After the game market has fully entered the era of stock, the competition between the two industry giants Tencent and NetEase is intensifying day by day, and all-round fierce competition is inevitable. Who will have the last laugh?
Moreover, the overall environment of the game industry has changed drastically, with many investment banks already placing bets on this trillion-dollar market. Among them, Morgan Stanley, in a research report released on June 18, placed more chips on Tencent.
Morgan Stanley analysts gave two main reasons in the report:
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Structural changes in the game industry (such as the shift in regulatory focus) are more favorable for Tencent's low ARPU (average revenue per user) games such as &#34;small games&#34;.
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Tencent's overseas investments are beginning to pay off, with strong momentum in international gaming business.
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<h2>Favorable changes in the game industry benefit Tencent, &#34;China's largest small game platform&#34; welcomes spring</h2>
Morgan Stanley stated that under the premise of the shift in regulatory focus, games with lower monetization levels are expected to receive more policy support. Tencent's low ARPU games (such as focusing on MOBA, first-person shooters, parties, and small games) may attract more players. Tencent's online game revenue is expected to grow by 10% year-on-year in the second half of the year, while NetEase is expected to grow by 5%:
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Since the regulatory rectification in 2021, the regulatory focus has shifted from protecting minors to excessive monetization.
NetEase has taken active measures to limit the monetization of &#34;Fantasy Westward Journey&#34; PC games, which may affect other games in its product portfolio.
We believe Tencent can benefit from its low ARPU game categories, as its main MOBA and first-person shooter game content is lighter, with lower levels of monetization through in-game purchases.
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In this context, the so-called &#34;small games&#34; are beginning to thrive:
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Compared to 2021, the overall potential market size of small games in 2023 has increased by 7 times, exceeding RMB 20 billion.
We expect that Tencent, which operates China's largest small game platform, will benefit from the industry boom, with small game revenue expected to double in the next two years.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/8084a96e-63a7-4539-b2a7-6bb38c3fad27.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/8084a96e-63a7-4539-b2a7-6bb38c3fad27.png"/>
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Furthermore, Morgan Stanley believes that, in contrast, the once dominant MMORPG (Massively Multiplayer Online Role-Playing Game) in China seems to be struggling to regain its past glory, and Tencent's layout in this area is limited:
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MMORPG used to be the largest game category in China, with very high ARPU values (ranging from RMB 500 to 1000) due to the pay-to-win mechanism.
However, we see consumer spending shifting towards games that offer value for money, and the revenue of MMORPG is shrinking (with a CAGR of -12% from 2019 to 2023), being eroded by new games
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<h2>Overseas investments show initial results, international gaming business momentum strong</h2>
In addition to dominating the stock market domestically, Tencent's ability to win the favor of Morgan Stanley is also benefiting from the initial results of overseas investments. Morgan Stanley wrote in its report:
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Tencent has been expanding its international gaming business by establishing independent game production studios and acquiring overseas studios, and these investments have shown initial results.
The CAGR of international games from 2020 to 2023 is 15%, and by 2023, the revenue share of international games will reach 30% (compared to 14% in 2019).
We expect the CAGR of international games from 2023 to 2025 to be 11%.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/54d8e2f7-c676-4dd8-a29f-d9647adb141a.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/54d8e2f7-c676-4dd8-a29f-d9647adb141a.png"/>
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Morgan Stanley stated that as regulatory focus shifts, Tencent, as the "largest small game platform in China," may usher in a new era. Coupled with Tencent's initial success in overseas investments, its international gaming business is gaining momentum

1. Core descriptive facts:
- Tencent and NetEase are the two major players in the gaming industry, engaging in intensified competition as the market enters a period of saturation.
- Morgan Stanley, in a report released on June 18, has placed more bets on Tencent in the trillion-dollar gaming market.
- Morgan Stanley analysts provided two main reasons for favoring Tencent: structural changes in the gaming industry and Tencent's successful international gaming investments.
2. Points and supporting logic:
- Structural changes in the gaming industry, such as a shift in regulatory focus, benefit Tencent's low ARPU games like "small games."
- Tencent's overseas investments are showing positive results, strengthening its international gaming business.
- With regulatory focus shifting towards less monetized games, Tencent's low ARPU games, particularly in genres like MOBA and FPS, are expected to attract more players.
- The focus on "small games" is predicted to thrive, with the overall potential market size growing sevenfold by 2023, exceeding 20 billion RMB.
- Tencent's dominance in the small games sector is expected to lead to a doubling of revenue in the next two years.
- MMORPGs, once dominant in China's gaming industry, are facing decline due to a shift in consumer preferences towards games offering better value for money.
- The pay-to-win model traditionally associated with MMORPGs is causing a decline in revenue, with a projected CAGR of -12% from 2019 to 2023, leading to Tencent's limited presence in this sector.

Morgan Stanley's prediction: The gaming environment has changed, unfavorable for NetEase, bullish on Tencent