Everybody Cha Cha Cha is CJ Games’ hit action racing title.

MARCH 28, 2014 • Tencent Holdings Ltd. continued its investment in significant game companies taking a 28% stake in South Korea’s CJ Games Corp for $500 million. The latter is one of the largest mobile game publishers in Korea and is a subsidiary of the huge CJ Group Pte. Ltd. Tencent now becomes the third-largest shareholder in CJ Games. In conjunction with the Tencent partnership CJ Games will restructure its operations including the acquisition and merger of Netmarble, a game distribution division of its parent firm CJ E&M. The distribution arm will be renamed CJ Netmarble. Two years ago Tencent paid out $231 million to buy League of Legends creator Riot Games, and spent $63 million for a 13.54% stake in Korean chat app leader Kakao Corp. In 2013 a 40% interest in Epic Games Inc. was purchased for $330 million, and Tencent was part of the investment group that put up $2.34 billion to help Activision Blizzard go independent.

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Impact: There is a rush on by Chinese online game companies such as Tencent to get as much leverage as possible over the swiftly expanding mobile games segment in Asia. Tencent’s WeChat is the huge smartphone chat app that has morphed into a game distribution platform during the last 18 months. The Kakao and CJ Games stakes provide better access to complementary mobile content and technology for use in China, as well as a major partner to help seed more of Tencent’s products into South Korea. For example, the WeChat Game Center is a version of Kakao Game Center. Now popular CJ titles such as Everybody Cha Cha Cha and Everybody Marble will have an easy path to the Chinese market via Tencent. The investment in CJ Games also takes the Korean company out of play for upcoming mobile games competitor Alibaba Group Holding Ltd., which has also been looking for a strong Korean partner. Alibaba is the e-commerce powerhouse that is building a platform to distribute third-party mobile games. All of this capital investment from Chinese companies into mobile content delivery is predicated on the lightning fast arrival of 4G networks in the country and further smartphone penetration. In Tencent’s case, the company is leveraging its online games business, which accounts for over half of the company’s revenue, to fund its mobile buying spree. China is a hard market to analyze since sources vary on how much revenue is generated from mobile game content and there are hundreds of distributors beyond Apple’s store and Google Play. DFC Intelligence believes the market was about $2 billion in 2013 but it could be larger. The market scale is huge, but despite this, so much money is being thrown at bids for dominance that we have to believe there will be a shakeout sometime soon. Chinese consumers are only now getting widely available 3G networks and it is a question how many of them will want, or be able to afford, upgrading to 4G. Of course, eyes are turning to up-and-coming mobile markets such as Indonesia, so there is plenty of growth potential nearby. We still are somewhat amazed about how much cash is being thrown around by Chinese companies globally and hope the game industry does not get too accustomed to the inflow. The spigot could easily be shut off if these mobile investments don’t return substantial revenue.