Business of Esports TV: Tencent Investment Jeopardy

(Podcast #131)

In this segment, we discuss Tencent being in talks with US authorities to keep their ownership stakes in US gaming companies.

The Business Of Esports brings you news, debates, and all the information you need to know about the gaming sector, the world’s fastest-growing market. With Paul “The Profit” Dawalibi leading the charge, and a variety of special guests, BoE TV is the only place to find insider information on the esports industry!

Check out the full podcast here:

Paul Dawalibi 10:01
Well, that was that was kind of a fun light one very serious. This is this is way more serious actually probably about as serious as it gets on this podcast. Oh, okay. And and this is an article about Tencent. The headline here is China’s Tencent in talks with us to keep gaming investments. And the gist of the story is Tencent obviously owns Riot Games. And they own a big chunk of Epic Games. And they’ve been in talks with the Committee on Foreign Investment, which basically has the authority to force Tencent to divest these us holdings. And, and so now 10 cents, essentially trying to work with this committee to figure out how they can keep these ownership stakes in these us game developers. Right. So they own majority of Riot have 100% of riot, I think, at this point and a 40% stake in epic. And, and, you know, there’s real risk here for Tencent that supposedly they have negotiated and risk mitigating measures with the committee. And and they’re currently negotiating, you know, to keep them. So, William, I’m curious, your thoughts on this let without getting into any politics, obviously. But you know, it could Tencent be in trouble at some point, because of everything they have amassed. And, and, and so, you know, it starts to raise red flags.

William Collis 11:29
Yeah. Yeah. I mean, this is a really potentially significant for 10. I mean, it’s an existential risk for their business. Right. Do you know what I mean? Like, if you think about, you know, if you think about, like, all the success that companies had in gaming, right, and let’s be honest, it’s had a phenomenal amount of success, particularly in the esports sphere of gaming. I mean, we basically, I think we pretty much, rightly or wrongly, impute real genius to Tencent, right? Yeah. At least Certainly, the the success they’ve seemed to have seems to indicate genius. The reality is, you know, there are existential risks to businesses like 10 cents, and one of them is in this multinational heavy investment strategy. Are you going to be allowed to like, is government regulation a problem? Right? Can government regulation come in and disrupt? And it’s weird for us to think about government regulation being an issue in video games, right? Because it sort of doesn’t it’s like video games come out like government like what are we the last? We haven’t? We haven’t anything about loot boxes yet? You know, like what’s happening, but because of the the value I’m you’ve seen this so many businesses we’ve talked about on the podcast, achieving billions of billion dollar valuations, right? They’re such big targets, and they have so much foreign money coming into them. Because they’re so like, games are such a fungible global commodity, right. Like you can launch. Like, if you have a game that works in North America, chances are it probably be pretty good in Europe, Australia, Asia, everywhere, right. And the ability to defuse that product is relatively easy to because digital, right. So as long as you have internet in your home country, and yes, there’s, you know, localization, everything, but fundamentally, it’s much easier than, say, shipping cars around, right. So the reality is, it makes games I think, even more of an attractive market for foreign investment, because the product itself is so fundamentally decentralized, if you want to think about it that way. Right? So yeah, it’s, it’s scary. And I you know, I think 10 cent like, you gotta, you gotta be worried. Because what do I mean? Like, let me be clear, I don’t think they’re going to be forced to divest their ownership of Riot Games or Epic Games, right? I don’t think that’s likely. I do think what’s interesting here, though, is what prohibition strictures or gives 10 cent makes to us regulators to be able to keep those positions in the companies because the reality is, once you’re sitting down at the table, like they’re gonna lose something here. I think something’s going to be extracted from them. The question is, what is it going to be? And it’s interesting to think, is it an opportunity for mirrored investment in you know, related domestic companies that are domestic Tencent smartlook, that’s an interesting option. It’s interesting thinker, they’re going to be strictures in terms of the control they can exert on their, you know, like us based investments that will be interesting. particularly in light of the fact that I wonder, there seems to be so much independence today from Riot Games. And, you know, and epic, right, like, you makes you wonder if, you know, maybe like control was never an issue, but maybe now it gets formalized, you know, but it’ll be very interesting to watch, I think it’s gonna be very important because 10 cents money is most of what most not most, and it’s a significant portion of the money driving the industry today. So whatever happens for them, it’s going to dictate how they can invest in future as well. And this could actually have a cooling effect on some of the game stuff that we’ve seen.

Paul Dawalibi 14:57
Yeah, I was gonna ask that question like, do you think this makes them more gun shy Are you know,

William Collis 15:02
you know, it’s tough because you’ve had so much success with strategy, right? Like, you’ve made so much money? Like,

Unknown Speaker 15:10
oh, you know, there’s

William Collis 15:11
now a problem. And like I said, I don’t think this is though it’s a potential catastrophic business risk, I would just be amazed if there’s a forced divestiture something here just doesn’t seem likely to me.

Paul Dawalibi 15:21
Well, what do you think they’re gonna have to give? What do you like if you had to? I know, you threw out some options there. But what do you think? How do you think this plays out?

William Collis 15:32
My ear, I, I just don’t I was tickled by that. But I think it’d be something to worry about controlling corporate governance, right, and a limited ability to influence companies to maybe you know, an inability to vote some of their shares or something, I think that’ll be a part of that. I also wonder if there’s, you know, like, I can’t imagine be much more than that. I can’t even really see a cap being put in place on the ownership stake they could take or something for future investments, right? Both because, you know, they, like I just I doesn’t seem to be how we do business today. But also, it’s very rare that they’re buying 100% of things like Riot Games, most of what they have is very significant, but still minority positions, like what they hold an epic. So do you think that’s right? I don’t know. What do you think?

Paul Dawalibi 16:16
I’m curious, do you think if any of this has was any of this conversation around, you know, divesting these us assets was accelerated by this news from last week that we discussed, you know, where valorant A Riot Games game valorant voice communications are all being recorded. And you know, that maybe, maybe this raise some red flags, it’s Hey, this is a security issue. We can’t you know, the Chinese listening to every everything we’re saying.

William Collis 16:49
Yeah, I mean, look, I mean, like, in general, I think games are potential, you know, games have incredible because they’re just think how often you and also buddy, we think how much communication, you know, you do through games, like, you know, it’s game related, you know, products, like we’ve talked about discord in the past, and how much discord gets used for things, right. I think the reality, though, is, if you’re going to be picking on businesses based on their control, and monitoring, games might be a good place to start. But it feels like the mobile market is the place to really begin, you know, I think it’s probably the apps that are the higher risk. Because let’s be honest, like, like League of Legends is is amazing game and hugely significant. But its ability to know what I’m doing, I’m guessing is far less than, than, say, the ability of, you know, dozens of apps on my phone, which are basically designed around data collection, I’m not saying right doesn’t do a lot of sophisticated data collection. I presume they do, as we’ve talked about on the podcast before, but, you know, I think their ability to access, you know, is is more gated? I would imagine. So, yeah, I don’t think it’s related. But it would be interesting if it was, and it would certainly highlight sort of the the regulatory scrutiny that’s being placed in general and getting gaming, I think, by the way, has sort of had regulatory scrutiny jus for it for a long time. You know, I think we’re overdue. overdue. Yeah. Yeah. I don’t think it’s gonna be heavy regulation. But things like loot boxes, like I’m still amazed, we don’t have movement there. You know what I mean? Like, I’m, again, it’s a personal opinion, but it would seem to me something that you might want to look at least having some government guidelines for around this. You know, I think games have just been for so long perceived as what kids play in basements, and silly little industry, and oh, we don’t really come on that’s, you know, it’s highways and airplanes. And you know, but the reality is, the money is so large now, you know, money attracts attention. I think there’s gonna be like, my prediction for the back half of this year is we’ll probably see more stories, not aggressive, scary stories, but more stories about things being looked at in the space, because I think there will be some some changes here coming. What do you think, Paul? I’m curious, like, what’s your take on this? Well, what do you think Tencent would have to give here? Um,

Paul Dawalibi 19:03
good question. Good question. I think I’m with you on, you know, problem, if anything, because I actually think they’ll probably there probably won’t be anything if I had to guess. I don’t think there will be any repercussions here. For 10 cent, I don’t think anything will change. I think this is mostly ceremonial, or, you know, like, it’s, we, you know, we have to make it seem like we’re looking at it, and we’re, you know, we’re we’re thinking about it, and I really don’t think they’re going to end up with any kind of repercussions. And if anything, I’m totally with you on maybe it’s a governance issue. I think the more interesting conversation that I like to sort of theorize about or if I put my tinfoil hat on, right, if this does go through, right, and Tencent is forced to divest these assets.

William Collis 19:49
What that’s really I didn’t even think about that, because that would not have where do they go?

Unknown Speaker 19:53
Yeah. Well,

William Collis 19:55
what their whole strategy is, I mean, what would that mean for the global gaming land? landscape, right? I mean, it would, you know, probably like, and this is a real reach, but it would probably be a return more to historical norms. Right? If you think about how gaming used to be in the 80s and 90s, right, there was a lot more regionalized manufacturer, you had things like Japanese consoles that were basically only had games made for them in Japan by Japanese companies, right. I mean, I’m extremely still, you know, simplifying there, but that’s what immediately jumps to my mind, like, the PlayStation era where it was, it was like rare for, you know, or like, even early Nintendo era, right, it was rare for foreign developers to be producing a lot for Japanese domestic console’s for various reasons, like the Nintendo seal of quality program or other things. I, I wonder if you wouldn’t see more regionalization, you know, again, as a result to that, because it’s just tougher for money to be International. And funnily enough, I wonder if that might bring back more console exclusivity, like as a really strange knock on effect, because if you think about it, what you’re really saying is, development budgets are probably going to have to get smaller, if they’re going to have to be maybe more, you know, like, there, there’s going to be more risk because there’s less money to flow into studios and things you might want partnerships with, you know, large platforms like an Xbox or Playstation, to play the role of an investor almost in diffuse some of the risks. So it’d be interesting. Yeah, you might see us I mean, I’m really reaching here to be interesting. But like, one possible world, you if you walk through that mirror of Tencent is forced to divest one possible world, we end back up and is the 90s. You know, and another console wars will be modern, and it might be more platform based all these other things, but that could be where you end up going.

Paul Dawalibi 21:41
You may see more, more, like smaller studios, just in greater quantity also. Exactly. Yeah. But I

William Collis 21:50
think that is multi title studios, and more of, you know, sort of what it used to be where, you know, studios had one to two IPS. And, you know, they were just focused on sequencing or, or, I mean, paradoxically, I wonder if it might, in some sense, have more innovation in the industry, because again, there’s sort of this trade off with the larger the more money that flows in, the more risk averse the industry gets, because the more cost of failure goes up, right. So again, maybe thinking about the 90s. And like looking glass studios and thief, the dark project might not be the weirdest world to think about. But to be very clear, I do not think it would be overall good for the industry to have a forced divestiture here, it would have a cooling effect that would overall be very negative. But it might be some interesting knock ons. And it’s always fun to think about going back to the 90s and gushers. After School snacks, you know, that’s my memory.

Paul Dawalibi 22:42
What’s interesting is who buys riot in a divestiture situation right. And and the way my Evan and I inevitably come to is, it’s got to be Activision Blizzard.

William Collis 22:53
Well,

Paul Dawalibi 22:55
right, because they’re, they’re 10 cent friendly. Yep. Right. Why not pass it along to a to a friend?

William Collis 23:03
I mean, that would be the greatest

Unknown Speaker 23:04
Paul,

William Collis 23:05
I refuse to think about that world. Because what does that mean for heroes?

Paul Dawalibi 23:09
Like true? What does that mean for your story? Maybe Heroes of the Storm gets a fighting chance at that point. I

William Collis 23:14
don’t know. No, no, I think what would happen is he started having here ladies serving Blizzard skins popping up in League of Legends, and here’s the storm would date, it would be done. It’d be scary. No, but you’re right. That’s me. But why wouldn’t Riot go public in that world? Just to speculate

Paul Dawalibi 23:29
maybe, that

William Collis 23:30
that’s what I would suggest. Because if I’m Tencent and I’m like, I’m Ryan, I’m looking at this and I’m saying, look, like Activision Blizzard is a public company, you know, like, look how well like, it’s our time, you know, they now they’re large enough, they have a multi title suite, right? They’re no longer, you know, a one game company, right, which they were for most of their history, you know, they arguably have and we thought sort of Riot might be preparing to go public on the podcast historically, right. Like, we talked about that with their, you know, big multi game, you know, long term plan and, you know, diversified channel strategy. They’re doing all the things that made sense before public offering. I would bet that rather than be acquired, they would they would go public, particularly with today’s market in the valuations game.

Paul Dawalibi 24:12
I mean, that would be that like, this would be ridiculously hyped, like IPO to right, like, we’re talking way bigger than Roblox way bigger than yabby. Well, not

William Collis 24:23
only that, but just think of what the Robin Hood effect would have.

Paul Dawalibi 24:27
Yes. Everyone wants to actually have legends.

William Collis 24:29
Yeah, the 100 million players who own who played League of Legends all decide they want to put in a week’s allowance into the money. That’s a billion dollars of capital right there. You know, like, right there, right. Similar allowances $10 a week, which I don’t know maybe maybe it’s more nowadays, I don’t know. or less. I have no idea. But um, I mean, that it’s, it’s it’s crazy. I mean, actually talking about it makes me wonder like, why aren’t they public? It would seem like they get I guess, you know, the pains the strictures of being a public company. It seemed like they would get such a favorable reception in the market. Right?

Paul Dawalibi 25:04
Yeah. But that is why, like last week’s news scared me so much in the sense that being public invites scrutiny. Yeah. Well, yeah. Private and owned by Tencent. Good luck, like, knowing what they’re actually doing. Right. So maybe they just don’t want the public scrutiny either.

William Collis 25:23
Well, I you know, to some extent, and I’m, I’m not going to, I don’t wanna cast any aspersions here. I want to be difficult about how I phrase it. But like, I think the fact that Riot hasn’t gone public sort of explains why Riot still makes good makes very good games, right? Because, right. And I’m not saying you can’t be a public company and make great games. Like, obviously, there are a million counter examples to that. But it shows where the focus of the management team is right. Like it. And and candidly, there are probably a lot of incentives to be public. But if your goal is to make the best competitive games, which I think is probably how Riot would describe their business model, right? You’re right, that you know, you have enough money, you’re well funded, you’re doing well, you don’t actually need access to the capital, which is the big reason to go public, right? It might be more rewarding and more intellectually satisfying to stay private, and have the flexibility and the control, and all the things that you give up a little bit. So yeah, I don’t know. It’s interesting. It’s interesting.

Paul Dawalibi 26:24
Yeah. And it’s again, it’s one of those things where, you know, I’m not suggesting they’re doing anything nefarious with the data, but you just don’t want prying eyes. And because they’ve looked at you can look at Blizzard right and go, look what being public did for them? I mean, practically.

William Collis 26:42
You know, that’s not I don’t want to go into the blizzard conversation. But I

Paul Dawalibi 26:45
was, I may look at it that way. If you’re a developer, right? If you’re just the guy if you’re forget about management, forget it. Like if you’re just the guy making games, yeah. Yeah. You probably know people at Blizzard who are, who are not happy with why you have this sort of exodus of people there and you’re going, maybe, you know, maybe we’re better off the way we are, where they don’t care how long it takes, they’re focused on making a good game, right? They have no shareholders to answer to every quarter they don’t have, right, it’s Yeah, yeah, there’s a lot of upside to staying private.

William Collis 27:17
There’s huge upside to staying private in Piglet. Because at the end of the day, you know, I wouldn’t describe riots goals as artistic because I even if many people in the company would because I think it’s more. It’s more I think of them less as artists and more as craftsmen if that makes any sense. Yeah, like, I think what they’re doing is like they’re just, you know, it’s not like they’re trying to do this crazy, you know, non commercially like, they’re just, they’re honing this thing again and again and again. It’s like a wood carver.

Paul Dawalibi 27:47
You’re not trying to win Oscars. Exactly, exactly. But they’re gonna build a really cool house.

William Collis 27:52
Exactly. Yeah. And I think if you have that Craftsman mentality, where you want to bake titles for 10 years and cancel projects that you don’t think are going to work out and take you know, have random development teams work on things that never you know, all the things that you kind of associate like, I guess you could say the old Activision Blizzard with right you know, or the old Blizzard, right? Like, yeah, just why would you? Why would you want to invite that whole? I mean, look at the headache that blizzards with right now with the launch of Diablo four, like, you know, and Overwatch two

Unknown Speaker 28:25
and Overwatch two,

William Collis 28:26
why would you want to invite that? You know, nobody was asking for valorant until valorant just appeared.

Paul Dawalibi 28:32
That’s true. It’s true. It’s a good point.

William Collis 28:34
But if a public company the question would have been where’s where’s the next game? Where’s the next game? Where’s the next game? We’ve been waiting guys. It’s been five years. Come on. Yeah,

Paul Dawalibi 28:41
yeah, you previewed whatever, that fighting game, you know, six months ago. We want it now. Where is it? Right.

William Collis 28:47
Yeah. And there’s also the lesson of cdpr now to in the market looking at this, which is like, you know, you could have argued they were the model for a publicly traded Oh, tour company. And yeah, that, you know, cyber. I wonder, would cyberpunk have released when it did had they not been a public company trying to hit holiday sales? I mean, I’m I’m good point to say it but like a good point. You have to think that played a factor in it, you know?