Shooting match

Activision buy sets up Tencent metaverse battle


Now part of Microsoft’s army

If the way that the metaverse is being built is indicative, it is going to mirror many of the world’s geopolitical tensions rather than provide a means to escape them. That’s already apparent in how the media is talking about these virtual realities as arms races between the world’s tech and internet giants, with growing input from governments in Beijing and Washington.

As yet there’s no real agreement on what a metaverse actually is – beyond a vague definition of a social cyberspace that intersects with immersive goods and experiences. However, online video games (and the players that enjoy them) are setting much of the pace on how the concept might be developed, making gaming an early battleground for leadership.

Hence the stir over the news that Microsoft has agreed to pay $75.3 billion for Activision Blizzard, the maker of moneyspinning titles such as Call of Duty, Candy Crush and World of Warcraft. The deal is the biggest yet in the gaming sector, although Microsoft pulled the trigger after Activision Blizzard’s share price had halved last year, following internal unrest over the handling of sexual harassment cases.

Chinese newspapers are wondering where the prospective takeover leaves Tencent, the world’s largest games publisher. Gaming accounts for roughly 30% of Tencent’s sales, compared to 9% at Microsoft on a pre-acquisition basis. Post-deal Tencent will still be a third larger, based on current sales. But Shen Meng, founder of Chanson Capital, told China Business News that Activision Blizzard’s core products will give Microsoft a new means of building out its version of the metaverse. He even thinks the deal will give Microsoft a chance to monopolise it.

Gao Dongxu, founder and chief analyst at China Entertainment, a think tank, disagrees, telling the same newspaper that Microsoft is too far behind in gaming knowhow and that it will find it hard to displace Sony, the second largest games publisher. There is also the question of whether Microsoft will be able to complete the takeover, because of regulatory hurdles. In Washington, the US Justice Department and Federal Trade Commission (FTC) have joined forces to rewrite merger rules relating to antitrust and the FTC has already launched an action against Facebook’s parent Meta.

In Beijing, the government’s efforts to control online gaming in particular (and big tech in general) have cast a similar shadow over companies like Tencent (whose shares have lost about 40% of their value over the past 10 months). Tencent may also be forced to unwind some of its key investments in gaming because of concerns that it holds too much sway in the sector. These include its 40% stake in Epic (publisher of Fortnite) and its full ownership of Riot Games (publisher of League of Legends).

Of course, Tencent is also under pressure to do more to protect younger players from addiction to its gaming titles and new China regulations now limit children to playing for just three hours a week between 8pm and 9pm on Fridays, Saturdays and Sundays and then a further hour during public holidays

In a research report published on Smartkarma, independent analyst Mio Kato describes the implications of Beijing’s efforts to regulate the gaming sector as “far more severe than the market is assuming”. The short term impact of the rule changes is more manageable as children account for a small portion of Tencent’s gaming revenues (2.6% in the second quarter of 2021). But Kato argues that the government is intent on achieving lasting behavioural change over the longer term: if children don’t develop gaming habits, they’re far less likely to become addicted as adults.

The irony is that the extended and obsessive playing hours of many gamers are a key attraction for metaverse designers, who see the same kind of in-depth engagement as crucial to the metaverse becoming a reality. For the metaverse to take wider hold, people will need to come back to it every day or stay within its virtual realm for longer periods – something that the gaming firms have been able to achieve with their most popular titles.

Of course, these are behavioural trends that the Chinese government disapproves of – and which it is doing its best to discourage.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.