These alliances with foreign studios sometimes involve making a minor equity stake investment, and obtaining the rights to create mobile versions of their partners‘ popular titles. This would normally be a time-consuming project for a studio’s own developers, but outsourcing that work lets a company capitalise on the popularity of mobile games with minimal effort. The details of revenue sharing arrangements are usually not disclosed, and vary according to the game, but a studio could expect up to 50 per cent share in gross revenue.

While PC gaming remains more popular in China than consoles, mobile gaming has become a huge business because most people in the country use a smartphone. An estimated 2.4 billion people worldwide play mobile games, which account for nearly half of global gaming market value, a share that has risen quickly in recent years, according to Newzoo.

The biggest player in mobile gaming today is Tencent, which makes a third of its revenue from gaming and could become Asia’s first company to reach a market capitalisation of US$1 trillion.

The Shenzhen-based company, founded by Pony Ma, has been aggressive in its push into overseas markets as growth in China slowed. In a deal announced this week, Tencent spent 30 million euros to acquire a minority stake in Dontnod, the French studio behind Life is Strange and Tell Me Why, a move that could lead to revenue-sharing arrangements for the developer’s games.

Tencent is already widely known for its mobile versions of hit games like Pokémon, Call of Duty and Player Unknown’s Battlegrounds (PUBG). The next game to get the Tencent mobile treatment could be Assassin’s Creed, which is expected after a recruitment ad from the company earlier this month featured a Chinese warrior striking a classic pose from the game with arms crossed over the chest. Tencent bought a 5 per cent stake in Ubisoft, the French owner of Assassin’s Creed, in 2018.

While many gamers have traditionally perceived mobile gaming as an inferior experience to playing on consoles or PC, Tencent has been largely responsible for helping close that gap. Some of its mobile versions of popular games have gone on to surpass the success of the original titles.

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NetEase, China’s second-largest gaming company by revenue, obtained a license last July to develop a mobile game called The Lord of the Rings: Rise to War based on J.R.R. Tolkien’s epic book trilogy that takes place in the fictional world of Middle-earth. The deal came from a partnership with Warner Bros. Interactive Entertainment. That partnership also allowed NetEase to develop Harry Potter: Magic Awakened , a mobile game based on the popular fantasy novels by J.K. Rowling that combines the gameplay of a card game and a role playing game.

The Hangzhou-based company, founded by Ding Lei, has also worked with Blizzard Entertainment to develop Diablo Immortal, which will be the first mobile game based on the hit Diablo franchise.

China’s deep-pocketed and entrenched gaming giants are not the only ones using this strategy. Yoozoo, one of a new generation of gaming companies to sprout up amid the country’s gaming boom in recent years, is behind the browser-based game Game of Thrones: Winter is Coming, which was also ported to mobile devices. The game is based on the blockbuster book series A Song of Ice and Fire by George R.R. Martin, which HBO adapted into the massively successful Game of Thrones TV show.

Yoozoo has also been handling other successful properties. Most notably, it owns the adaptation rights to The Three-Body Problem, a widely acclaimed Chinese science fiction novel by Liu Cixin that is currently being adapted for Netflix. Yoozoo recently made international headlines when company founder Lin Qi died last month at the age of 39 after a suspected case of poisoning.

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Given the success of the strategy so far, Chinese gaming companies are expected to continue to seek the rights to popular foreign franchises. Steven Ma, a senior vice-president at Tencent who is in charge of gaming operations, said in December 2019 that the company plans to have as many players abroad as in China. In the fourth quarter of that year, Tencent got 23 per cent of its gaming revenue from overseas, according to the company.

The Shenzhen-based company has invested heavily in overseas operations, including in high-profile gaming companies like Epic Games and Riot Games. It has also set up several overseas bases and poached engineers from other top studios.

One reason Chinese gaming companies have such a big appetite for foreign intellectual property (IP) is that their home market for mobile games has become saturated and competition is fierce.

China’s domestic gaming revenues rose 20.7 per cent in 2020 to 278.7 billion yuan (US$43 billion), but that growth came primarily from existing gamers, according to statistics from the government-backed China Audio-Video and Digital Publishing Association. Nearly half of China’s population is now playing video games. The number of gamers in the country rose 3.7 per cent last year to 665 million, according to the association.

A key theme for China’s gaming industry is chuhai, or going overseas to open up new markets. Data from the association showed China’s video game exports increased 33 per cent in 2020 to US$15.4 billion, with 60 per cent of the revenue coming from the US, Japan and South Korea.

New challenges are also emerging overseas even as China’s gaming giants are relying on them more for growth. Competition from overseas companies is increasing while foreign regulators are increasing scrutiny of Chinese apps, particularly in India and the US.

India banned PUBG Mobile last September, when the game had already become widely popular in the country, along with 58 other Chinese apps on national security grounds after deadly clashes at the Himalayan border.

The regulatory environment in the US might not be any better, despite a new administration under President Joe Biden. The Department of Commerce this month tightened the rules on transactions with Chinese software, including games, if they have more than 1 million users in the US. A number of games developed by Tencent meet the threshold, which could mean higher scrutiny.

The rising popularity of mobile games has also meant that overseas companies are becoming less interested in outsourcing that work. Matthew Kanterman, a research analyst for Bloomberg Intelligence, said that Western gaming companies have woken up to the importance of controlling their own mobile games.

“In the past, they lacked the internal expertise on mobile development, mobile user acquisition and mobile live services,” Kanterman said. “But they are building these resources up with the aim to eventually do it themselves.”

US gaming giant Activision Blizzard – the owner of Call of Duty, World of Warcraft and Diablo – said last November that it would eventually move all its franchises to mobile over time. Take-Two Interactive, the US gaming titan behind Grand Theft Auto and NBA2K, has also been acquiring mobile game companies to boost its in-house capabilities.

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However, many Western studios remain comparatively inexperienced at developing their own mobile games, so they still prefer to license their IP for a good price, according to Eric Kress, principal of Gossamer Consulting Group. Ubisoft made just 193 million euros (US$233.7 million) from mobile games in the 12 months through last September, according to the company’s financial results. By comparison, PUBG Mobile made more than that every month in the second half of 2020, figures from Sensor Tower show.

“These [Western] game companies don’t know what they’re doing on mobile,” Kress said.

There are still many other popular franchises that Chinese gaming companies could try to snap up, Kress said. These include popular first-person shooters like Far Cry and Rainbow Six, along with other second-tier titles that might not be household names but have the potential to be adapted for mobile.

This reliance on other companies’ IP has a pitfall, though: Chinese companies have a hard time building up their own brands with overseas gamers, according to Chundi Zhang, a gaming analyst with Ampere Analysis.

“Tencent focuses on developing games with established IP, but its own name is easy for players to ignore,” Zhang said.

Zhang said Tencent needs to develop its own IP for original games, but Chinese companies have had limited success in creating stories and characters with cultural cachet overseas. This is why Tencent’s Honour of Kings can rely on the popularity of figures like Sun Wukong, aka the Monkey King, and Wu Zetian, China’s only female monarch, but the overseas version called Arena of Valor includes DC Entertainment heroes like Batman, Superman and Wonder Woman.

“The popularity of famous game IP is often part of the comprehensive cultural popularity of the country of origin, such as Japanese culture and American culture,” Zhang said. “The influence of Chinese culture is still small.”