Tencent Holdings Ltd is reportedly initiating talks with Huya Inc and DouYu International Holdings Ltd, two of China's biggest gaming platforms, in a deal that will allow it to dominate the multi-billion dollar video gaming space. People familiar with the matter said that Tencent had been discussing a merger with the two Chinese companies over the past few months.

However, details of the deal are yet to be finalized. The Chinese social media giant commands the largest share in the global videogame market with the likes of Sony, Apple and Activision Blizzard far behind in the race. If everything falls in place, Tencent will not only cement its position as the market leader in videogames but also will be able to sell ads across an expanded content network.

Tencent's Big Dreams

Visitors use their smartphones underneath the logo of Tencent at the Global Mobile Internet Conference in Beijing May 6, 2014. REUTERS/Kim Kyung-Hoon/File Photo
Tencent’s marquee games like PUBG Mobile and Honor of Kings have already helped Huya and DouYu establish a dominant position in the streaming platform space Reuters

Tencent has been holding discussions with DouYu and Huya over the past few months for a possible merger that would allow it to dominate the massive $3.4 billion video gaming space, according to a Bloomberg report. Tencent, which owns a 37 percent and 38 percent stake in Huya and DouYu, respectively, aims to become the largest stakeholder in the merged entity, according to people familiar with matter, the media outlet reported.

Understandably, that will further strengthen Tencent's position as the market leader in videogames and social media in China. The deal will give the company a user base of a whopping 300 million and a combined market value of $10 billion. Huya and DouYu will continue to keep their respective platforms and brandings while working closely with Tencent's e-sports site eGame.

Tencent has lately been facing stiff competition from rival ByteDance Ltd and its bouquet of apps that have been fast gaining popularity. The merger will definitely give Tencent and edge over its rivals by allowing it to sell ads across an expanded content network.

A Strategic Move

PUBG Mobile
China’s game-streaming market is projected to reach $3.8 billion (23.6 billion yuan) in revenues by the this year pubgmobile / Instagram

China's game-streaming market is projected to reach $3.8 billion (23.6 billion yuan) in revenues by the end of this year. The country's game streaming networks survive on the popularity of the star players and the virtual tips and gifts fans buy for them, leading to aggressive bidding among the most popular names. This has also seen the likes of Google-backed Chushou TV closing down its business after failing to raise money. Tencent's marquee games like PUBG Mobile and Honor of Kings have already helped Huya and DouYu establish a dominant position in the streaming platform space.

However, the company has seen a decline in revenue in recent quarters as an increasing number of users have been shifting to ByteDance's Douyin, a typically designed Chinese app like the company's flagship TikTok. The merger will also help Tencent to cut broadcast and content cost at a time when two other Tencent-backed rival video gaming services Kuaishou and Bilibili are making all efforts to expand their gaming content.