24/08/2020   Chundi Zhang
Tencent's investment in Voodoo will be mutually beneficial

Tencent has officially confirmed that it will buy a minority stake in Voodoo, an established hyper-casual games company headquartered in France. Hyper-casual games are a type of mobile game that are free, routinely ad-supported, basic in design, with simple gameplay and instant play making them highly accessible and popular. The scale of the investment has not been revealed however Tencent typically takes a 5%-30% stake in middle-sized companies with advanced technology or important IP. Tencent does not commonly interfere with the companies it invests in, as it helps it retain autonomy after receiving the funds, and this eases concerns about the potential constraint of such a move.

Tencent gives Voodoo an advantage over its competitors and helps transform its business

For Voodoo, this investment gives the company further ammunition to shift its product strategy from hyper-casual games - a highly competitive part of the market - towards casual games that will be monetised using IAP as well as advertising. Casual games differ from hyper-casual games as they often have deeper gameplay mechanics, progression features and are monetised in-game through IAP. The mobile advertising market is about to be significantly disrupted on iOS with the introduction of new rules related to IDFA opt-in for apps coming with the launch of iOS 14. As such, this is a good time to diversify into other forms of monetisation as the ad-based market adjusts.

Voodoo has also been facing increasing competition from larger mobile game publishers (Zynga, King and Playrix for example) in its traditional business area, where, based on its own stats, it has reached 3.7 billion downloads and 300 million monthly active users. In the context of its rivals making acquisitions to bolster their businesses (for example, Zynga's $168m acquisition of Rollic Games and $1.8b deal with Peak Games), it is believed that Voodoo will take advantage of Tencent's capital and will benefit from Tencent's experience in developing more complex mobile games. 

Tencent will attach greater importance to hyper-casual games to compete with ByteDance

Tencent is a leader in the core and mid-core mobile games segments in China, which generates a huge amount of revenue; but for hyper-casual games, it has not had a clear strategy for expansion. The company's foray into hyper-casual games began in late 2017 on its popular instant messaging app, WeChat, where it released a mini-game, Jump and Jump, which reached over 100 million daily active users (DAU) within weeks of the release. In late 2018, Tencent had an internal dispute regarding which department should be leading the development of mini-games, resulting in Wechat becoming the internal leader for hyper-casual games; as Tencent regarded said games as a way to boost user acquisition and engagement on IM rather than a viable revenue stream.

Recently, TikTok's owner ByteDance, has started to lead the hyper-casual games market in China, following the establishment of its gaming division. ByteDance used hyper-casual games as a starting point, trying to break through the patterns of the market. It has been pouring advertising resources into said games and has published several successful products, including Combat of Hero and Wobble Man which topped the download charts. ByteDance has also invested in studios which have expertise in making casual games; on Aug 21, ByteDance announced its investment in MYBO, a casual games studio which focuses on markets in Europe and the US.

The deal's potential impact on the Chinese games market

Based on the aforementioned, it is believed that this deal would have the following impacts on the Chinese market:

  • Tencent will help Voodoo bring its hyper-casual games to WeChat, and integrate this with its social networking platform. A huge amount of non-gamers will be introduced to hyper-casual games through viral marketing on the app. For a long period of time, the hyper-casual games library and number of users will grow faster than before and play a more important role in Tencent's advertising business, whilst keeping development within its WeChat team.
  • Voodoo will be working with Tencent on R&D for deeper casual games; it will also likely support bringing Voodoo's casual games to mainland China through publishing, marketing and applying for relevant ISBNs if required; this will allow Voodoo to gain access to the massive Chinese market, which will potentially be a major area for growth for the company.
  • Under the stricter control of ISBN approval in China, major companies are continually exploring the potential value of ad-supported games (which do not need an ISBN) with hyper-casual games being a major product type in this category. Due to low average revenue per user (ARPU), this is a genre which relies on viral marketing via social media for advertising, to reach as much of the audience as possible. Therefore, we expect the hyper-casual battle to mainly occur between Tencent and ByteDance, both of which have access to a massive user base through Wechat and Douyin (The Chinese version of TikTok). The battle may spill over to other divisions, such as advertising or copyright, forming a full-blown competition between the two in hyper-casual games.

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