Tencent to Focus More on In-house Titles, Deprioritizing Third-party IPs

Tencent is shifting its gaming strategy to prioritize in-house developed titles over those based on licensed third-party franchises, a move prompted by weaker-than-expected revenue growth in its gaming segments. The company's FY23 financial report indicated a 10% overall revenue increase to 609 billion yuan ($86 billion), with gross profit up 23% to 293.1 billion yuan ($41.4 billion). However, the Domestic Games segment saw only a 2% year-over-year increase to 126.7 billion yuan ($17.8 billion), with a 3% decline in Q4 revenue due to decreased contributions from major titles like Honor of Kings and Peacekeeper Elite. The International Games segment grew 14% to 53.2 billion yuan ($7.5 billion), accounting for a record 30% of total gaming revenue, though Q4 growth was only 1%.

The strategic pivot involves focusing on fewer, larger-budget games, particularly those that iterate on successful internal intellectual property or proven gameplay mechanics. This change is driven by the high costs associated with developing games for major publishers, including royalty payments of 15-20% to IP owners, in addition to app store fees. Tencent is reportedly seeking to reduce royalty fees to under 10% in some negotiations. Evidence of this shift includes the redeployment of hundreds of developers from Assassin's Creed Jade to Tencent's own DreamStar, delaying the former's launch to 2025.

Further motivations for this strategy adjustment include setbacks with third-party IPs, such as the cancellation of Apex Legends Mobile and a Nier mobile title, suggesting that external IP no longer guarantees user acquisition as it once did. While Tencent has also experienced failures with in-house productions, like the high-budget Undawn, CEO Pony Ma emphasized that gaming remains the company's flagship business and that proactive measures are necessary to compete. To foster internal development, Tencent launched the "Spring Bamboo Shoots Project," offering budgets of up to $42 million per in-house project. The company plans to launch several new mobile titles in 2024, including DnF Mobile, Need for Speed, Honor of Fight, and One Piece.