beyondbrics

Computer games are anything but child’s play.

Tencent, China’s biggest internet company by market value, is buying a majority stake in Los Angeles-based Riot Games for an estimated $400m, marking the biggest cross-border deal by a Chinese company in the games sector. It is the latest example of a a growing number of outbound Chinese deals – $38bn in 2010, according to  PwC.

Riot Games is the developer and publisher of the online video game League of Legends – a team-based game which has more than one million unique users in the US each month. The game is free to download but makes its money selling low-cost enhancements that give characters special strengths, helping them to win. The game, released in September 2009, won last year’s PC Gamer’s free-to-play Game of the Year award.

But Tencent isn’t acquiring Riot Games for its League of Legends game – it already owns the rights to publish the game in China:  It has shelled out the big bucks in order to acquire three things, says Ian Maude, analyst at Enders Analysis, a UK-based media research group. It wants Riot Games’s professional team, the infrastructure of the business, and control of its future profits.

Already an investor in the company, Tencent bought out two of Riot Games’s other early investors – Benchmark Capital and FirstMark Capital last week. The total amount the two VCs had invested is said to have totalled $18m. Tencent has not disclosed either how much it previously owned of Riot Games or precisely how much it will now own but has said it will have a majority.

Tencent, which holds a 31 per cent of China’s gaming market (according to research company iResearch), also runs the wildly popular instant messaging program QQ which has over 600m users in China. In addition to online games and messaging services, it offers social networking and shopping applications.

Riot Games, which will work independently of its new parent, has expressed interest in hiring several hundred employees including publishing managers in other emerging markets including Russia, Brazil, Thailand and Indonesia, according to one analyst at Goldman Sachs.

But Tencent’s new purchase will also come in handy back in its home market where the number of online gamers is increasing exponentially. China’s online games market rose 25 per cent in the fourth quarter of last year, reaching Rmb9bn in revenue. This number is still small, as is China’s current internet penetration, but both are set to continue growing at a quickening pace.

As beyondbrics has pointed out, what Brics countries have is scale and potential. China only has 20 per cent PC internet penetration (compared to over 90 per cent in the US), but collectively the country already spends 1bn hours online each day. Its digital market, valued at $420bn in 2008, is said to be growing by 20 per cent each year, according to the Boston Consulting Group.

So popular are online games to Chinese youth that the authorities on Monday ordered online game operators to allow parents to watch their children’s game sessions. A previous attempt to control China’s “addicted” youth involved clinics offering electric shock therapy, promising to “cure” children glued to their computer screens.

Judging by Riot Games’ success in the US, Tencent’s introduction of the game on the mainland – set for this year – is unlikely to help.

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Marketing in China: go online, beyondbrics
China Mobile search engine eyes market share, FT