Tuesday trade.

Tencent has been leading the crowd, shedding 3.4 percent on Tuesday and down another 3.2 percent in early trade on Wednesday. Those two declines have collectively wiped out more than $4 billion in market value from one of the world’s most valuable Internet companies. The bloodbath was felt among the broader realm of Chinese companies that provide any form of video content over the Internet, be it games, live broadcasting or even traditional moves and TV shows.

The biggest loser in the sell-off by far was recently listed Huya, whose shares tumbled 16 percent after it released only its second quarterly earnings report that apparently didn’t get people too excited. Huya was followed closely by its parent, YY, whose shares fell 13.7 percent. Others who felt similar pain included the recently listed video site iQiyi (Nasdaq: IQ), which lost 5.6 percent, and social dating app Momo (Nasdaq: MOMO), which has found a recent revival in direct broadcasting and whose shares slipped 8.8 percent on Tuesday.

Tencent’s closest gaming rival, NetEase (Nasdaq: NTES) also lost a more modest 3.5 percent. But you get the picture, namely that Tuesday was not a pretty day for these online entertainment Chinese concept stocks.

All that said, let’s return to the Tencent news that got this particular show rolling, which came in the form of an announcement on its website regarding the popular Japanese-developed game “Monster Hunt: World”. (English article) Tencent posted the game on Aug. 8, which is a lucky date because it contains to two eights (8-8), which is a homonym for “get rich’ in Chinese.

Not So Lucky

Seems that date wasn’t all that lucky in the end, however, since Tencent yanked the game from its WeGame platform just five days later, on the more aptly unlucky date of Aug. 13. It didn’t provide much color on the reasons for the move, except to say that the game had generated a high volume of complaints. As I’ve said at the outset, its note to gamers was dripping with contrition, which China-watchers can interpret to mean that one or more government regulators was probably quite displeased about something.

It seems the regulator that must approve all Chinese games for content hasn’t approved any new titles since March, and some are speculating that Tencent may have violated that unofficial ban with its “Monster” release. These kinds of unofficial suspensions of new approvals aren’t unheard of in China, though this particular one does seem to have stretched on for longer than most, of course without any explanation whatsoever.

As China’s 500-pound gorilla in gaming, Tencent must have all kinds of connections in China’s Culture Ministry and other departments connected with the industry. Thus there’s all sorts of buzz swirling about how it managed to make such a blatant mistake, prompting it to make such a high-profile and groveling apology. Again, it does seem like maybe it thought it had gotten some kind of under-the-table assurance that the game would be approved, and perhaps had gone ahead and jumped the gun by releasing it early under that assumption.

Regardless of what actually happened, the bottom line coming from this particular action is clear: Beijing is closely watching what online entertainment companies are doing and is prepared to step in and potentially levy big punishments for those who step out of line. We’ve seen plenty of recent examples of that, especially from the live broadcasting sector that has been in headlines nonstop with its own rectifications to remove offensive material.

The fact that even a giant and relatively responsible corporate citizen like Tencent isn’t immune from Beijing’s wrath certainly isn’t a good sign for the industry as a whole. We’ll have to see when the suspension of approval of new gaming titles finally ends, which perhaps will signal that Beijing regulators are finally easing up on their latest cleanup campaign.


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