With large portions of the world’s population locked at home due to the coronavirus pandemic, the demand for video games for entertainment has shot up dramatically. Per a recent survey by Nielsen, 83% of gamers from the 18-34 years age range are spending more time on online games compared with the time before the coronavirus outbreak.
The solid demand for video games has attracted technology companies like Google, NVIDIA NVDA, Amazon AMZN and Microsoft MSFT.
However, Chinese tech giant Tencent TCEHY is quickly climbing the ladder to the top, threatening to take the limelight away from stalwarts like Google Stadia, NVIDIA’s GeForce NOW, Amazon’s Twitch, and Microsoft’s xCloud.
Markedly, Tencent along with NetEase NTES dominates China’s video gaming space.
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Tencent recently launched a new studio in California, as part of its strategy to expand and bring 50% of its gaming revenues from international market.
Markedly, former Rockstar Games veteran, Steve Martin, will head the new studio — LightSpeed LA — which will focus on the creation and publishing of AAA titles.
Moreover, prior to this announcement, Tencent opened another studio grouped under TiMi Studios, the maker of Arena of Valor and Call of Duty: Mobile.
Last month, Tencent announced plans to launch more than 40 game products, including the release of Mobile Dungeon & Fighter and an unnamed Metal Slug mobile game. Tencent also announced a cross-platform Pokemon game running on Nintendo's Switch console and mobile.
What Tencent’s Growing Efforts Mean to Peers
Chinese game-streaming platform Chushou shuttered on Jul 2, two years after $120 million was invested in it by several companies, including Google, primarily due to competition from Tencent. Notably, per iResearch, this Zacks Rank #1 (Strong Buy) company is expected to generate $3.4 billion in revenues by the end of this year from its game-streaming business. You can see the complete list of today’s Zacks #1 Rank stocks here.
However, Microsoft, which currently carries a Zacks Rank #3 (Hold), and Google, have a much larger reach than Tencent, currently. Google’s worldwide data centers make using Stadia a smooth experience. Microsoft’s expansive Azure cloud infrastructure is keeping xCloud strong. Nonetheless, Google’s cloud services have no presence in China.
Moreover, Google’s Stadia has been receiving tepid reviews from gamers who are unsatisfied with its unstable gameplay. Further, gamers are required to buy the games they want to play on Stadia.
Meanwhile, Tencent is trying to integrate its cloud gaming services into its video streaming platform, Tencent Video, and messaging platforms, QQ and WeChat, which have a monthly active user reach of 731 million and 1.15 billion, respectively. If this is achieved, Tencent will have a strong competitive edge over Google Stadia.
Further, Tencent has been tacitly testing a mobile-based streaming network — Trovo Live — in collaboration with a U.S.-based affiliate since early 2020. Trovo, which is similar to Zacks Rank #2 (Buy) company Amazon’s Twitch in appearance and functionality, offers popular games like Grand Theft Auto and Destiny 2, apart from its own popular games like Fortnite and PUBG Mobile. Tencent’s foray into American social media is expected to stir up competition with Twitch.
Notably, Twitch topped three billion hours watched over the first quarter of 2020. The streaming platform accounted for 65% of total streaming hours watched and 72% of total hours streamed.
Again, in February 2019, Tencent launched a cloud gaming platform, Instant Play, in collaboration with Intel INTC. Following this, in March 2019, the company launched another cloud gaming service — Start.
Meanwhile, NetEase began testing its own cloud gaming service in November last year. Although this Zacks Rank #3 company claims to require less storage space and battery for its streamed games, its platform is much smaller than Tencent’s, with limited gameplay slots per game. This gives Tencent the first mover's advantage over NetEase.
The series of Tencent’s video-game related announcements come at a dynamic time in the American gaming scene, with Microsoft announcing the closing of its Mixer platform, Twitch facing various allegations against its popular users, and increased scrutiny over China-owned entertainment platforms. However, the Sino-U.S. relations do not seem to stop Tencent’s expansion and penetration in the U.S. video gaming space.
Tencent’s expanding ecosystem could widen its moat against peers in the video gaming market. Its efforts in strengthening the cloud gaming portfolio are also expected to boost its video game unit, which generates a significant portion of the company’s revenues.
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