Tencent’s recent purchase of Finnish game developer Supercell, which values the firm at more than US$10 billion, has been widely seen as a major move to cement the Chinese tech giant’s leadership in the global video gaming industry.
To discuss why Supercell is so special and how the two companies can benefit from each other, EJ Insight spoke to Yat Siu, founder and CEO of Outblaze, an established player in gaming, cloud and smartphone software.
Here are some of Yat Siu’s insights from that interview:
Q: What makes Supercell so special as a game firm?
A: Supercell is an expert in multiplayer social games. They have a great working culture and are a creative team passionate about what they do.
Q: What does great working culture refer to? Why is it so difficult for other people to come up with similar products?
A: This is the million dollar, or in this case billion dollar question, isn’t it? Perhaps the best answer, other than of course a good dose of luck, lies in enhancing the probability of fresh and innovative ideas through lots of diversity.
There are many famous examples of groundbreaking ideas that have happened due to serendipity and therefore the composition and acceptance of new and original ideas and a culture that fosters this is very important.
Most of the very successful companies in our industry have a very strong belief in diversity and diversity in culture, not just skill sets. Think ethnic background, experiential differences, education and beliefs and gender as just some of the basic ones.
Q: How different are the tastes of players in China or Asia versus their western counterparts?
A: While there are quite a few games in the local market that are designed for local appeal, there is also far more acceptance to games that follow a different taste direction.
It is no longer appropriate in our view to categorize between western and Asian in the same way that there are some clear differences between even Chinese, Hong Kong and Taiwanese cultures, to provide a more local example, and therefore what works in China may not work as well in Hong Kong and vice versa.
Supercell games are very popular in Asia and because the platforms are also global. In fact, we have games that are very popular in the US even though our games are made in Hong Kong. Supercell games are not the only popular games people in Asian countries love to play and certainly won’t be the last. Think Angry Birds, Candy Crush and, on PC, League of Legends.
Also teams are becoming more multicultural. Just because you are based in the US or based in Korea, for instance, does not mean you don’t work with different teams from around the world to create a globally appealing product. [It] happens a lot these days.
Q: For a fast growing company that makes almost US$1 billion profit out of US$2 billion plus turnover, is a price tag of US$10 billion kind of cheap?
A: Revenue, profits, talent and intellectual property, IP they own, IP they license, coming IP are key things for valuing a game company.
The game industry is a mature business in certain ways so PE ratios are cheaper than other industries. That said there are companies trading with better PE ratios because of their track record in performance.
Cheap is also in the eye of the beholder. For Tencent, given its own PE ratio, this is an accretive and good deal.
It is debatable also whether Supercell is a fast growing company. It is a very profitable and successful company but will it be able to increase its turnover to US$3 to 4 billion? It may with the help of Tencent and the China market but by itself it may not.
In that sense, the value of Supercell for its founders may become even higher (under Tencent). So selling for a “lower PE” can happen because better value could be generated for the remaining shareholders of Supercell.
Q: How does Supercell fit into Tencent’s future?
A: Like their acquisition of Riot Games, it would now cement Tencent’s leadership in mobile games globally in the same way that they have done with PC online games. Supercell could be seen in the same light as the way Riot Games is being handled, i.e., very independently run.
Q: What is the deal’s impact on the mobile games market?
A: The silent rise of Tencent around the world and a model of successful acquisitions if they can make it work like Riot Games.
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