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Tencent, NetEase to face user acquisition, branding struggles as they go global

Chinese internet companies Tencent Holdings Ltd. and NetEase Inc. will find acquiring overseas users and striking effective partnerships challenging as they expand outside their home market, analysts said.

Tencent said in March it will partner with more global game brands, having recently doubled its overseas online gaming revenues. In the fourth quarter of 2019, 23% of total online gaming revenue came from outside of China, up from a "teens percentage" in the prior quarter.

Similarly, NetEase aims to draw 30% of total gaming revenue from outside of China in the next three to five years, up from about 10% in 2019, a Jefferies research report said, citing a March investor call. It will do this by licensing popular games from third-party publishers.

NetEase titles including Knives Out and Identity V launched in Japan in 2019.

Distribution, operation costs

According to Lisa Cosmas Hanson, president of Niko Partners, Tencent will face higher costs trying to enter overseas markets as it does not have its own marketing and distribution channels as it does in China with WeChat and QQ.

WeChat and QQ are Tencent's instant messaging portals, which provide the company with data on user preferences and recommend game products. NetEase has its own website and e-commerce platforms in China as well.

The overseas distribution of games also requires significant capital expenditure, namely marketing from social media platforms such as Facebook Inc. This will impact profit margins, Shawn Yang, deputy head of research at China-based investment bank Blue Lotus said.

There are also some cases where spending a lot on distribution has not led to success, Tam Tsz Wang, equity analyst at DBS Bank said, giving IGG as an example.

Hong Kong-listed game developer IGG Inc invested 100 million Chinese yuan in advertisements in Japan. However, due to a lack of knowledge about consumers' preferences in the country, IGG received less than 10 million yuan in revenue from games released there, according to a local report.

Global partnership risks

Typically, licensing deals do not include access to user data, making it difficult for players such as Tencent and NetEase to assess user behavior and tailor game development accordingly, the experts said.

Yang pointed to how Tencent was not part of the marketing overseas strategy of the game Call of Duty Mobile as an example.

Tencent and NetEase need to invest in data collection themselves as a result, Tam said. This will help them adapt to the local culture "more easily and efficiently," Tam said.

Partnership opportunities may also become more scarce, the experts said. IP owners could try to publish games themselves to retain control of "valuable" user data, Yang added.

So far, Tencent and NetEase have already partnered with Activision Blizzard Inc., Warner Bros. Entertainment Inc. and Marvel Studios LLC, among others.

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