Tencent are reportedly negotiating with a US national security panel to keep their investments in US companies Epic Games and Riot Games.
Why the Suspicion over Tencent and China?
Tencent’s reputation is often marred being a Chinese company; and as such having to comply with laws regarding personal data being available to the Chinese government. Further, Tencent’s aggressive expansion and investment in US companies has led to concerns of those companies being restricted in what they can create; prevent content the Chinese government would forbid within their own country.
The influence of the Chinese market’s potential, oft-lauded by economists and analysts, has also been blamed for certain decisions in the video games industry; such as the rise and focus of mobile gaming and microtransactions.
Recent stories include how GOG announced they would not be selling Chinese-blacklisted horror game Devotion, hours after the developer stated they would. While now available for sale from Red Candle Games’ own website, it was blacklisted for accusations of mocking the Chinese government. The game contains themes of cult-like devotion, and a hidden message allegedly mocking Chinese President Xi Jinping.
Other examples include Mount & Blade II: Bannerlord‘s Chinese moderators asking users to report those saying things that would violate Chinese law, and an ASUS collaboration event with Hololive being cancelled due to referring to Hiryu Coco and Akai Haato having previously referred to Taiwan as an independent nation. They had already been temporarily suspended, and Hololive cut ties with its Chinese audience.
Activision were also accused of censoring the trailer for Call of Duty Black Ops: Cold War on behalf of the Chinese government, after it used footage from the Tiananmen Square protests.
Blizzard Entertainment’s suspension pro-Hearthstone player Blitzchung for his support of the Hong Kong protests in 2019, firing the casters, and their overall handing of the entire debacle led some to speculate their desire to continue to operate freely in the Chinese market was behind the decision. We looked into the financials of parent company Activision Blizzard to see if that was the case. Tencent owns 5% of Activision Blizzard, with profits from China making up less than 13% of their total.
In late December 2018, SIE Japan Asia President Atsushi Morita stated the then recent spate of censorship of anime-styled sexual content on PlayStation 4 games had been “to meet global standards.” This censorship was seemingly forced in Japan. A June 2020 rumor proposed that Tencent had influenced Sony to encourage censorship of anime-styled sexual content.
The Indian government banned 118 apps from Chinese developers in September 2020, including PUBG Mobile. They cited they were a risk to the nation’s sovereignty, defense, and public order.
When 45th United States President Donald Trump signed an executive order banning any US transactions with TikTok owners ByteDance, and WeChat owners Tencent. Many thought this would have also resulted in Tencent from being upended from their investments into video games; including Epic Games’ Unreal Engine and Fortnite. A White House official later stated “The executive order concerning WeChat only blocks transactions related to WeChat, not those involving other Tencent holdings.”
Tencent Negotiating with CFIUS Since Second Half of 2020
Now, that scenario may be closer to reality. Reuters reports “according to people familiar with the matter” Tencent Holdings are negotiating agreements with the Committee on Foreign Investment in the United States (CFIUS), to allow it to keep ownership over Riot Games and Epic Games.
These negotiations have been ongoing since the second half of 2020; meaning the discussions have occurred under republican President Donald Trump, and 46th President Joe Biden, a democrat. The CFIUS has the authority to order Tencent to divest its US holdings. The CFIUS is examining if the personal data Epic Games and Rito Games handle would be a national security risk.
Tencent are reportedly negotiating (in Reuter’s words) “risk-mitigation measures” with CFIUS, allowing it to keep its US investments, though the details of this proposal have not been leaked. Reuters reports this would typically involve “ringfencing” owners from any operations that would have national security implications, and independent auditors to monitor the implementation of the agreement.
Why the Suspicion over Epic Games and Riot Games?
Players have had concerns with privacy over Riot Games’ Valorant before. In April 2020 they came under fire for their kernel-based anti-cheat software– dubbed Vanguard. In short, a kernel-based software would be able to detect cheating software operating in any part of the computer.
However, it could also hypothetically give Riot Games the ability to spy on user’s systems. Other concerns raised included how the system could be vulnerable to crashing computers, buffer overflow, and granting hackers access to the entire computer system (should work-arounds be created).
Riot Games initially defended their kernel based anti-cheat software, in a way some deemed flippant. “This isn’t giving us any surveillance capability we didn’t already have. If we cared about grandma’s secret recipe for the perfect Christmas casserole, we’d find no issue in obtaining it strictly from user-mode and then selling it to The Food Network.”
Riot Games’ Senior Software Engineer Nemanja Mulasmajic later stated that month that they would be granting players more control over the anti-cheat software; allowing users to turn it off any time when the game is not running.
Recently, Riot Games announced they will begin recording players using voice chat in Valorant, in order to tackle harassment and hate speech. While re-assuring players the voice clips of reported players would be deleted after analysis, they also insisted they would not be actively listening to users.
“We know collecting voice data is a concern for many of you,” Riot Games stated, “but be assured that we would never ship anything if we weren’t comfortable having our own data treated the same way. And if you prefer to not have your voice chat captured, you may turn off voice chat.”
One source told Reuters that Epic Games have not been sharing any user data with Tencent. The Epic Game Store has come under fire partially for concerns over Tencent, with the free game giveaways being seen as a way to encourage downloads more than making profit; leading to suspicions of personal data abuse.
The ongoing Apple vs. Epic Games lawsuit has also revealed that Epic Games stated they would not be profitable until 2023; with Apple giving a prediction of 2027. Combined with the Epic Games Store proudly boasted only taking 12% from sales (while rival Steam takes 30%), this only encouraged fears that Epic Games’ object was expansion and domination over the PC gaming market, rather than profit.
It should be noted however, other concerns over the Epic Games Store has been over its lack of features, and demanding exclusivity for many titles. This resulted in some games scheduled to on Steam jumping ship at the 11th hour.
How are Negotiations Going?
Sources told Reuters there was no certainty if Tencent would be able to reach a deal. Tencent, Epic Games and a CFIUS representative at the U.S. Treasury Department declined to comment to Reuters. A Riot Games spokesman told Reuters they operate independently of Tencent, and has implemented “industry-leading practices” to protect player data. He declined to comment on the alleged negotiations however.
The CFIUS has reportedly been focused on Chinese ownership of US tech companies and assets over the last few years; stemmed from concerns US citizen’s private data could be given to the Chinese Communist Party.
Under President Biden the (in Reuter’s words) “hawkish stance” against China has been inherited from President Trump. However, key CFIUS roles have reportedly not been staffed, resulting in a reprieve for BtyeDance needing to sell TikTok to Oracle. Now under Biden, the CFIUS has reportedly not sought to enforce the divestiture order.
Along with the eagerness of the CFIUS being under questioning, how loyal Tencent is to the Chinese government is also up for debate. Reuters previously reported how the Chinese government is preparing a “substantial” antitrust fine for Tencent. Tencent also lost $20 billion USD in 2018 after the Chinese government recommended fewer video game approvals.
What does Tencent Own?
Tencent’s portfolio also includes becoming the major shareholder for Marvelous in January 2020, 100% ownership of Riot Games, 80% of Grinding Gear Games, 40% in Epic Games, 29% in Funcom, 5% in Activision Blizzard, 5% in Ubisoft, 5% in Paradox Interactive, a “major investment” in PlatinumGames, a majority stake in Klei Entertainment, a minority stake in Dontnod Entertainment, and others.
Beyond investments, Tencent are also aiming for their own AAA studios. Tencent reportedly hired several industry veterans who had worked on “blockbuster” titles. Alleged hires included former Konami developer Kenichiro Imaizumi (Death Stranding), and Scott Warner (Planescape: Torment, Mercenaries 2: World in Flames, and Halo 4).
This studio was later revealed as LightSpeed LA (a subsidiary of Lightspeed & Quantum, itself a subsidiary of Tencent). While LightSpeed LA itself had previously announced “globally marketed” open-world cyberpunk FPS Syn at Tencent’s annual conference, LightSpeed LA working on an open-world AAA PlayStation 5 and Xbox Series X game.
Reuters also previously reported Tencent’s TiMi Studios made $10 billion USD in 2020, which would make them the world’s largest developer. At least one of TiMi’s major upcoming games may face some difficulties however.
The news that Tencent were developing a Pokemon game was met with concern and skepticism due to Tencent’s aforementioned reputation. When it was announced it was a free-to-start MOBA Pokemon Unite by TiMi, the reaction was poor.
Whether it be because of the genre, the company being based in China, or fans expecting announcements of new mainline games; the trailer received many dislikes (even after being made private and re-uploaded). The game’s regional beta tests are ongoing.