Tencent is said to slash game marketing budget amid freeze

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HONG KONG (Nov 8): Tencent Holdings Ltd is cutting the marketing budget of its gaming division, as the business suffers through regulatory disruptions and a slowdown in the Chinese economy, according to an internal memo seen by Bloomberg.

China’s largest gaming company is asking marketing executives to control their cash flow and curtail spending to “endure the hard times together,” according to the letter sent to executives a few days ago. Games that don’t yet have government licenses, for example, will have to return their unspent money to the group. Jane Yip, a spokeswoman for Tencent, declined to comment on any potential budget cuts.

China’s gaming industry, which generates more than US$30 billion of revenue, has been hammered this year after regulators froze the approval process for new games, preventing companies from making money from their hit titles. The move has thrown Tencent into disarray, leading to its first profit drop in at least a decade and the evaporation more than US$200 billion of market value since a January peak.

To cope with the challenges, the operator of the WeChat social network is cutting in half the branding budgets for some mature games, if the money hasn’t already been deployed, according to the letter. Tencent’s also cutting spending on those that aren’t performing well or have had their release pushed back to next year, with unused money to be returned to the group level.

While Tencent remains a strongly profitable company, it’s total debt has soared to a record US$26 billion, according to data compiled by Bloomberg. Analysts are expecting the company to record only a 24% rise in revenue for the third quarter when it reports earnings on Nov 14, the slowest growth in more than three years.

Tencent distributes its own games, as well as those from others, including Fortnite and Playerunknown’s Battlegrounds. Other developers that supply the company include Capcom Co, Nexon Co, Activision Blizzard Inc and Electronic Arts Inc, according to data compiled by Bloomberg.

Capcom fell as much as 2.7% in Tokyo trading, while Tencent rose 2.1%. Tencent is the largest stock in the MSCI Asia Pacific Index, which includes more than 1,300 prominent securities across Asia.

Two of Hong Kong’s online game makers lost more than 60% of their value Thursday, another example of wild moves in the world’s fourth-biggest stock market. Guangzhou-based FingerTango Inc and Digital Hollywood Interactive Ltd closed down 63% and 68% respectively.

Tencent had been seeking to make money from Fortnite, this year’s hottest title, via a special channel that allows distributors to experiment with commercializing the title for a month. However that permit was shut down in October, people familiar with the matter said last month.

The freeze in approvals comes as China shakes up the regulatory agencies responsible for allowing games into the market. Previously, all new titles were registered with the country”s culture ministry and checked for sensitive content. Another agency then granted licenses for commercialization. It is unclear how the process will change after the Communist Party finishes its overhaul of approvals.

Temporary approvals through the so-called green channel, never significant in volume to begin with, topped entirely last month, the people familiar said. The process had given publishers the ability to test how users reacted to games before the official approval process. In practice, it provided some game makers with a limited window during which they can make money from player.