Consolidation is remaking the game industry as we know it, and it is likely going to happen faster as the threat of a recession looms larger. The first half of 2022 has seen more than 651 deals announced or closed with a disclosed value of $107 billion, according to investment bank Drake Star Partners.
We talked at the Gamescom event in Cologne, Germany, with Pete Smith and Eddie Chan at Tencent, which has become the world’s biggest game company. Smith joined the company 15 months ago to help serve the second-party studios that Tencent has invested in. And Chan focused on making investments in companies through Tencent Games Global, which has more than 20 game studios now. Now he is spending more time helping to govern those studios.
At Gamescom, Tencent showed off 10 or so games being developed under its Level Infinite brand, like Metal Hellsinger and Warhammer 40,000: Darktide. Chan said the key to making deals work is giving the acquired or invested teams creative independence. The goal is to support and empower them, Chan said.
Still, Chan sees a natural pullback happening across the game industry as the slowdown takes root and growth in games slows down. It’s also a time to focus on gameplay, and to be cautious about hyped categories such as metaverse and blockchain.
Here’s an edited transcript of our interview.
GamesBeat: Can you tell me more about yourself and your background?
Pete Smith: I’ve been at Tencent for about 15 months now. I was previously at PlayStation for a long time, almost 18 years, and before that at EA. I’ve been in the game industry all my working life, and I love it. I’ve seen a lot of changes.
I joined Tencent to help manage some of what we call the second-party studios, the majority invested studios. There’s a difference in the way we treat those and the small investees. Once you cross that majority threshold, then they’re part of the family, but also they can get access to–there’s no secrets at that point. They have access to all the technology and knowledge. That’s one of the many ways we want to support those developers in terms of all the knowledge that exists within the Chinese teams about games as a service and live ops. Plus just supporting the teams.
Our brief is very simple. How can we help the teams make great games? Great games that are focused on maximizing their success in the west on PC and console, which is something Tencent traditionally hasn’t done. I’m building a team in Liverpool to manage some of the developers globally, outside of China.
GamesBeat: Is onboarding newly acquired developers a big part of it?
Smith: It’s the whole soup to nuts. Helping those teams, the new teams–there’s a learning curve. But often there’s a relationship prior to any acquisition. It’s not as if all of a sudden the studio pops up and nobody’s worked with them before. Sumo Digital is a perfect example. They have had a relationship with Tencent for a long time. That transition was much smoother as a result. And that’s great, because everyone knows what the partnership is likely to look like before a more formal acquisition.
That’s definitely a part of it, the onboarding. And then it’s just working with the team. What we don’t want to happen is a situation where a studio comes into the family and nothing changes. There should be positive changes. It’s all about the balance. How do we make sure we don’t break anything and ruin the reason we acquired them in the first place? We can’t change a studio into something that it isn’t. But at the same time, with the backing of a partner like Tencent, how can we support them to maximize their potential and grow and deliver some great games? It always has to be about making great games.
GamesBeat: What are some studios that came in that way recently?
Smith: The most recent addition to my team–we have Tequila Works. That was one that was started a long time ago, but it was quite a long process. Just within this year we’ve had Tequila Works, Inflexion – they’re doing Nightingale – and Sumo. Again, that started quite early, but it’s only completed this year. We’ve been quite busy.
GamesBeat: And Eddie, how long have you been at Tencent?
Eddie Chan: About four and a half years. It’s been an interesting journey.
GamesBeat: It feels like a bunch of things have slowed down in the industry at large. I don’t know if that affects what you’re doing.
Chan: I’d say my role has evolved. At Tencent things are always changing. I’ve learned to go with the flow a bit. Even before the market slowdown or what-have-you, I was already transitioning from doing more investments to more working with the studios we’d already invested in. We’ve grown from–when I got here we had maybe two or three of the studios inside of Tencent Games Global. Now we’re at around 20. We’ve gotten to a stage where we needed more governance and a system of working with those studios. I’ve naturally been evolving more to that side. The majority of my time is now spent there instead of the investing side.
GamesBeat: I see some companies that are still extremely successful at making investments and acquiring companies, like Tencent and Embracer. What’s the usual selling point? And how do you try to distinguish yourself? How do you attract the people who want to do deals and make them happy?
Chan: I can’t speak to what others do, but our approach has been pretty consistent throughout. We definitely want our studios to have creative independence. We want them to do what they’re passionate about. Not having them do that seems like a waste. That’s the objective, to find the best talent and allow them to make the game of their dreams. Typically we look for studios that have a track record and that we believe in in terms of their ability to do that.
Our goal on the one hand is to help them from a financial standpoint, so they don’t have to worry about that treadmill of constantly trying to get funding for the next project. On the other hand, we want to provide support in specific areas where we’re able to. That’s different for every studio. For some it might be market intelligence. Where should they focus with their next game? For some it may be technology, helping them with the back end and architecture to stand up multiplayer in their next project. For some it might be games as a service. For some it might be transitioning to mobile. We look at it and say, “We think we have some know-how. We’re happy to make whatever we have available to help you find success.” It’s pretty straightforward.
Smith: It’s really about finding the value add on our part. The two words I use are support and empower. We want to support them, obviously, on the financial side. It’s important to almost remove that from the conversation. It’s a big thing, but it’s not there. We can take that away. The more time the developer can spend thinking about the game, the better. But it’s also about supporting them with technology and the whole knowledge base across not just Tencent, but the suite of studios we have as well. There’s a huge amount of experience and knowledge. We really encourage collaboration.
And then it’s just empowering them, making sure they have everything they need so they can focus on great games. Having a big partner that has such a wide reach–there are so many small things that can distract a developer. We can take all that away so they can single-mindedly focus on making the most successful game they can.
GamesBeat: What does the Level Infinite brand mean or stand for at Tencent?
Smith: We’re trying to create something that’s synonymous with quality. We’re in a great position to not just say this, but deliver this. Focus on quality. Focus on making something that moves the needle, that makes a difference. That goes across all of the teams. If we can deliver games that do something different, that surprise and excite our gamers, that will become synonymous with the brand. We have to define the brand through our games, through our content. We need to build the right games, and then people will look at Level Infinite and say, “Right, I know what to expect.”
There is a Tencent type of game. We are looking more toward the future in terms of the games as a service side of things. We’re looking for those trends that we can take advantage of and maximize. There’s a certain type of game. But that will be defined over time through our content. It’s easy for us to say it’s going to be this and this and this, but I’d rather we say, “Here’s what it is because you can see it in our games.”
Chan: It’s going to be a long-term journey. What Level Infinite represents right now is still being built. Ultimately the proof is in the pudding. We need to release great quality games. But the aspiration is that Level Infinite becomes synonymous with great games, great gameplay. That’s what we’ve always aspired to. We wanted to create a brand that, over time, represents that.
As we were thinking about it, we now have a portfolio of a lot of smaller studios that we hope will be putting out great content. Can we create some sort of halo effect around all of them that helps them all benefit across the board over time? That was the intention around it. We’ll see if we get there, but that’s the hope.
If you look at the first couple of titles coming out under the brand, with Tower Fantasy we’re at about 10 million installs worldwide in a little over two weeks. Last night Metal: Hellsinger got the award for Most Anticipated PC Game here at Gamescom. Darktide is already causing a huge buzz. Media people have loved it. Those are just the first three titles coming under the Level Infinite branding.
GamesBeat: How many games are you showing here this week? Is it about 10?
Smith: At the booth it’s eight or 10. Anyone can see the investments we’ve made, if you look at the suite of studios. What you can’t see is what those teams are doing. But because we’re supporting those teams, that’s why the future should be incredibly bright for those teams. We’re now in the background talking to those teams, looking at what their vision is. Eddie mentioned that dream game. It’s lovely to be in a position where we can go to developers and say, “We’re a new partner. This is a new relationship. What’s the goal? What can we do? How can we collaborate and work together to make the game you’ve always wanted to make, but you’ve been restricted for whatever reasons.” We’re almost starting with a clean slate. That will then pay dividends for years to come. I think you’ll see the Level Infinite brand evolve over time. We have a relatively small slate of games right now, but that’s only going in one direction as you start seeing the benefits of the investments we’ve made.
GamesBeat: Is there anything that you think needs to slow down now because the overall global environment has changed?
Chan: Not really, in the sense that–most of the projects, or all the projects we have underway are multi-year investments. They’re already on the path. There’s not a lot of change. Fundamentally I don’t think anything about the game industry has changed, in the sense that–there’s a rising tide that’s going to lift all boats. Gaming is going to continue to grow. More people are going to play games. More people are going to engage with games. The overall industry and revenue trends are only going to continue to grow.
We got ahead of ourselves going through the pandemic. I think this is a natural pullback in the overall arc of an industry that’s otherwise going to continue to drive more engagement. From that perspective, we’re always relatively long-term in our view. Fundamentally our approach hasn’t changed.
GamesBeat: Are you excited about things like the metaverse, blockchain, web3, or are they distractions from games?
Chan: This is speaking for myself, but I think it’s still early days. For me it comes down to the gameplay experience. There’s a lot of potential in those new technologies. It could be the future. I want to see it actually improve the experience for players and make it a better, more interesting, more innovative, more engaging experience. I don’t think we’re quite there yet. We’re watching excitedly, but still on the sidelines.
Smith: For our developers, as Eddie mentioned, we want them to have creative autonomy. One of the benefits of having such a wide range of developers is we have so many different people thinking about games in different ways. If a developer wants to explore an area like the metaverse, we won’t say, “That’s not something we’re interested in.” But Eddie is absolutely right. My first question is, “How does that benefit the game?” If someone comes along and says they have a blockchain game, I’m probably not interested right off. If they say they have a great game that takes advantage of blockchain, then that’s the right way to think about it.
We’re supporting our developers to be creative, to experiment, to look at the long-term plan and what the future is. Within that, the brief is very wide. The developers are all noodling away and thinking about what the future looks like with our backing, and they’ll come up with some amazing ideas.
GamesBeat: I was looking at the first and second quarter investment numbers for blockchain game startups. It was a third of all funding, and then half of all funding in the second quarter. Some VCs were saying that nine out of 10 pitches they were getting were blockchain game startups. I wonder if that’s going to clear out now, if that level will start dropping down.
Chan: I imagine it would, with the crypto winter and everything else going on. We’ve certainly been seeing a lot of pitches in that area as well. But to us it starts and ends with gameplay.
GamesBeat: With mobile, I don’t know if the motivation for companies to sell and become part of bigger companies–did that change because of things like the IDFA challenges everyone is facing? We saw Zynga comment about how they didn’t know if they’d be affected. Then they were affected. Soon enough, they sold. That’s their cushion to deal with a market that’s now less predictable. I don’t know if that’s a prevailing reason for some companies to want to become part of a bigger company.
Chan: Again, I can’t comment on what others are doing. But what I would say is, our games, on the mobile side–first of all, at Tencent Games Global we haven’t invested in that many mobile companies. We’ve primarily invested in PC and console. Second, I think the games that we focus on and pride ourselves on in the mobile market have relied less on that user acquisition model. That’s a difficult model to sustain. It’s hard to drive ROI. We typically focus on the mid-core and hardcore games that are driven more by gameplay and word of mouth, rather than needing to allot UA to drive user growth. We’re somewhat more insulated from those trends.
The other thing I’d say about this is, our approach in terms of investments and acquisitions is always about empowering the founders to stay. In fact, if a founder says, “I’m out, I’m not sticking around,” we’re probably not interested in a deal like that. If there are motivations about exiting, that probably doesn’t suit us. We’re not in the business of running studios ourselves. We’re in the business of empowering great game developers to continue to do what they’re passionate about.
GamesBeat: Does it feel like there are some regions on the rise for you as far as where you’re interested in investing or acquiring? For a while Finland was the obvious place. Turkey saw a lot of deals happen more recently.
Chan: Honestly, we’re not driven by geography. That’s not how we think about things. Of course, our team is spread out across the world to be able to find opportunities. But we don’t necessarily have a thesis that says, “Now we want to invest in New Zealand. Now we want to invest in Finland.” We meet great folks at Supercell or GGG and we think, “We really like these guys!” Our goals are aligned to what they want to do and we think we can help. So it’s not driven by geography per se. Sometimes it naturally looks that way. Sometimes when we learn more about a market and build our network there, more deals will come out of that region. But we don’t go in with a deliberate thesis like that.
Smith: What’s great is that we have ended up with a diverse suite of developers. Not just geographically, but in terms of content as well. That’s a real strength, especially once we start getting those developers to collaborate. Those learnings in one area, whether it’s content or geography, can be dispersed throughout the group. That’s a great strategy.