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Nintendo picks Tencent for third shot at China game market

Partner in Switch deal no stranger to Beijing regulatory risk

A customer tries out the Switch in Japan. Nintendo hopes its tie-up with Tencent will help make the device a "global platform." (Photo by Wataru Ito)

OSAKA/GUANGZHOU -- Nintendo will try again to crack China's video game market after two failed attempts, this time with a powerful local ally that understands the country's regulatory perils: Tencent Holdings.

Tencent, the world's biggest video game company, received approval on Thursday to sell Nintendo's handheld Switch game device in China.

"Now is the time for Tencent to invest in game devices," a source familiar with the Chinese company, one of Asia's most valuable listed tech groups, said Friday.

Another insider said: "Tencent had wanted to team up with Nintendo for the past two or three years."

Tencent, whose businesses include the WeChat app and streaming music services, has focused on games for smartphones, which have far more reach in China than devices like the Switch or Sony's PlayStation.

Now, betting that game hardware will catch on in China, Tencent has enlisted Mario and others in Nintendo's cast of globally recognized characters. With WeChat peaking, Tencent is looking for chances to expand its business profile.

Meanwhile, the Japanese company approached Tencent with the hope of turning its gaming devices into "a global platform," according to a Nintendo insider. Competition looms from new entrants such as Google, which recently unveiled the Stadia cloud gaming service. Nintendo apparently sent a representative to China to discuss software development with Tencent.

Nintendo will reveal the details of the distribution deal with Tencent in due time, a company spokesperson said.

Success in China for the Switch -- Nintendo's best-selling device since the hit Wii console released in 2006 -- remains an open question. China is home to the world's largest gaming market, worth 214.4 billion yuan ($32 billion) last year, according to an industry report. But mobile games occupied a 60% share while console games wallowed at 0.5%.

A 13-year ban on gaming consoles in China made room for the rise of mobile games, such as Tencent's Honor of Kings.   © Reuters

The console fraction is tiny because China generally banned such hardware for 13 years starting in 2000, citing a purported negative influence on youth. When the ban was lifted, neither Microsoft's Xbox One nor the PlayStation 4 made a dent in a market dominated by online games for personal computers and phones.

Nintendo still must contend with China's censorship regime. The Switch could enjoy greater operational latitude since Tencent is believed to have government connections. Tencent is expected to receive approval soon from Guangdong Province to release the Super Mario Bros. series of games.

Yet Chinese censors are anything but predictable. Last August, authorities banned Monster Hunter: World just five days after it went on sale, dealing a blow to distributor Tencent. A freeze in approval of new games last year contributed to a plunge in the Chinese tech group's share price.

Despite the risks, the tie-up with Tencent could provide a new perspective that helps Nintendo regain its status as a creative powerhouse. The top spots among Switch games are monopolized by long-running series. Sales of new offerings like the Nintendo Labo interactive cardboard kits or the "Arms" 3D fighting game have languished.

Nintendo first tried its luck in China in 2003 with the Nintendo 64, which was redesigned and rebranded as the "Shenyouji" by a local joint venture. The console failed to take off because users had to download games at exclusive agents.

Yet "starting from that period, Tencent had interest in Nintendo and its high name recognition," the insider said.

Nintendo tried again in 2005 with the introduction of the DS handheld device. But the device faced direct competition from free mobile games, and it gained little traction with consumers.

The Switch "can differentiate itself from non-portable consoles since it can be taken into the bedroom and other places," said Hideki Yasuda, senior analyst at Ace Research Institute.

The Tencent tie-up marks a departure for a Nintendo that had appeared to be looking more inward for growth since the Wii.

"Over the past few years of core development, relationships outside [Nintendo] had noticeably diminished," said an executive at a Nintendo business partner.

Additional reporting by Shiko Ueda in Osaka

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