Tencent’s first profit drop since 2005 blamed on wait for Chinese regulators to approve new games
A regulatory restructuring, which has led to a months-long halt on the approval of new video games in China, highlights the big role that the central government plays in the country’s internet industry
Tencent Holdings may run the world’s biggest video games business by revenue and China’s most widely used social media platform, but the company is finding out that it too is subject to the sometimes unpredictable workings of the government.
Shenzhen-based Tencent, along with other companies in China’s gaming industry, have been forced to wait patiently on the sidelines amid a regulatory restructuring that has led to a months-long halt on government approval of new games.
“There’s a temporary suspension on the monetisation approval mainly because of a restructuring of officiating bodies at the senior government level,” said Martin Lau Chi-ping, the president of Tencent, in an 80-minute conference call with analysts on Wednesday evening after the company’s earnings results announcement.
Lau said “a lot of games have not been approved”, which confirmed a South China Morning Post report last week that the State Administration of Radio and Television (SART) – the body in charge of monitoring games and other entertainment content – has not given licences to any new games since March 28.
“The administration is aware that the restructuring is affecting the industry,” he said.
The suspension has come after the SART was formed in March to replace what was formerly known as the State Administration of Radio, Film, and Television, as part of a broader government overhaul to strengthen the Communist Party’s control over cultural policies, among other things.
That regulatory shake-up further highlights the big role that the central government plays in China’s internet industry.
The government is “the visible hand” behind the country’s internet market, where success or failure – especially for media and entertainment companies – is contingent upon its approval, according to the China Internet Report co-authored by the Post, its online tech news site Abacus and San Francisco-based venture capital firm 500 Startups.
In April, China’s media regulator ordered news aggregator Jinri Toutiao and Tencent-backed live-streaming video service Kuaishou to clean up content on their platforms, singling out both operators for disrupting order in the online media industry, the report said.
Beijing is continuing to tighten its control over the internet, particularly content, with popular news and video apps – most recently the anime, comic and games-focused Bilibili – being taken offline for content deemed “inappropriate” or “vulgar” in the past few months.
Despite the current suspension of game approvals, Lau said Tencent believes the situation is “not a matter of whether [new games] will be approved for monetisation, but a matter of when exactly”.
He said Tencent has “at least 15 games in our portfolio that have been approved for monetising”.
Tencent, which has lost more than US$150 billion in market value since January, reported a 2 per cent drop in second-quarter profit on lower gaming revenue and investment-related gains.
Net income fell to 17.9 billion yuan (US$2.6 billion) in the quarter ended June 30, compared with 19.3 billion yuan average of 12 analyst estimates compiled by Bloomberg. Sales were 73.7 billion yuan, missing analyst estimates.
Tencent’s smartphone game business reported a decline of 19 per cent to 17.6 billion yuan from the prior quarter, as it failed to get approval to charge fees for popular tactical tournament games and new game releases were delayed.
Company chairman and chief executive Pony Ma Huateng, who let Lau respond to analysts’ questions about the gaming business, said mobile games revenue was affected by external factors, but there was still “healthy growth in the number of people playing our mobile games each day in China and overseas”.
The company expects measures to “reinvigorate” its mobile game revenue growth to take “several months to take effect”, according to its filing. Those steps include “deepening engagement” with its existing major titles and “monetising” popular tactical tournament games.
Still, concerns remain about the prospects of the company’s video games business.
“This is the worst result in recent memory from Tencent, with the first quarter-on-quarter fall in profits in 13 years and major disappointment on mobile gaming revenue and margins,” said Douglas Morton, the head of research in Asia at Northern Trust Capital Markets. “The miss, however, was driven purely by regulatory delays to game approvals, meaning the long-term story for Tencent may well remain intact.”
Alibaba Group Holding, which competes with Tencent across a number of businesses, is the parent company of the Post.