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Analysts: ByteDance to take on Tencent following gaming acquisitions

Artificial intelligence startup and TikTok short video app owner Beijing Byte Dance Telecommunications Co. Ltd. has a solid chance at cracking China's Tencent Holdings Ltd.-dominated US$33 billion-per-year digital games market following recent acquisitions, according to analysts.

The US$75 billion Beijing-based company purchased a 45.19% stake in game publisher Shanghe Internet Technology (Shanghai) in the week of March 25, according to reports. Earlier in March, ByteDance purchased Shanghai-based developer Mokun Technology. It released its own in-app game in February through TikTok.

Niko Partners gaming analyst Daniel Ahmad said Mokun Technology Co. Ltd., which was founded in 2013, had a good track record under its previous owner, developer 37 Interactive Entertainment (Shanghai) Technology Co. Ltd.

"We believe the [Mokun Technology] acquisition will give ByteDance a strong starting point in the mobile games market, as it will be able to leverage Mokun's experience to develop high-revenue-generating titles," Ahmad said.

Further acquisitions of similar studios will help ByteDance "improve [its] development capabilities in a short time," Chenyu Cui, senior research analyst for games at IHS Markit, added.

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The company has expanded into various sectors since it was founded in 2012. Cloud-based productivity tool Mubu, which offers online documents and productivity tools, confirmed last week that it had been acquired by ByteDance in 2018. ByteDance said Jan. 23 that it will expand its online education business after acquiring part of Chinese handset maker Smartisan Digital Co. Ltd. It also bought Flipagram Inc. and Inc. in February 2017 and November 2017, respectively.

ByteDance is up against two gaming giants, Tencent and NetEase Inc., who both saw gaming revenue increase last year despite a nine-month title approval freeze in China. Regulators had voiced health and gambling concerns for children and announced plans to limit the number of online games.

Tencent reported 2018 online game revenues of 104 billion yuan, up from 97.88 billion yuan in 2017. Mobile games were the primary driver of growth, generating 77.80 billion yuan, up 24% year over year. Despite the temporary game license approval freeze, the company published 38 games in 2018 and has received eight licenses for new games since approvals resumed in December, according to market research and consulting firm Niko Partners.

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Chinese rival gaming giant, NetEase, generated 28.53 billion yuan from mobile games in 2018, up from 25.69 billion yuan in 2017.

Tencent and NetEase saw their gaming revenue as a percentage of their overall revenue fall year over year in 2018, largely due to China's intensified scrutiny over the gaming industry.

Even so, analysts say ByteDance has a fighting chance against the two companies.

The Chinese startup is considered a "minnow" compared with the established games companies but it has the added benefit of being able to leverage its popular news apps Jinri Toutiao and Douyin, known as TikTok internationally, Matthew Brennan from tech consultancy China Channel said.

In November 2018, TikTok had more than 500 million monthly active users globally. In China, Douyin reported 400 million monthly active users, 50% of which were active daily, according to industry resource Business of Apps. The short-video platform has a market penetration of 30% in China.

"ByteDance will make use of low-cost user acquisition opportunities such as traffic [to its apps] to build out their gaming titles," Brennan said.

Cui agreed, adding that ByteDance is a "major user acquisition and distribution channel in China" and has an advantage over the two gaming giants because it is able to reach a wider audience beyond "hardcore gamers."

The AI startup reportedly closed a pre-IPO financing round in October 2018, which raised between US$3 billion and US$4 billion. Investors include Japan's technology and telecom conglomerate SoftBank Group Corp.

As of March 29, US$1 was equivalent to 6.71 Chinese yuan.