China's Internet Giants Vie to Win Income From Mobile Games

TAIPEI (TheStreet) -- The next wave of tools to bash sugary little blobs in Candy Crush Saga could really start costing smartphone users in China. Obsessed gamers might feel sideswiped by the gradual accumulation of charges, once they pause play long enough to notice. But China's top mobile Internet providers will experience a burst of sweetness.

Tencent (TCTZF), Baidu (BIDU) and a few mid-cap peers in Chinese Internet space are moving to rely on this gradual accumulation of charges to monetize mobile games as a core second revenue stream after advertising, industry watchers say.

Providers who sell games through social messaging services or other convenient, user-friendly mobile means should score the most serious money. Investors who sell popular game apps to China's smartphone users stand to earn a few chocolate gold coins, as well.

The country's middle-class, particularly its younger urban male population, already forms a willing, passionate consumer base for these pay-to-play schemes. Such schemes are evolving in the West and elsewhere -- still without a clearly defined leading strategy.

Developers and mobile content providers would offer that market segment a free starter version of popular games such as UK-based King's Candy Crush Saga or World of Warcraft by Activision Blizzard's (ATVI) Blizzard Entertainment in the United States. Higher levels of the game or special tools for raising scores would come at incrementally higher prices noticeable to users only in the long term.

"There are a few hundred levels of Candy Crush, for example, so if you pay a few dollars a small amount you can get special powers to crush more of the candy basically," says Eric Harwit, tech-specialized Asian studies professor at the University of Hawaii. "It's like death by a thousand slices. You don't realize how much you're paying for the games. Then it's an economy of scale."

The charges would make money for app stores run by China Mobile (CHL) or China Telecom (CHA). Tencent's WeChat social messaging platform and its peers -- if there are any yet -- will step in as a payment platform. WeChat may even become a channel that provides games. Its ominously successful parent company already runs an app store. Baidu, also with its own app store, is probably working on a way to monetize mobile games, as well.

Software developers, including any number from overseas (oddly, no obvious bans yet), can reach the market by selling games through China's mobile app stores. China's revenue from mobile games hit $1.5 billion last year, much of that going to Tencent, and should grow by double-digit percentages from this year.

The market is fragmented today, but that will change as money comes in.

"In mobile games, competition among developers and publishers will intensify, while channels may further consolidate into the hands of several major traffic owners," Credit Suisse forecasts in a Jan. 20 research report.

Stock picks? The Swiss investment bank suggests Baidu "for its under-appreciated mobile monetization value" and Tencent for its existing means of collecting mobile payments. Share prices of both rose solidly last year and this month hit dips that might appeal to the risk-on investor.

My dime is on Tencent. It's leading the China pay-to-play trend and entered the market with enough in-built business diversity to cushion any game monetization glitches.


At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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