Electronic Arts Could Cure Tencent's Fortnite and PUBG Blues

Tencent (TCEHY 5.23%), the world's largest video game publisher, struggled last year with a nine-month freeze on new game approvals in China. That suspension prevented Tencent from reaping profits from two of its hottest licensed games -- Bluehole's PUBG and Epic Games' Fortnite -- within its home market.

PUBG and Fortnite are two of the top titles in the genre of "battle royale" games, which have experienced a surge in popularity over the past two years. Chinese gamers are allowed to play PUBG and the Tencent-developed PUBG Mobile, but Tencent isn't allowed to monetize the game with microtransactions yet. Fortnite hasn't been approved for any platforms in China yet. China started approving new games again last December, but regulators still haven't approved microtransactions for PUBG or Fortnite.

Apex Legends. Image source: EA.

That's why it wasn't surprising when recent reports suggested that Tencent was interested in bringing Electronic Arts (EA -0.12%) and Respawn Entertainment's new battle royale title, Apex Legends, to China.

Apex Legends hit 25 million players a mere week after its launch in early February. The free-to-play game, which is set in Respawn's Titanfall universe, offers the same free-for-all battle mechanics and shrinking battlefield as PUBG and Fortnite. But can Tencent really gain regulatory approval for Apex Legends when Fortnite remains in limbo?

Why Tencent needs Apex Legends

In response to the government's hostile stance toward video games, Tencent restructured its businesses last year to prioritize the growth of its other businesses.

However, Tencent still generated nearly a third of its revenues from online games last quarter, so it needs to stop the bleeding. A look back at the growth of Tencent's gaming business over the past year shows how badly it was hurt by China's suspension of new game approvals.

Tencent's online gaming revenues. Source: Quarterly reports.

During the third quarter, Tencent's mobile gaming revenue rose 7% annually as it launched ten pre-approved mobile games. Honor of Kings, its top mobile title, also locked in mobile gamers.

Honor of Kings/Arena of Valor. Image source: Tencent.

Unfortunately, that growth was offset by a 15% annual drop in PC gaming revenue, which was caused by a lack of major new games and gamers shifting toward mobile devices. Tencent tried to revive its PC gaming business with the launch of Capcom's Monster Hunter: World last summer, but regulators forced Tencent to pull the game shortly after its launch. That game still hasn't been approved.

Tencent needs a new hit PC title to bring gamers back to its Steam-like WeGame platform. Its top game, League of Legends, remains popular, but the aging title can't carry the PC gaming business on its own.

Bringing Apex Legends to WeGame could give the platform a shot in the arm. However, the game is also violent and features microtransactions -- two key issues which could prevent it from being approved. More importantly, Chinese regulators recently announced that they would stop accepting new gaming approvals due to a backlog of unapproved games, which could put Apex Legends on the back burner for a long time.

How Tencent can help EA

EA is also one of the world's largest video game publishers, but it doesn't have a meaningful presence in China beyond FIFA and a handful of mobile games.

Tencent currently publishes mobile games for EA's FIFA, Command & Conquer: Red Alert, Plants vs. Zombies, and Need for Speed franchises in China. Red Alert and FIFA cracked App Annie's latest ranking of the country's top 50 highest grossing iOS games, but they're not chart-topping blockbusters like Tencent's own Honor of Kings.

Launching Apex Legends with Tencent in China could help EA expand its reach in the PC market, boost interest in Respawn's prior Titanfall games, and pave the way for future Titanfall game launches in China. It could also strengthen EA's presence across esports circuits, where it's established a minor presence with its FIFA, Madden, and Battlefield titles.

Check out the latest earnings call transcripts for Electronic Arts and Tencent.

But let's not get ahead of ourselves

Tencent and EA are probably eager to launch Apex Legends in China. However, a deal probably won't happen anytime soon, since there's still a massive backlog of unapproved games and regulators could still block new battle royale games due to concerns about violence or gaming addiction.