Tencent (NASDAQOTH:TCEHY) recently pulled the plug on the mobile version of PlayerUnknown’s Battlegrounds, or PUBG Mobile as fans call it, after failing to win regulatory approval for in-app microtransactions.

The battle royale video game is one of its most popular games in China and had about 70 million active players in China, according to Renaissance China. Those active players could have generated roughly $1.18 billion to $1.48 billion in annual in-app revenues.

That sounds like a big setback for Tencent, which generated 29% of its revenue from online games last quarter and is still recovering from the nine-month freeze on new game approvals in 2018. But if we dig deeper, we'll see that the premature death of PUBG Mobile in China is actually good news for the company.

Promotional art for PUBG Mobile's crossover with Capcom's Resident Evil.

Image source: Tencent.

PUBG Mobile was a money pit in China

Tencent initially released two versions of PUBG in China -- Exhilarating Battlefield and Army Attack, which were two ports of the same game from different developers. Exhilarating Battlefield, which targeted higher-end devices, became the more popular version and was launched overseas as PUBG Mobile.

PUBG Mobile was a hit in China, but Chinese regulators blocked Tencent from monetizing the game with in-app purchases due to concerns about gaming addiction. This meant that Tencent was shouldering the server costs of hosting all those battles, but it wasn't making a cent off gamers. That's why Tencent discontinued the game, realizing that its user base could never be monetized.

But PUBG Mobile remains an overseas hit

PUBG Mobile can't be played in China anymore, but it remains online with microtransactions in overseas markets. Last month, Sensor Tower estimated that the game generated $320 million in revenue from those players since its overseas launch last March.

That equals less than 1% of Tencent's 2018 revenue, but that figure is quickly climbing. Sensor Tower estimates that PUBG Mobile's gross revenue surged 83% from February to $65 million in March. Its battle royale rival, Epic Games' Fortnite, only generated $36 million in revenue that same month. Tencent notably owns stakes in both PUBG publisher Bluehole and Fortnite publisher Epic Games.

Tencent claims that PUBG Mobile is the most popular mobile game in the world, with over 200 million players (excluding China) and 30 million daily active players at the end of 2018. Fortnite topped 200 million players last November. Therefore, the end of PUBG Mobile in China marks a missed opportunity, but it won't disrupt the game's core growth engines.

A screenshot from PUBG Mobile's crossover event with Resident Evil.

Image source: Tencent.

Clearing the way for a state-approved successor

PUBG Mobile's abrupt end in China surprised many gamers, but Tencent filled the void with another shooter called Game for Peace, a game that features the Chinese military fighting terrorists.

The game, which features a very similar user interface, lets players transfer over their PUBG achievements and has already been approved for monetization -- likely because it's a "patriotic" game which was designed under the guidance of the Chinese military's recruiting unit. Game for Peace may not attract as many players as PUBG Mobile, but at least it will generate revenues for Tencent.

The launch of Game for Peace could also help Tencent remain in the government's good graces, which will be essential to future game approvals.

But what does this mean for Fortnite?

Tencent investors had been waiting for the Chinese government to approve microtransactions for PUBG Mobile and Fortnite, which was launched in China a year ago.

The government's decision to block PUBG's microtransactions doesn't bode well for Fortnite, a similar battle royale game that also generates revenue from in-game purchases. Fortnite players in China already face in-game penalties (like disabled features and reduced experience points) for playing more than three hours per day to address gaming addiction concerns.

However, Chinese regulators approved the monetization of NetEase's (NASDAQ:NTES) mobile Fortnite clone FortCraft, as well as microtransactions for its two PUBG Mobile clones -- Knives Out and Rules of Survival. Sensor Tower claims that Knives Out generated $81 million in revenue in China and $465 million in worldwide revenue last year.

The government's decision to approve the monetization of NetEase's battle royale games while shunning Tencent's is baffling, and suggests that regulators want to rein in the company's dominance of the mobile and gaming markets. Tencent already publishes four of the top five highest-grossing iOS apps in China, according to App Annie. It's the largest video game publisher in the world by annual revenue -- which makes it an easy target for the country's regulators.

The bottom line

The death of PUBG Mobile in China won't dent the growth of Tencent's gaming business, but it represents a missed opportunity. Fortnite could still suffer the same fate, but Tencent can still profit from the game's popularity in overseas markets.