Games as an Industry: Two Core Categories
The gaming industry comprises two primary types of games, with competitive games boasting a superior business model compared to content-driven ones.
Competitive Games: Gameplay-Driven, Everlasting Appeal
Competitive games are driven by gameplay, similar to offline sports like football and basketball—multiple players compete online under a unified set of rules. Examples include Honor of Kings and Teamfight Tactics: each match is a fresh start, with fixed rules but random, unpredictable in-game events.
Key advantages of competitive games:
- Strong network effects: The more players join, the more engaging the experience, leading to a pronounced “top-tier effect” (dominance by leading titles).
- Evergreen gameplay: Core mechanics are timeless, allowing for indefinite playability.
- Social synergy: Multiplayer online functionality aligns with social needs. The business model is highly efficient—sustained operations require minimal additional costs (e.g., adding new characters, skills, or map tweaks to enhance playability), similar to how football and basketball retain enduring appeal with incremental rule adjustments.
Content-Driven Games: Narrative-Driven, Episodic Enjoyment
Content-driven games (e.g., Genshin Impact, Black Myth: Wukong) derive appeal from storytelling and immersive, interactive narratives—players engage like watching a TV drama, often forming emotional bonds with in-game characters.
Challenges of content-driven games:
- Continuous content investment: Narratives are non-reusable; once players complete a storyline, they lose interest in replaying it. Developers must constantly invest in new plotlines, which carries inherent risks (e.g., uncertain reception of new content).
- Fragmented demand: Narrative preferences are highly personal (e.g., romance, horror, martial arts), leading to scattered user bases. Unlike competitive games, content-driven titles struggle to achieve market concentration or dominance by top players.
Business Model Comparison: Competitive Games vs. Content-Driven Games
From a commercial perspective, competitive games outperform content-driven ones across three critical dimensions:
| Dimension | Competitive Games | Content-Driven Games |
|---|---|---|
| Market Concentration | High (strong network effects drive monopoly) | Low (fragmented demand due to narrative preferences) |
| Monetization Capacity | High ROI (low ongoing costs, scalable revenue) | Challenging (high content production costs, uncertain returns) |
| Sustainability | Evergreen (reusable gameplay) | Episodic (non-reusable narratives require constant updates) |
Tencent’s Edge: Social Networks + Gaming Industrialization
Tencent has secured a dominant position in gameplay-driven competitive games through two core strengths: WeChat’s “acquaintance social chain” and world-class gaming industrialization capabilities.
1. Excelling in Polished Gameplay Execution
While core gameplay mechanics are replicable, success hinges on optimizing user experience. For example, among battle royale games, Tencent’s titles stand out due to superior graphics, faster update cycles, and operational excellence—enabling them to monopolize the genre.
2. Leveraging Social Networks for Rapid Growth
Competitive games inherently demand social interaction, and Tencent’s “acquaintance social chain” (via WeChat) delivers two key advantages:
- Rapid cold start: Instant user acquisition through social connections accelerates initial growth.
- Enhanced engagement: Social elements (e.g., teaming up with friends, in-game social features) amplify player retention and enjoyment.
Building Great Games: The Dual Pillars of Creativity and Industrialization
Developing high-quality games requires two complementary “orders”: creativity and industrialization—both indispensable. Tencent has mastered both by refining in-house industrialization and investing in overseas creative studios.
Creativity: Unpredictable, Culture-Driven
Creativity thrives in highly open cultures, where passionate teams collaborate, experiment, and embrace significant trial-and-error costs. This “gardener-style” approach nurtures ideas—providing the right environment for creative seeds to flourish into unique experiences.
Industrialization: Efficiency-Driven, Scalable
Industrialized R&D and operations are data and efficiency-focused, requiring agility, discipline, and reusable resources (e.g., proprietary game engines, development tools, and iterative data/experience). This “carpenter-style” approach transforms creative concepts into polished, mass-market products that meet broad user needs.
Tencent’s Solution: Separating and Integrating the Two Orders
These two orders rarely coexist within a single organization. Tencent’s strategy solves this dilemma:
- In-house studios: Focus on industrialization, refining polished, scalable gameplay-driven titles.
- Overseas investments: Back “creative seed studios,” providing them with development tools, operational support, and genre expertise to grow.
The result: A symbiotic ecosystem where creativity and industrialization converge to deliver both innovative and commercially successful games.
Tencent Games’ Overseas Expansion: Limited Near-Term Breakthroughs
We believe Tencent will struggle to achieve significant success in overseas gaming markets in the short to medium term, due to structural challenges in both competitive and content-driven segments:
1. Competitive Games: Fierce Competition, No Social Edge
- Established incumbents: Core gameplay genres in overseas markets are already dominated by major players with strong network effects (e.g., League of Legends, Fortnite).
- Lack of social leverage: Tencent’s “acquaintance social chain” advantage (WeChat) is irrelevant overseas, making user migration difficult.
- High barriers to entry: Leading overseas studios in competitive gaming are financially robust, limiting Tencent’s ability to gain market share through investment or acquisition.
- Slow gameplay innovation: Major gameplay innovations occur in 10-year cycles, with no near-term incremental opportunities.
2. Content-Driven Games: Lagging Behind Overseas Leaders
Tencent still trails international studios in narrative-driven games, which require:
- Advanced industrialization for immersion: Leading overseas developers have spent years refining proprietary tools (e.g., game engines, realistic physics for foliage movement, sunlight reflection, and climbing animations) to deliver high-fidelity, immersive experiences. Catching up requires decades of accumulated expertise.
- Organizational alignment: Different game types demand distinct organizational structures and cultures. Transforming Tencent’s capabilities to excel in content-driven games will be a long and arduous process.
Near-Term Outlook for Tencent’s Overseas Gaming Revenue
Tencent’s overseas gaming profits will likely remain concentrated in two areas:
- Returns from existing investments in overseas studios.
- Partnerships with studios seeking “PC-to-mobile migration” (adapting PC games to mobile platforms, a Tencent strength).
Beyond these, significant breakthroughs in overseas markets are unlikely in the short to medium term.
Published by: Zherui Investment
Disclaimer:
All articles on this platform are original content and may be revised or updated without prior notice. Unauthorized reproduction is prohibited. While we strive to ensure the accuracy of the content provided, we shall not be liable for any errors, omissions, misstatements, inaccuracies, or failures to update the information. All articles are for reference only and do not constitute any investment advice. Past investment cases may differ significantly from current or future investment decisions. Investing involves risks—please conduct thorough assessments and make rational decisions.
