Tencent buys developer of League of Legends

Tencent acquires Riot Games, the creator of online game League of Legends, for around $400 million.

Tencent Holdings has acquired a majority stake in Riot Games, the developer of online game League of Legends. Financial terms were not disclosed.

Tencent is China’s largest internet portal and has a leading position in instant messaging. The Shenzhen-based company gets its revenues from internet value-added services, mobile and telecommunications value-added services and online advertising. Tencent listed on the Hong Kong stock exchange in mid-2004 in an initial public offering led by Goldman Sachs.

Riot Games was set up in 2006 by Brandon Beck and Marc Merrill. The two twenty-something-year-olds had an idea to develop video and online games that could be played in short stretches of time, for example during a lunch break. Riot Games launched its first and thus far only title, League of Legends, in October 2009. It is a free, multiplayer, online, battle-arena game. Since its launch it has built up a community of more than 1 million active players who play for more than half a billion minutes monthly. Although the game is free to play, it earns revenues when players pay for skills, equipment etcetera, through a system of micro-transactions.

In September 2009, Riot Games raised $8 million of financing from Tencent alongside venture capital firms Benchmark Capital and FirstMark Capital. The investment was the second round of financing for the Los Angeles-based firm and followed a deal agreed between Riot Games and Tencent earlier in 2009 for the Chinese company to distribute League of Legends in China.

Sources said the current sale by Riot Games of a majority interest to Tencent was done on a principal-to-principal basis, as Tencent was already a shareholder in Riot Games. Various media has reported that Tencent will shell out around $400 million to buy out the existing investors, allow Riot Games management to monetise part of their stake and lock up some key members of the management for the near term.

Both buyer and seller stressed in a press release that Riot Games will continue to be based in Los Angeles and operate independently. The investment by Tencent is expected to enhance the League of Legends game, expand it into new markets and provide Riot Games with capital to develop new games.

“Tencent's investment will provide our talented team of designers, developers and community staff with additional resources to focus on innovating around League of Legends and launching new projects that push the boundaries in the gaming space,” said Beck, who is chief executive officer of Riot Games.

“Tencent will provide the Riot team with the support and autonomy to continue to deliver high quality experiences that impress both fans and critics in the global gaming market,” said David Wallerstein, senior executive vice-president of Tencent.

And Riot Games is clearly in expansion mode, evidenced by the fact that it is looking to add around 100 employees and more than double its staff strength.

However, some followers of League of Legends were clearly sceptical about Tencent's investment. League of Legends has an active blogspot moderated by Riot Games. “Greetings Summoners [a player is referred to as a Summoner in League of Legends]…Today we're announcing that Tencent, one of our international publishing partners, is taking a bigger investment in Riot Games… What this means to Summoners is that we will have the resources to build more features and add more content to League of Legends, nothing will change except us being able to deliver more awesome to you and faster!” posted a Riot Games moderator on the blog. The post generated more than 90 pages of responses including some outspoken ones speculating that the new Chinese owners would mark an unwelcome change in direction for Riot Games.

Tencent’s acquisition of Riot Games follows the acquisition by Shanghai-based Shanda Games of Mochi Media last year. Based in San Francisco, Mochi provides a platform for distributing and monetising browser-based games worldwide. However, at a consideration of $80 million, that was a smaller deal.

Tencent is paying for something which, within the technology industry, is considered a valuable property. Website BusinessInsider annually compiles a list, the Digital 100, which ranks what it considers the world’s most valuable internet start-ups. Last year it evaluated more than 300 companies and estimated what they would be worth in the public market. Facebook topped the list with an estimated valuation of $25 billion, followed by Zygna, the social game developer; Wikipedia, the free online encyclopedia; internet telephony provider Skype; and Craigslist, a listing of local classifieds.

Riot Games ranked 52nd with an estimated value of $250 million, based on an estimated revenue in 2010 of $25 million to $50 million. The entry also mentioned the fact that Riot Games' first game achieved a user base of 1 million just one year after launch.

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