MARCH 21, 2013 • China’s Tencent Holdings Ltd. rode growth in smartphone ownership and its League of Legends online arena game to a strong fourth quarter ending Dec. 31. Total Tencent revenues were 12.15 billion yuan ($1.9 billion), an increase of 5.1% over the third quarter of 2012, and an increase of 53.4% over the fourth fiscal quarter of 2011. Internet revenues, of which online games are a part, were 8.45 billion yuan ($1.3 billion), an increase of 1.0% from the third quarter, and an increase of 32.1% compared to the same period last year. Mobile revenues saw year-over-year growth to 933.9 million yuan ($148.6 million), an increase of 9.3%, but a decrease of 1.3% from the third quarter. The company is investing aggressively in mobile services and software in Asia, as well as expand the reach of its WeChat social messaging service internationally. Recognizing the growing integration between its online and mobile businesses, Tencent plans to combine both segments in future financial reports and merge related revenue categories from the first quarter of 2013 onwards. Tencent has been quick to adjust its operations as new products and technologies take hold with consumers. Last year the company reorganized its business units into six new business groups plus a wholly-owned subsidiary focusing on e-Commerce. The company has also signaled a desire for further investment and acquisitions. In addition to acquiring League of Legends developer Riot Games, last June Tencent also invested $330 million to purchase 48.4% of outstanding shares in leading PC game technology studio Epic Games.

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Impact: Tecent is a Shenzhen-based game and social media company with four key divisions: 1) Internet Value Added Services (IVAS), which includes online games; 2) Mobile Value Added Services (MVAS) which includes mobile games; 3) Online Advertising and 4) the new category for 2012, e-commerce transactions. Tencent has fairly successfully weathered an industry-wide slowdown in ad revenue within the Chinese market – a fairly serious trend for a company heavily vested in web portals. Online advertising revenue was up 70% for the year.  Another major growth area for Tencent was their Internet online games revenue in their IVAS business.  Revenue for online games was up 44% to $3.5 billion making Tencent far and away the largest revenue generator for PC games.  Tencent does not report mobile game revenue, but their MVAS division under which mobile games is reported grew 14% to $572 million.

Tencent is profiting significantly from the revenue coming in not just from League of Legends, but many other online games that are not well known outside of China. The company has a long-time association with Korean game publishers, notably NCsoft, and has done very well licensing Korean titles for the Chinese market. Rumors often swirl in Chinese media naming Tencent as a likely new partner for Blizzard’s World of Warcraft if relations with Netease sour.

Rrevenue from online games for the Internet Value Added Services division of Tencent at a rate of 1 USD = 6.5 yuan.

The other recent money-maker for Tencent has been e-commerce revenue as the firm expanded its reach from Eastern China to Southern China, with plans set for an expansion into the northern portion of the country in the near future. Tencent also has an impressive mobile strategy. Instead of jumping into the crowded competition for low-margin mobile content, the company is pushing fast and hard into social networking and communication with WeChat, which already has 300 million users in China. The Chinese technology as well as digital entertainment market continues to evolve at a lightning pace, and companies like Tencent are taking savvy steps to keep up while growing huge in the process. Now the question for Tencent, like most successful Asian companies is whether they can expand into North America and Europe.  Given there willingness to spend on established Western products they are definitely a major player to watch.