Tencent Just Made Its Biggest Metaverse Move Yet | The Motley Fool

Tencent Just Made Its Biggest Metaverse Move Yet | The Motley Fool

Last Fall, the "metaverse" became a buzzword when Facebook changed its company name to Meta Platforms. While the ultimate shape and scope of the metaverse is yet to be determined, it seems likely virtual worlds will grow in the future. Oculus became the most downloaded app on Christmas Day, indicating that more and more people may be trying out this whole metaverse idea.

In China, the best positioned company to benefit from the metaverse is clearly Tencent (OTC:TCEHY). While Meta dominates global social media with its Facebook and Instagram platforms, Tencent dominates China, with its WeChat "super-app" used by more than 1.26 billion people.

And Tencent one-ups Meta when it comes to mobile gaming, which could be another key metaverse application. Tencent is the number one game publisher in China, as well as a large investor in many of the biggest gaming studios across the world.

Yet while Tencent has the upper hand over Meta in mobile gaming, it hasn't yet developed virtual reality headset unit, as Meta has with its Oculus platform.

That is, until now.

Image source: Getty Images.

Tencent is buying Black Shark

Last Monday, Chinese media outlet 36Kr reported that Tencent would be acquiring Black Shark. Started in 2017 and funded by Chinese phone maker Xiaomi (OTC:XIACY), Black Shark currently makes gaming-oriented mobile phones and accessories. However, according to the report, Black Shark will be changing its business model to invest in AR/VR headsets after Tencent buys it.

According to sources, Tencent is paying between RMB2.6 and 2.7 billion ($410 to $425 million). That's far below the $2 billion paid for Oculus back in 2014 -- especially when adjusting for inflation.

Of course, Black Shark doesn't even make a headset yet, which will require additional investment. So why did Tencent choose Black Shark, a company that has to date only made phones, and not headsets?

According to 36kr, Black Shark had become somewhat redundant for Xiaomi. Its other phone brands Mi and Redmi had developed enhanced gaming features, while the number of Chinese citizens who bought specialized gaming phones was relatively small.

However, Black Shark had also developed expertise in adapting games for high-end mobile experiences, especially in working with Qualcomm chips. Qualcomm's modems should continue to be crucial for virtual reality and metaverse applications, just as they were in mobile phones. So that type of technological expertise could prove invaluable in the emerging metaverse.

Black Shark could be a missing piece of the metaverse puzzle for Tencent

Black Shark is not as fully developed in terms of its VR technology as Oculus was, but the acquisition does seem like a low-cost way for Tencent to get into the augmented- and virtual-reality hardware market. And Tencent already has lots of software and platform expertise as the leading video game distributor in China, along with its large ownership stakes across many major game studios. These include Epic Games and Roblox, owners of the Unreal engine and Roblox Studio game engines, respectively.

On its third quarter conference call with analysts, Tencent CEO Pony Ma answered an analyst question about the company's metaverse plans:

When you combine Tencent's expertise in gaming, social networking, cloud infrastructure, artificial intelligence, streaming videos, and digital payments, you can see how it would perhaps be the best positioned company to tackle the metaverse. The only missing piece is really on the hardware side, where Tencent hasn't really ventured to date. Outside of a few proprietary semiconductor designs for internal use, most of Tencent's current businesses are in software internet platforms, which tend to be very high-margin and capital-light.

Yet the technological needs of the metaverse may be larger, requiring companies to optimize software with proprietary hardware solutions. Hence, why Black Shark could be the "missing piece" of Tencent's metaverse puzzle. Only time will tell how this all plays out.