In game-industry deal-making, it appears there is Tencent, then there is everyone else. As a sign of both financial muscle and the need to expand beyond core markets given the effective closing of the Chinese market to new games in 2018, Tencent was either a major shareholder in or investor in four of the top five deals last year that saw record $5.7bn invested in startups, according to Digi-Capital’s first quarter (Q1) report by Tim Merel.
Tencent was behind investments in Epic Games ($1.25bn raised), Douyu ($630m raised), Shanda Games ($474m) and Huya ($462m raised). France’s Voodoo raised $200m from Goldman Sachs to round out the top five in 2018, Digi-Capital said.
The “games acquisitions market was also on fire in 2018,” Digi-Capital added, with more than $22bn in games mergers and acquisitions (M&A) making it the second highest year on record. Games M&A dollars are always dominated by mega-deals, which last year included Naspers selling 2% of Tencent for more than $10bn for a 60,000% return, and Tencent and others acquiring Vivendi’s $2bn plus stake in Ubisoft.
Digi-Capital’s report from the year before found the Chinese group Tencent led or participated in over $4 of every $10 invested in games companies worldwide in the 12 months to the end of Q1 2018. It was involved either sell-side or buy-side in over three-quarters of all games M&A by deal value in the same period.
Last week saw a complementary strategy as Reddit was in the process of raising up to $300m in a round that will be led by a $150m investment from Tencent’s corporate venture capital (CVC) unit. The so-called Front Page of the Internet is seen by many as the internet’s enfant terrible but Reddit had some 330 million monthly active users as of October and is reportedly raising the funding at a $2.7bn pre-money valuation. Condé Nast, the media company that acquired Reddit in 2006 before spinning it off again eight years later, retains a minority stake.
Tencent-backed Spotify also acquired two CVC-backed companies, Gimlet Media and Anchor, in hopes of creating a podcast behemoth. Gimlet focuses on producing high-quality narrative podcasts while Anchor helps with distribution and monetization.
What potentially joins these deals together is an approach laid out by perhaps Tencent’s largest external games success, taking a 48% stake in Epic Games, the developer behind the Fortnite success.
As Matthew Ball at Redef noted: “In 2018, there was a lot to read about Fortnite, and even more to learn from it. And to point, “the game” is indeed the future of entertainment (as well as the greatest threat to today’s media giants)….
“Fortnite’s most significant achievement may be the role it has come to play in the lives of millions. For these players, Fortnite has become a daily social square – a digital mall or virtual afterschool meetup that spans neighbourhoods, cities, countries and continents. This role is powered by Fortnite’s free availability, robust voice chat, cross-platform functionality, and collaborative gameplay.
“Accordingly, examples abound of kids, adults and families simply hanging out or catching up on Fortnite while they play. Studies find that Fortnite’s players spend one to one and a half hours per day in the game, versus thirty minutes for active Snapchat or Instagram users. Fortnite wasn’t designed to be a Second Life-style experience, or even a digital ‘third place’; it became one organically. What’s more, it is drastically out-monetizing dedicated social squares such as Facebook, Snapchat and Instagram – even combined.”
As Ball noted “Fortnite’s 200 million+ accounts together with Epic’s balance sheet and game engine to become a new, ecosystem-centric platform…a goal consistent with an enduring obsession of founder Tim Sweeney’s: the metaverse.
“The term ‘metaverse’ stems from Neal Stephenson’s 1992 novel Snow Crash, and describes a collective virtual shared space that’s created by the convergence of virtually enhanced physical reality and persistent virtual space. In its fullest form, the metaverse experience would span most, if not all virtual words, be foundational to real-world AR [augmented reality] experiences and interactions, and would serve as an equivalent digital reality where all physical humans would simultaneously co-exist. It is an evolution of the internet. More commonly, the metaverse is understood to resemble the world describe by Ernest Cline’s Ready Player One (brought to film by Steven Spielberg in 2018)….
“The proof of Fortnite’s unique potential was demonstrated live on February 1, 2019. At 2pm Eastern, the Marshmello (who ranks #10 in DJ Magazine’s Top 100) held a live concert that was held exclusively inside Fortnite. The event, which was live synced to the real Marshmello, was attended by more than 10 million in the game – with millions more watching live via Twitch and YouTube – many of whom used their characters’ user-specific dance moves to join in. The event was stunning. And it showcases the potential of the metaverse (including payment for performances, music rights, etc.), wherein a user can have potentially unlimited experiences inside a single medium.”
The issues around AR, virtual reality (VR) and games will be explored in more depth at the GCV Symposium in May 22-23, where Tencent’s managing partner, Jeffrey Li, will be joined as a speaker by demos of top companies.