Tencent’s Online Games Revenue Understates The Company’s True Gaming Power

Tencent published its financial results for Q1 2017 this week. Online Games revenues grew by 34% to RMB 22.8 billion (approximately $3.3 billion at the current exchange rate). To illustrate the degree of its dominance in the gaming world, this alone is more than EA’s and Activision’s revenues combined during the period. It is also more than Microsoft’s gaming revenue in the same quarter. Tencent’s games-related power, success, and in reality, its games dependency reach far beyond what is reflected by the Online Games revenue line.

To shine more light on how exactly games revenue is reported at Tencent, we spoke with Tencent’s investor relations who were happy to clarify:

Tencent’s Online Games revenue segment (RMB 22.8 billion) in Q1 2017 consisted of:

The first nuance to note is that Tencent’s Smartphone Games revenue is booked partially under Online Games and partially under Social Networks. While the former mostly (but not exclusively) includes in-house games, the latter books revenue from games (often 3rd party), which are distributed via Tencent’s social networks like QQ. Tencent’s IR confirmed that in Q1 2017, approximately two thirds of the RMB 12.9 billion Smartphone Games revenue was booked under Online Games, while the rest was booked under Social Networks.

This is important in helping estimate Tencent’s true revenue dependency on games. In this case, RMB 4.3 billion of the Social Network revenue line (which totalled RMB 12.3 billion) is directly attributable to games.

There could be various potential reasons why Tencent allocates revenue segments in this way. While this was not confirmed by Tencent’s IR, one reason may be to prevent the company’s revenue mix from appearing too games-heavy. With the current method, Online Games account for 65% of Tencent’s Value Added Services (VAS) revenue, but if a portion of Smartphone Games revenue was not booked under Social Networks, it would be 77% instead. The more games-heavy Tencent’s revenue mix becomes, the more it may get examined as a gaming company by investors, rather than a mobile life ecosystem company. Being judged on successes of individual titles is a much more volatile position to be in than being examined as a mobile life ecosystem company with games merely as a part of its monetization strategy.

Another key factor contributing to Tencent’s understatement of its gaming power (and dependency) is the fact that revenues from Supercell are not included in the company’s revenue mix. This is because Tencent does not own 100% of the company, so it is not obliged to disclose revenues as it would be with wholly-owned subsidiaries. The acquisition of Supercell was done through a separate vehicle – a consortium, the majority of which Tencent controls. So the only sign of Supercell’s performance that can be seen on Tencent’s financial reports is in form of Dividend Income in Other Gains, but not in revenues.

Supercell’s revenues reportedly reached $2.3 billion in 2016. Applying a rough quarterly average of $575 million this would account for an additional 17% of Tencent’s reported quarterly online games revenue, if Supercell was included.

All in all, Tencent’s true power in (and dependency on) the gaming world is far greater than its Online Games revenue line suggests.