Learning from Past Battles and Attacking the Flanks: Tencent’s Gaming Playbook

#TencentsGamingEmpire Robin: ‘Even a company like Tencent, with its gaming empire, lost its first few forays into games without really understanding why. And even after some initial success, those gains are hard to secure unless you examine and learn from the experience in depth: how did you win, how can you establish a repeatable playbook, and how can you keep innovating and breaking new ground within it? If you win through luck, your own limitations will eventually make you lose.’ ----- Tencent’s unfavorable start Before Tencent expanded from QQ into games, China’s major gaming companies included Shanda. It operated the Korean game Legend. Its hit success even helped Shanda’s Chen Tianqiao become China’s richest person for a time. Another was NetEase, which developed Westward Journey Online itself and also did very well. Tencent initially chose the licensing model too. Its thinking was that if it was going into games, it should offer the best. It licensed Kai Xuan, then Korea’s most advanced 3D role-playing game. Its graphics and features far surpassed Shanda’s 2D Legend. Tencent, accustomed to meticulous user-experience optimization, had a difficult first encounter with gaming. Kai Xuan’s advanced 3D technology demanded powerful computers and substantial network bandwidth. Most Chinese gamers’ equipment and the broader internet environment had not caught up. Even after Tencent’s technical team repeatedly optimized the underlying game, performance remained poor, with jagged edges and pixelation across the screen. Players soon abandoned this expensive import, and Tencent’s first test of the gaming market ended in failure. Shanda responded: ‘We regard Tencent’s entry into online games with respect, but Tencent must also respect the online gaming industry itself.’ ----- Tencent reenters gaming around QQ’s strengths In 2003, after that painful first experience, Tencent chose lighter casual board and card games. It rewrote the entire website platform and, in its tradition of emphasizing user experience, rebuilt the product to make its interface and operation friendlier. But experience alone could not challenge Ourgame, which nearly monopolized casual board and card games. Ourgame had 200 million registered users and almost 80% of that market. The decisive factor was Tencent’s ability to build around QQ, its pivotal social product. A new version of QQ included QQ Games. Users did not even need to register: they could sign in with their QQ account and start immediately. Tencent also added a window showing which games a user’s friends were playing. Clicking took you directly to the game room to play with them. Unlike large online games, board and card games had little technical complexity and fixed rules, making them easy for Tencent to imitate. Their players overlapped heavily with QQ users, so those attracted from Ourgame to the QQ Games lobby felt little need to adjust. From rules and interface to functions and prompts, QQ Games copied Ourgame directly; users could not tell them apart. Once players’ relationships became established on QQ as friendships and groups, switching became harder still. Tencent began to understand the power of a social gateway. For other Chinese startups, a more frightening question emerged: if a team as formidable as Tencent, armed with QQ as the ultimate tool for traffic and social relationships, entered my territory with similar tactics, could I resist? How should I defend myself? ----- Tencent reviews its battles and considers its next move Many companies win a battle without understanding why. Those that win through luck often lose through their own limitations later. Understanding how a company won, developing a repeatable playbook, and finding ways to innovate beyond it can take a long time to absorb. Victory never comes in one stroke. It takes breakthroughs in many battles, large and small, as well as prolonged endurance and patience. After winning in casual board and card games, Tencent again concentrated its best technical talent on a large online game. It developed QQ Fantasy with the hugely popular World of Warcraft as its model. The launch went smoothly and users grew rapidly, but the good times did not last. QQ Fantasy made the opposite mistake to the 3D Kai Xuan: the design was too simple, and many players quickly completed everything. Then Shanda made a move. In December 2005, Chen Tianqiao made three hit games—Legend 2, Fantasy Kingdom, and The World of Legend—‘permanently free.’ Revenue shifted to the familiar model of free gameplay with charges for value-added services. QQ Fantasy, in the same category, immediately lost its competitiveness. Two years on, Tencent suffered another significant setback in large online games. Two strategic debates emerged within its gaming division: First, how could Tencent continue into large online games and win back the market? Second, should its future focus on licensing imported games or developing its own? Ren Yuxin, the head of Tencent’s gaming business, began considering the way forward and what Tencent’s playbook really was. After studying the history of standalone games and the Korean gaming market, he reached a new conclusion. Although large online role-playing games were very popular, other genres had not disappeared. In 2005, for instance, large online games had 15.9 million users, while casual games had 17.9 million. Gaming also exhibited a winner-take-all pattern: the top game captured most of the market. Korean game rankings suggested that in many niches only first place mattered; from second place onward, hardly anyone remembered the titles. Ren Yuxin therefore made an important judgment: Everyone is debating two questions: how to make large online games and regain the market, and whether to license imports or develop them internally. The first approach currently offers poor odds; the second is a false choice. Tencent should bypass the main battlefield of large online games built around fighting monsters and leveling up, attack from the flanks, focus entirely on casual competitive games, and become the leader in every category. He called this a ‘latecomer’s flanking strategy,’ or a strategy of surrounding the cities from the countryside. His final directive identified shooting, racing, fighting, flying shooters, and music and dance as the categories Tencent Games should capture. Internal development and licensing could coexist: use whichever approach fits. ------- Tencent’s ‘horse-race’ system Because Tencent did not get hung up on imported licenses versus internal development, it even evolved an internal horse-race system: back whoever runs fastest. This extended beyond gaming to the later development of WeChat. The company-wide culture known as the horse-race system was formally established through Tencent Games. The idea is simple. Internal projects such as Qzone, QQ Games, WeChat, and Honor of Kings were not entirely products of top-level planning. They came from independent innovation by frontline business units. After several teams produced their own versions, they could put them online to compete. Tencent would identify the best and allocate promotional resources based on the results. China’s most phenomenal game of the preceding two years was Honor of Kings. Its developer, TiMi Studio, was based in Chengdu, Sichuan, rather than Shenzhen headquarters. Yao Xiaoguang, who oversaw Tencent’s game development, had led several successful studios that produced games including QQ Speed, Tiantian Kupao, and Tiantian Ai Xiaochu. TiMi’s predecessor, Wolong Studio, had been established in 2008, but had produced virtually no particularly successful games in all those years. Its annual bonuses were dismal, and colleagues called it the ‘also-ran studio.’ Yao later brought it under his wing. Tencent thought multiplayer online battle arena games—the genre of Honor of Kings and LOL—were worth exploring, so it began an internal horse race. Several studios developed similar games. TiMi’s was called Yingxiong Zhanji. Just as it emerged, another studio released Quanmin Chaosheng, with almost identical gameplay. Both began testing on the same day. TiMi’s game lagged on every front, its metrics were worse, and other departments would not provide resources. The studio spent over another month changing the gameplay and renamed it Wangzhe Lianmeng, then renamed it Honor of Kings ten days later. Constant changes and iteration sent Honor of Kings soaring. Seeing the momentum, Tencent Games committed more resources and ultimately turned it into a blockbuster with more than 50 million daily active users and peak monthly gross billings of 3–4 billion. Tencent also had three teams developing mobile instant-messaging systems simultaneously; the Guangfa development team led by Allen Zhang ultimately won. Apart from contributing nearly half the company’s profits, the horse-race system may have been the gaming division’s greatest contribution to Tencent as a whole. #Dedao #ZhangXiaoyusClassicBusinessCaseCourse