BEIJING – Chinese internet giant Tencent Holdings Ltd. is having trouble making money from two of the biggest mobile games in its home market on Thursday.
People familiar with the matter say the difficulties stem from China’s unofficial economic sanctions against South Korea for its decision to install a United States missile-defense system, even though there were signs of improving ties last year.
“We’re working hard to get regulatory approval,” Tencent President Martin Lau said on the call, noting there would be a hit to earnings while operating the game without revenue. “It’s going to be an uncertain amount of time before we start monetizing,” he added, without elaborating.
Tencent made the games, which have become a hit in China, based on a PC game called “PlayerUnknown’s Battlegrounds” that it bought the rights to last year.
Tencent released two mobile versions of PUBG, as it is known to fans, in China in Jan. and Feb.
The games are free to play but Tencent can’t begin selling in-game items until China’s media regulator approves them.
Although Tencent executives have never publicly discussed why these approvals are taking so long, they alluded to a delay in monetizing the games on an earnings call Wednesday.
The games are licensed from South Korean developer Bluehole Inc.
China’s media regulator didn’t respond to a request for comment.
Since March 2017, no games based on South Korean content have been approved by China’s media regulator, according to analysts, industry insiders and a review of Chinese regulators’ websites.
Beijing hasn’t formally acknowledged any ban on South Korean content.
But analysts and industry insiders say the effect can be seen in a drop-off in new South Korean TV shows and pop music being played in China, and a decline in sales of vehicles made by South Korean auto makers.
In the case of PUBG, one person familiar with the approvals process said the delay in monetization stems from the fact that Tencent’s mobile games are licensed from a South Korean company.
“If it wasn’t based on Korean intellectual property, Tencent would have started to monetize the game long ago,” the person said. “You don’t want to make your game ‘old’ before monetizing.”
Tencent didn’t reply to requests for comment. A spokeswoman for PUBG declined to comment.
Tencent’s struggle to get approvals highlights the challenges companies face in China’s tightly regulated online-games market, which is expected to top $45 billion in revenue this year, according to iResearch.
“Licenses haven’t been issued even after Chinese and Korean relations have improved, and it is difficult to say when they will be given,” said Oh Dong-hwan, a senior analyst at Samsung Securities. “Korean games have suffered a lot of losses...revenue expected for this year wasn’t made,” he said.
PUBG is the cornerstone of Tencent’s games strategy this year, company executives have said.
Tencent also is working on a PC game based on PUBG that is pending approval. Tencent executives even discussed acquiring a stake in Bluehole in April, according to a person familiar with the matter.
Tencent executives said Wednesday that the mobile games – “PUBG: Army Attack” and “PUBG: Exhilarating Battlefield” – had a combined 50 million daily active users, with 40 million of those in China.
Those executives have said they want to focus on building users for both games first before activating in-game item sales.
The financial details of Tencent’s licensing agreement with Bluehole isn’t public. People familiar with these deals say standard contracts include a flat fee along with a revenue-sharing agreement.
“If Tencent can’t secure a license soon for PUBG in China, it will be a major frustration as well as a delayed financial return on that investment,” said Lisa Hanson, a managing partner at Niko Partners, a research firm specializing in Asian games.
PUBG, which sells for $30 a copy overseas, was the top-grossing premium PC game last year and has earned more than $1 billion as of April, according to SuperData Research.
The game’s success has spawned an entire genre known as “battle royale,” where players parachute onto an island, scavenge for weapons and armor, and fight until one combatant is left standing.
Lau said Wednesday that the genre, which resembles the plot device in the Hunger Games films, represents “the biggest opportunity after the mobile opportunity in the gaming industry in the past five years.”
He added, “We’ve really nailed this genre.”
For the PC version, which gamers must pay to play, analysts estimate at least 40 percent of its players are already in China, having bought the game from overseas stores.
But if it could be officially sold in China, Tencent could heavily promote the game, localize it for Chinese players and organize spectator competitions.
Tencent’s announcement that it would license PUBG was made in November, several weeks after Beijing and Seoul agreed to ease tensions and gradually restore economic, military and political ties.
At the time, Tencent said it would add “socialist core values, Chinese traditional culture and moral rules” to its version to win approval.
The statement came after one Chinese content regulator said it was unlikely to grant licenses for the game because it was too bloody and violent.