Tencent (TCEHY 0.80%) recently suffered a big setback when PUBG Corporation, which licenses its eponymous battle royale franchise to the Chinese tech giant, cut ties with the company in India.
India's government recently banned 118 Chinese apps, including Tencent's PUBG Mobile, in response to escalating military tensions between the two countries. Over 400 million people play PUBG Mobile worldwide, and more than 50 million of those players were in India.
Image source: PUBG Corporation.
PUBG Corporation, which is owned by the South Korean company Krafton (formerly known as Bluehole), likely wants to distance itself from Tencent to regain access to India's gaming market. PUBG plans to assume all publishing responsibilities for PUBG Mobile in India, but it's unclear if the change will satisfy Indian regulators, since Tencent still owns an 11.5% stake in Krafton.
Regardless of what happens, the sudden loss of a blockbuster game in one of its fastest-growing markets spells trouble for Tencent's overseas ambitions.
How much does PUBG Mobile matter to Tencent?
PUBG Mobile was the world's highest-grossing smartphone game of 2019, according to Sensor Tower, beating out Tencent's own Arena of Valor (also known as Honor of Kings in China) for the first time. The research firm estimates PUBG Mobile's revenue surged 652% to $496 million during the year.
Tencent doesn't break down its revenue by individual game, but Sensor Tower's estimate would be equivalent to just 0.9% of Tencent's total revenue in fiscal 2019. Therefore, Tencent's loss of PUBG Mobile's gamers in India won't significantly throttle its total revenue, which is diversified across its online gaming, social networking, digital advertising, cloud, and fintech units.
Sensor Tower's estimate also doesn't include Peacekeeper Elite, the reskinned version of PUBG Mobile that replaced the original in China after regulators blocked Tencent from monetizing the game last year. Peacekeeper Elite, which featured more "patriotic" themes, was approved for monetization and remains one of Tencent's most popular games in China.
But this could be the tip of the iceberg
PUBG's sudden divorce with Tencent in India gained a lot of attention, but it's really just the tip of the iceberg. Tencent's other top game, Arena of Valor, and its messaging platform WeChat were also booted from India.
Image source: Getty Images.
Prior to the political crisis, Tencent had ramped up its investments in India with stakes in the e-commerce platform Flipkart (now owned by Walmart), the ride-hailing app Ola, the music streaming site Gaana, and the news aggregator NewsDog. It also considered India to be a key growth market for its gaming and esports ambitions.
Those investments, along with Tencent's broad portfolio of overseas investments, set the foundations for its expansion beyond China, where it faces tighter censorship laws and playtime restrictions for its games.
They also helped Tencent keep pace with Alibaba (BABA -0.50%), which owns stakes in Indian firms -- including the payment firm Paytm, its e-commerce platform Paytm Mall, the food delivery company Zomato, and the online grocer BigBasket. However, Alibaba's top first-party apps, including Alipay and Taobao, were also blocked by India's sweeping ban.
Other countries could follow India's lead
Tencent probably wouldn't be too worried if its troubles were limited to India. However, the Trump Administration also plans to block WeChat in the U.S. on Sept. 20 due to national security concerns.
That ban also won't significantly impact Tencent's business, since most of WeChat's users are based in China. But that ban could expose Tencent's U.S. subsidiary Riot Games, which produces the hit game League of Legends, and its investments in American companies -- including Epic Games, Snap, and Activision Blizzard -- to tighter regulations.
Other countries haven't followed India and the U.S. in banning Tencent's apps yet. But if tensions continue to rise between China and the rest of the world, we could see other countries kill off Tencent's overseas expansions of its gaming, cloud, and digital payment businesses.
The key takeaways
On their own, the loss of PUBG Mobile in India or WeChat in the U.S. won't derail Tencent's impressive growth, since it only generated 4% of its revenue outside of mainland China last year. Nonetheless, investors should keep an eye out for other bans down the road -- which could strangle its nascent international business and sever its relationships with overseas partners.
