Atop the Publisher Heap
Some observers may recall the deal announced early last month in which Chinese Internet and mobile behemoth Tencent, already a minority owner, acquired the rest of developer Riot Games. According to unconfirmed but seemingly credible reports, the out of pocket cost was nearly $400 million, which put the value of the studio around $475 million. Both amounts are staggering, especially if we consider that the studio had only one major asset, the popular free to play property League of Legends.
If anyone wondered where the money to fuel such an investment came from, Tencent reported its unaudited financial results last week for the last three months of 2010. Total revenue was approximately $834 million, which produced over $334 million in profit. Compared to the same period in 2009, these figures were up about 50 and 44 percent respectively.
Tencent's Internet division accounted for most of this revenue, around $662 million. While full details were not made available, it's clear that the large majority came from games. The major drivers named were a web MMO called Qi Xiong Zheng Ba that launched last August and significant increases for military shooter Cross Fire, the action-oriented Dungeon Fighter and QQ Game, the casual aspect of the company's IM service.
Notably, this brings up the very real possibility that Tencent has become the world's leading online game publisher, taking over the position Blizzard held for quite some time. Indeed, this may even have happened before the quarter in question. What's more, there are no significant reasons to think it will cede this slot any time soon; it's the top dog in what is both the largest national market and still the fastest growing, and there's opportunity aplenty to expand its small operations elsewhere... like in the regions of more interest to this site's readership, North America and Europe.
How likely is such a scenario? Well, it's hard for me to imagine we won't see some more acquisitions. The main question in this respect may be what's out there worth purchasing. Affordability doesn't seem like much of an issue. Not only is Tencent highly profitable, it also has a stock market capitalization in neighborhood of $45 billion. For what it's worth, that's more than double Activision Blizzard's, and roughly nine times EA's. Basically, the company's war chest appears to be filled with more than enough money to buy pretty much any target it's likely to choose.
For the past few days, I've been thinking about potential acquisitions. In terms of independent studios, KingsIsle strikes me as an intriguing possibility. Like Riot, it's known for its success with a single property, Wizard101, although it did have an undisclosed project in the works as far back as two or three years ago. I have no idea if the company would be for sale, but it sticks in the back of my mind that its principal has a business background outside games. As such, I wondered if he started up the studio with an exit strategy in mind. If so, the most obvious one could well have been selling.
This led me to think about what other companies might have the same exit strategy. It seems possible, and quite possibly even probable, that a number of the prominent western F2P publishers might be in play, or at least willing to be. A key factor in this line of thinking is the nature of their funding. In particular, I'd suspect those that have received substantial investments of venture capital - as was the case with Riot Games - could be available.
For Tencent or any other major Asian company looking to the west, buying an established publisher could offer some attractive benefits. One would be an instant portfolio of titles, which would mean not having to build market presence and visibility from the ground up. Another would be bypassing the need to build an operating infrastructure from scratch. The past few months have been quite quiet in terms of rumors about possible acquisitions, but it wouldn't shock me if more negotiations that have been percolating out of sight start popping into view as completed deals.
I'm well aware that some people automatically dismiss anything to do with Chinese companies as being "not in my back yard", and thus of no interest. That's their prerogative, and I have no expectation of changing their perspective. However, I can't ignore them. They may not be overly important in our back yard at the moment, but this situation is changing, and I'm very curious to see how much the market landscape will differ a year or two from now.