ByteDance declares ‘game over’ for gaming division

The parent of short-video sensation TikTok made the decision in the face of stiff competition from established gaming giants like Tencent

Key Takeaways:

• ByteDance will phase out its Nuverse gaming division, laying off hundreds of employees and terminating all ongoing gaming projects by the end of the year
• The internet giant’s decision follows previous similar scale-backs in its education, real estate and virtual reality businesses

By Ken Lo 

It’s a sort of “game over” for ByteDance Technology Ltd.

The TikTok parent is restructuring its gaming business and prioritizing other long-term strategic growth areas, according to numerous reports last week saying the company would significantly downsize its Nuverse gaming brand. The move marks a rare setback for ByteDance, as it was trying to compete for a piece of a massive global gaming market with hometown rival Tencent (0700.HK), which is trying to expand outside the crowded China market.

Sources earlier told Reuters that ByteDance informed Nuverse senior managers to terminate ongoing game projects and lay off hundreds of employees by the end of this year. As part of the wind-down, Nuverse plans to divest its well-performing games in a way that protects user interests, according to other media reports. These include names such as “Crystal Core,” “Planet Restart” and “Nautical King.” 

ByteDance set up Nuverse in 2019, and acquired game developer Moonton Technology for $4 billion in March 2021, double the $2 billion bid made by Tencent. Nuverse boasted 3,000 employees at its peak, reflecting its ambition. At that time, the unit’s head, Yan Shou, stressed in an internal speech that the company would mostly target the global gaming market, avoiding the crowded China market and going head-to-head with Tencent’s growing global ambitions. 

Losing momentum

Nuverse released its proprietary game “Crystal Core” in July, which looked like a hit when it generated revenue of 400 million yuan to 500 million yuan in its first two weeks. ByteDance had high hopes for the game, aiming to compete with Tencent’s hugely popular “League of Legends” and “King of Glory,” and NetEase’s (NTES.US; 9999.HK) “Dream Journey to the West” and “Onmyoji.” But the game quickly lost steam, and had slipped to 11^th place in September from fifth in August on Sensor Tower’s “China App Store Mobile Game Revenue Ranking.” 

Nuverse was once a potent force in leisure games, with its Ohayoo platform boasting nine titles with revenue of more than 100 million yuan each and 39 surpassing 10 million yuan in 2021, fueled by ByteDance’s “data-driven growth” model. But data released by Ohayoo during this year’s Lunar New Year revealed that downloads for its leisure games had fallen by nearly half from the same period of 2021.

Unsurprisingly, ByteDance founder Zhang Yiming, Chairman Liang Rubo and other top executives quickly grew impatient with Nuverse’s failure to develop global hits and its struggle to retain players for its existing games. The disappointment with “Crystal Core” may have been the last straw, leading to ByteDance’s decision to abandon the business.

This wasn’t the company’s first time cutting the cord with a business that wasn’t performing up to expectation. Facing regulatory and economic headwinds at home and abroad, ByteDance has previously scaled back its forays into a range of other sectors including education, real estate and virtual reality (VR). Just last month it downsized its VR headset business PICO, which some saw as a precursor to its gaming exit.

Chairman Liang declared at an internal annual meeting to start the New Year that ByteDance’s resolution for 2023 was to be “focused” and “pragmatic.” It would boost its investment in information and e-commerce services tied to its main businesses in areas like short video and news aggregation. Liang also insisted the company should “stay imaginative but be level-headed” in its emerging businesses. 

Liang has classified the company’s information platforms and e-commerce as key businesses, while grouping gaming with education, PICO and other emerging businesses, suggesting the gaming business was far from untouchable.

Revenue leader

ByteDance has become China’s latest internet superstar, taking off with its global success for TikTok, which contributes both advertising and e-commerce revenue. By comparison, gaming has been only a minor contributor, generating just 10 billion yuan of the company’s total of 360 billion yuan in 2021. The company has leveraged TikTok’s huge popularity in China, where it is known as Douyin, to enter the e-commerce business and take on local leader Alibaba (BABA.US,9988.HK). With its sights set in that direction, its decision to exit gaming comes as less of a surprise.

ByteDance’s revenue in the first quarter of this year rose 34% year-on-year to $24.5 billion, while its profit nearly doubled to $6 billion, according to operating data disclosed by The Information. In the second quarter, its revenue rose more than 40% to about $29 billion. When added together, the company’s $53.5 billion in revenue for the first half of the year easily surpassed Tencent’s $41.4 billion.

Regulatory uncertainty in China has stopped ByteDance from creating a clear roadmap for an IPO, since the company possesses troves of sensitive user data that China might consider a matter of national security if the company sought to list abroad. But its gaming withdrawal should positively affect its valuation, and could even reflect its strong intention to continue pursuing a listing. Caplight estimates that investors valued ByteDance at $231 billion based on the sale of its shares in the secondary market, implying a price-to-sales (P/S) ratio of 2.3 times.

So, how does that stack up with its peers? We can contrast the numbers with those for other major online advertising and e-commerce companies such as Alibaba and JD.com (JD.US; 9618.HK), which have far lower P/S ratios of 1.56 times and 0.3 times, respectively. Perhaps that’s not surprising, given ByteDance’s rapid ascent – especially on the global stage where Alibaba and JD.com have had far more mixed results. 

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