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Tencent’s Upcoming Development: A Reduction in Major International Franchise Games and an Increase in Internal Productions

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Reuters, Hong Kong – (This March 21 story has been updated to reflect the correct time period, which is now “in January,” and to add the global revenue for January to Undawn’s Appmagic revenue data, which was previously reported as $287,000.)

An easy-to-play game featuring adorable characters navigating obstacle courses has surpassed the development of a high-budget, complex foreign franchise for smartphones at Tencent, a major shift in the company’s strategy.

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The largest video game company in the world reportedly redistributed hundreds of workers from the team working on the multi-year “Assassin’s Creed Jade” mobile game, which was developed in collaboration with Ubisoft of France, late last year.

As Tencent’s response to competitor NetEase’s popular “Eggy Party,” they are currently working on “DreamStar,” which was just released. This is the company’s most prominent attempt to date at creating a party game, which features straightforward gameplay, minigames, and an emphasis on socializing among players.

Therefore, “Assassin’s Creed Jade,” an action-adventure game set in ancient China that has been in development for mobile devices for at least four years, is probably not going to be released this year but rather in 2025, according to three people with knowledge of the situation. They refused to give their name and were not authorized to speak with the media.

Tencent’s strategic pivot has been forced by trends, as evidenced by the redistribution of resources. First off, there’s usually little profit margin involved in creating well-known Western franchises for smartphones.

Competitors have, however, experienced breakthrough success with seemingly niche products that present fresh approaches to gaming, such as NetEase’s “Eggy Party” and miHoYo’s anime-style fantasy game “Genshin Impact”. Additionally, since the games were created internally, they keep all of the earnings.

Tencent enjoyed years of great success creating popular smartphone games, such as the shooter “Call of Duty” from Activision Blizzard and the battle royale game “PUBG” from South Korea’s Krafton.

These franchise games, also known as IP (intellectual property) games, are expensive to produce. According to the sources, royalty payments ranging from 15% to 20% of sales are usual; Apple’s App Store keeps 30% of the proceeds, and marketing and user acquisition costs can add another 30% to 40% to the total.

Fewer, higher-budget games are our main focus. At an earnings call on Wednesday, Tencent Chief Strategy Officer James Mitchell stated, “Generally, we’re looking to place the largest bets on games that either iterate on a successful IP… or games that are iterating around proven gameplay success within a niche and taking those to a more mass market.

One person with direct knowledge of the negotiations states that Tencent is now pushing for royalty fees to drop to less than 10% of sales in certain cases. That was practically unimaginable only a few years ago. Tencent was once far more giving,” the source remarked.

Tencent revealed on Wednesday that its gaming revenue for the fourth quarter had slightly decreased. It also warned that the overall gaming revenue for this quarter would be lower than it was for the same period in the previous year when pandemic restrictions were lifted and gaming sales spiked.

Tencent’s founder and CEO, Pony Ma, has made it clear that the company’s video game division needs to perform better. Last year, the division brought in 180 billion yuan ($25 billion), or roughly 30% of total revenue.

He told a stadium full of workers in Shenzhen during the company’s annual meeting in January that competitors have persisted in developing new products, “leaving us feeling we have achieved nothing,” according to a separate source with direct knowledge of the event.

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Young gamer having fun with action video games competition, playing online game championship. Caucasian woman enjoying rpg play tournament on live stream, gaming on modern computer.

Tencent also introduced the “Spring Bamboo Shoots Project” in that same month. The project’s goal is to develop in-house games with innovative gameplay, with funding up to 300 million yuan ($42 million) per game.

According to the sources, Tencent is showing that it is willing to take more chances with unconventional game design, even though that is far less than the 1 billion yuan budgets of major franchises.

The Tencent-developed game “Apex Legends Mobile” was canceled by Electronic Arts last year after executives at the American company claimed it did not live up to expectations. According to sources, Tencent shelved the development of a mobile game based on the Japanese company Square Enix’s “Nier” franchise in December due in part to the Chinese company’s inability to come up with a viable revenue model in light of the game’s high development costs and franchise rights.

According to Serkan Toto, the creator of the gaming industry consultancy Kantan Games, “Mobile game studios have learned that IP is not the magic bullet for user acquisition it once was.”

Also, Tencent has spotted a significant internal game bomb. Some two of the sources claim that “Undawn,” a zombie apocalyptic shooting game with more than 300 developers and a budget of nearly one billion yuan, failed miserably despite having Hollywood star Will Smith signed on to promote it. According to research firm Appmagic, “Undawn” generated just about $288,000 in revenue on Apple devices in China in January, nearly a year after its launch. That month, the game brought in about $1.4 million worldwide.

Additionally, Western businesses are beginning to move away from hiring Chinese firms like Tencent to develop mobile games. One new game that will directly compete with Tencent’s “Call of Duty Mobile” is “Call of Duty Warzone Mobile,” from Microsoft’s Activision Blizzard.

To exacerbate the situation, during the week-long Lunar New Year holidays in February, Tencent’s top two games experienced a decline in revenue. Relative to the same period last year, “Honor of Kings” and “PUBG Mobile,” which are nine and seven years old, respectively, saw declines of 7% and 30%, according to one of the briefed sources.

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