Tencent (OTC:TCEHY) and Sony (NYSE:SNE) are the two largest video game companies in the world. Tencent's gaming revenue rose 9% to $19.7 billion in calendar year 2018, according to Newzoo, while Sony's gaming revenue surged 41% to $14.2 billion.

Tencent's growth decelerated due to a nine-month freeze on new gaming approvals in China last year. Sony's growth accelerated significantly with the launch of high-profile PS4 exclusive games like God of War, while strong third-party titles like Red Dead Redemption 2 boosted its PlayStation Network revenue.

Those growth rates suggest that Sony could overtake Tencent as the world's top gaming publisher in the near future. However, investors should take a step back and realize that it's actually an apples-to-oranges comparison.

A couple plays a video game at home.

Image source: Getty Images.

A complicated question

First and foremost, investors should note that Tencent is the world's largest software publisher, but it doesn't sell mainstream gaming consoles. Sony generates less software revenue than Tencent, but it's the largest video game company if you include its hardware business.

Newzoo only tracks the companies' software and service revenues and aligns their sales to the calendar year. Tencent's fiscal year is aligned with the calendar, but Sony's fiscal year ended on March 31 -- which further skews direct comparisons.

A PlayStation controller.

Image source: Getty Images.

Sony's gaming revenue rose 19% to 2.31 trillion yen ($21.3 billion) in fiscal 2018. Within that total, its software revenue rose 45% to 1.1 trillion yen ($10.1 billion) and its network services revenue grew 21% to 326.5 million yen ($3 billion). However, its hardware sales dipped 2% to 795.9 million yen ($7.3 billion) as it sold fewer PS4 consoles ahead of the PS5's launch next year.

Sony expects its total gaming revenue to decline 13% to 2 trillion yen ($18.4 billion) in fiscal 2019. It's blaming that drop on lower PS4 hardware sales and currency headwinds, which should offset higher revenue from its PS Plus subscriptions. Assuming that its software and network services rise slightly as a percentage of its total revenue as its hardware sales fade, we can assume that Sony will generate about $10 billion in software revenue this year.

Tencent generated 104.7 billion yuan ($14.9 billion) in total gaming revenue (including its social network games) in the first nine months of 2019. Tencent didn't offer any guidance for the unit's fourth-quarter revenue, but it could roughly match its revenue of nearly $20 billion last year -- which would mean it would surpass Sony as the world's top video game company.

Tencent's total mobile games -- including Honor of Kings, PUBG Mobile, and Peacekeeper Elite -- still generate stable growth, but that growth is partly offset by an ongoing decline in its PC gaming business, which is losing gamers to mobile devices. Tencent also faces tougher competition from rivals like NetEase, as well as tighter gaming restrictions for minors in China.

Tencent's gaming unit is still one of its core growth engines, but it no longer considers the unit its most important division. That's why it's been focusing more heavily on the growth of its cloud and fintech businesses over the past year.

A man plays a mobile game on a smartphone.

Image source: Getty Images.

Different markets, different strategies

Sony and Tencent focus on completely different gaming markets. Sony's console market is more cyclical than Tencent's mobile and PC gaming markets, and it's approaching the end of a six-year cycle with the end of the PS4.

Therefore, investors shouldn't expect Sony's gaming business to perk up until fiscal 2020, which starts next April. However, its sales could accelerate significantly in the holiday quarter when the PS5 launches alongside exclusive launch titles. Square Enix's upcoming remake of Final Fantasy VII could also lock in more gamers.

After the PS4's launch in late 2013, Sony's gaming revenue rose 39% in fiscal 2014 and another 33% in fiscal 2015. The PS5 could give the gaming unit similar boosts in 2020 and 2021, which would propel it far ahead of Tencent's gaming business.

Sony's focus on next-gen gaming markets like cloud gaming (with PS Now) and virtual reality (with PSVR) could also gain momentum as those platforms attract more gamers. Those catalysts all indicate that it will remain the largest video game company in the world, but it probably won't surpass Tencent in total software revenue anytime soon.

Meanwhile, Tencent will keep struggling with competition and regulatory headwinds, but it will also expand overseas with mobile games like PUBG Mobile, Arena of Valor (the international version of Honor of Kings), and its upcoming mobile version of League of Legends. It could also boost its stakes in overseas publishers like Activision Blizzard, Ubisoft, and Epic Games, and expand its partnerships with companies like Nintendo.

The key takeaways

Investors should be aware that broad industry summaries, like Newzoo's annual rankings of top game publishers, often obfuscate important details about the companies.

At first glance, Newzoo's numbers suggested that Tencent's video game business was bigger than Sony's, but that Sony's was growing at a faster pace and poised to overtake the market leader. However, Tencent and Sony both lead different markets, so comparisons between the two companies can be misleading.