U.S. Ban Could Have Major Implications for Video Game Industry

While the president had been attacking TikTok, the addition of WeChat and Tencent to the ban was a surprise

Neil Macker, CFA 17 August, 2020 | 1:49AM

Dark controller U.S. President Donald Trump escalated the trade war with China via executive orders that ban U.S. transactions with the TikTok and WeChat apps and their respective owners, ByteDance and Tencent, effective 45 days from Aug. 7. While the president had been attacking TikTok, the addition of WeChat and Tencent to the ban was a surprise. The language in the orders is broad, and the specific banned transactions will be defined by the secretary of commerce before the 45-day deadline. While WeChat has a limited user base outside China, Tencent is the largest video game software firm globally by revenue thanks to its dominant position in China and its numerous investments. The four video game publishers we cover--Activision Blizzard (ATVI), Electronic Arts (EA), Take-Two Interactive Software (TTWO), and Ubisoft (UBI)--have some involvement with Tencent (TCEHY), ranging from direct investments to copublishing games in China. Given the lack of detail on the banned transactions along with news reports indicating that the order is targeted at WeChat, we are maintaining our narrow moat ratings and fair value estimates for the four firms. However, we remain watchful for any further specifics and potential changes in the aim of the executive order.

As parts of its efforts to expand beyond China, Tencent has invested in a number of video game studios, including owning all of Riot Games (League of Legends), over 80% of Supercell (Clash of Clans), 40% of Epic Games (Fortnite), and 11% in Bluehole (PlayerUnknown’s Battlegrounds). The Chinese gaming giant also holds 5% stakes in Ubisoft and Activision Blizzard, stemming from both firms’ battles with Vivendi. In 2020 alone, Tencent has reportedly made at least four sizable majority or minority investments in video game publishers, including majority stakes in Bohemia Interactive (Arma, DayZ) and Funcom (Age of Conan, Anarchy Online). It is unclear what would happen with respect to these sizable stakes if the Commerce Department decides to enforce a broader interpretation of the ban.

Beyond its investments, Tencent is the local partner for many Western gaming firms in China and Asia, including Take-Two (NBA 2K Online), EA (FIFA Online 4), Activision Blizzard (Call of Duty Online), and Ubisoft (exclusive partner for all titles). Given the regulatory requirement for a local partner in China, severing these relationships will not be easy and would likely cause the U.S. firms to lose a large share of their revenue in the world’s second-largest video gaming market, at least until a new relationship could be formed with another partner. Tencent is also a major mobile game developer for its own intellectual property and for third-party franchises like Call of Duty Mobile for Activision. Since the deal with Tencent probably includes revenue sharing, Activision would need to shut down the game if the secretary of commerce defines the ban broadly. Outside of gaming, Tencent also has a wide media footprint as well with investments in Snap, Spotify, Universal Music, and Warner Music. The firm is the streaming partner in China for the NFL, MLB, and NBA. Because a broad definition of the ban on Tencent would have a widespread impact on the video gaming and media industries, damaging the prospects of several U.S.-owned firms and entities, we expect the Commerce Department to focus on WeChat specifically. However, since the United States is in a presidential election year with the incumbent trailing in the polls, a broader definition and the resultant trade war escalation with China remains a possibility.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Activision Blizzard Inc80.09 USD1.68
Electronic Arts Inc125.90 USD0.51
Take-Two Interactive Software Inc158.49 USD-0.60
Tencent Holdings Ltd ADR67.02 USD0.54
Ubisoft Entertainment72.66 EUR0.44

About Author

Neil Macker, CFA

Neil Macker, CFA  Neil Macker, CFA, is a senior equity analyst for Morningstar.

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