United States President Donald Trump on Thursday, August 6, 2020 attempted to blow-up the US videogame industry after issuing executive orders banning “transactions” with the Chinese owners of the TikTok and WeChat apps starting Sept. 20. While the move against TikTok’s owner — Beijing-based Bytedance — was not a huge surprise, action against WeChat’s owner — Shenzhen-based tech giant Tencent Holdings Incorporated sure was. That’s because Tencent is one of the world’s largest and most valuable companies, with ownership stakes in a number of U.S. videogame companies, including Riot Games, which makes “League of Legends”; Epic Games, which makes “Fortnite”; and Activision Blizzard ATVI, which makes “World of Warcraft”.
Tencent also has significant stakes in Tesla Incorporated, TSLA, and Snap Inc. SNAP, the maker of Snapchat, and it has streaming deals in place with the NBA, the NFL, and Major League Baseball. The order could potentially also affect Apple Inc. AAPL, and Alphabet’s GOOGL, GOOG, Google app stores, which feature Tencent-owned apps. Industry analysts are concerned that Trump’s executive order could hit the company’s online games operations in the United States. But the company suggested that business is safe.
“Based on our initial reading and subsequent press reports, the executive order is focused on WeChat in the United States and not our other businesses in the United States,” said Tencent chief financial officer Shek Hon Lo. “We are in the process of seeking further clarification,” he added.
Tencent is the world’s largest gaming company by revenue. It has published several popular mobile and video games, such as PlayerUnknown’s Battlegrounds, or PUBG. US-based players spend a lot of money in PUBG — it ranked 10th in the United States by consumer spend last year, according to analytics company App Annie. But Tencent sought to reassure investors that the company makes little money in the United States. James Mitchell, a senior executive, said the United States accounts for less than 2% of global revenue.
WeChat & Tiktok
The executive order took aim directly at WeChat, which has more than 1 billion users worldwide, and whose “data collection threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information,” the order stated. That said, the TikTok and WeChat issues are still huge in the tech world. TikTok has been the major focus of recent conversations with the Trump administration essentially demanding it be sold to an American company to restrict Beijing’s access to its data.
WeChat was the bigger shock, however, as it is essentially the Facebook of China and many Chinese families and businesspeople communicate with their relatives and partners back home. Banning that app would be devastating for them, and yet again, from the executive order it’s not clear if something as simple as sending messages from WeChat would be disallowed, or if it’s only about giving money to Tencent for WeChat-related things is what’s being targeted. The tech giant runs an equivalent messaging platform in China called Weixin which it hopes will be unaffected.
Apple Sales in China
The bigger fallout maybe Apple’s sales in China if its iPhones aren’t allowed to download Chinese messaging apps. Business analysts are unclear about the full implications of the US bans on Tencent and ByteDance and are waiting for more details. There are fears that Apple could suffer if the ban stretches to its operations in China. Experts say sales of its iPhone will be hit hard if Chinese consumers are not allowed to download messaging apps like Weixin onto them. The executive order said it would ban “any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent Holdings Ltd. (a.k.a. Téngxùn Kònggǔ Yǒuxiàn Gōngsī), Shenzhen, China, or any subsidiary of that entity”.
Donald Trump & Tencent
Mr. Trump said that the spread in the US of mobile apps developed and owned by Chinese firms “threaten the national security, foreign policy, and economy of the United States”. “The impact on valuation would be more severe if the implementation included banning all transactions of Chinese businesses of U.S. companies with Tencent as a whole, as this would also hurt Weixin, advertising in mainland China by U.S. affiliated firms, the international cloud business, the international gaming business, and so on,” Morningstar analyst Chelsey Tam wrote this week. But the ban has wider implications. Even if the executive order doesn’t cover WeChat China, it could affect Tencent in other ways.
Take Tencent’s $15 billion cloud services and Fintech Division, a major driver of growth over the past years. If American firms can’t sell servers to support WeChat, that effectively means they can’t sell to Tencent itself unless the messaging service can be completely ring-fenced. Secretary of State Michael Pompeo has already urged American companies to cut ties with Chinese cloud providers including Tencent and Alibaba, part of a “clean internet” campaign. Then there’s Tencent’s cash cow.
Gamers from around the World
Gamers the world over were among the fastest and loudest opponents of the action, going online to campaign to save titles like PUBG Mobile and Call of Duty Mobile. Tencent has some $22 billion of investments in U.S. gaming assets and companies from Activision Blizzard Inc. to Fortnite maker Epic Games Inc. and League of Legends developer Riot Games Inc. Trump first targeted TikTok in late July, calling on the company to sell its US unit or end operations in October.
Microsoft confirmed on Sunday it was in talks to acquire the social media giant’s operations in the US, Canada, Australia, and New Zealand. Trump has since demanded the Treasury Department take a cut from the deal, should it close. Tensions between the economic superpowers flared earlier this summer after the White House ordered the closure of China’s consulate in Houston. China responded soon after, calling on the US to close its own consulate in Chengdu. The executive orders escalate tensions between the world’s two largest economies as US investors continue to grapple with economic recession and waning hopes for a fresh stimulus. Oh, boy! A battle of the biggies with the whole world watching in anticipation.