Tencent's High-Stakes Supercell Game

Supercell CEO Ilkka Paananen and Tencent President Martin Lau at Supercell’s Helsinki headquarters in June, after a consortium led by the Chinese internet giant made a deal to buy the Finnish game maker. ENLARGE
Supercell CEO Ilkka Paananen and Tencent President Martin Lau at Supercell’s Helsinki headquarters in June, after a consortium led by the Chinese internet giant made a deal to buy the Finnish game maker. Photo: Lehtikuva/Seppo Samuli/Reuters

Tencent Holdings Ltd. TCEHY -1.02 % ’s deal in June for Supercell Oy valued the Finnish mobile-game maker at more than $ 10 billion—a valuation that is raising questions in light of a recent revenue setback.

Supercell’s latest game, “Clash Royale,” has delivered declining revenue for four consecutive months, according to SuperData Research. The videogame-research firm estimates July “Clash Royale” revenue at $ 62 million, less than half of what the $ 133 million the game brought in in March, the month it was launched globally with much fanfare. It has been surpassed in buzz—and, according to data provider App Annie, in U.S. iPhone revenue—by the augmented-reality appeal of “Pokémon Go,” co-developed by San Francisco-based Niantic Inc. and Tokyo-based Pokémon Co.

Supercell and Tencent declined to comment about individual games’ revenue.

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Tencent’s largest-ever acquisition is a wager on a company that produces just a handful of games—four since its founding in 2010—in an industry dependent on fickle players. At $ 8.6 billion for an 84% stake, the purchase by a Tencent-led consortium put the value of closely held Supercell at $ 10.2 billion, nearly double what it was a year ago. Tencent and its partners are betting that money on the Helsinki-based company’s ability to replicate the success of earlier hit games like “Clash of Clans.”

Would any investor have paid so much, knowing the latest data for “Clash Royale”?

“I think the answer is no,” said U.S.-based mobile-game analyst and consultant Tero Kuittinen.

Supercell said it wants to make games that are played for years and it doesn’t release any game it doesn’t believe can succeed.

Supercell’s latest game, ‘Clash Royale,’ may not have the legs that investors hoped for. ENLARGE
Supercell’s latest game, ‘Clash Royale,’ may not have the legs that investors hoped for. Photo: Supercell

“Clash of Clans,” launched in 2012, has become one of the highest-grossing games in history thanks to regular updates—reinventions that attract both old and new users. But analysts say the recipe that worked well for “Clash of Clans,” a strategy game, may not necessarily work for “Clash Royale,” which centers on battles.

“Supercell is still learning how to extend the shelf life of different types of games,” said Peter Warman, chief executive gaming-research firm Newzoo.

Tencent, Asia’s most valuable technology company by market capitalization, is still completing the deal, which is structured so that Supercell won’t be consolidated in its earnings. Instead, the Chinese internet giant will reap any financial gains as a stakeholder through the consortium it controls, while also earning revenue through the distribution of Supercell games in China.

During a conference call with analysts on Wednesday, Tencent President Martin Lau said teaming up with co-investors in the consortium allows his company to “put in less money but still have a significant relationship with Supercell.”

Supercell’s super-successful ‘Clash of Clans,’ launched in 2012, is a strategy game in which players build clans. ENLARGE
Supercell’s super-successful ‘Clash of Clans,’ launched in 2012, is a strategy game in which players build clans. Photo: Thomas White/Reuters

The slowdown of “Clash Royale” won’t likely derail the deal. Bankers have recently arranged a $ 3.5 billion loan for Tencent to finance the investment, a person familiar with the matter said.

Analysts say if the declining revenue trend for “Clash Royale” continues in major markets like the U.S., it will make China—the world’s largest game market by revenue—even more important, and Tencent’s role in expanding Supercell’s share there even more crucial.

Last month Tencent started distributing “Clash Royale” in China through its WeChat social-networking platform, which has more than 800 million monthly active users.

“Supercell in China has been very popular, but it has not monetized that popularity,” said Tencent Chief Strategy Officer James Mitchell during an earnings conference call Wednesday.

Supercell’s games, which last year generated €2.11 billion ($ 2.35 billion) in revenue and €693 million in net profit, have rivals beyond “Pokémon Go,” such as “Game of War: Fire Age” from Silicon Valley startup Machine Zone Inc.

“Success is not guaranteed,” said Daiwa Securities DSEEY 0.70 % analyst John Choi. “That’s the inherent risk in the industry.”

Write to Juro Osawa at [email protected] and Matthias Verbergt at [email protected]


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