Tencent Holdings (0700.HK) is scrapping plans to venture into virtual reality hardware, as a dismal economic outlook prompts the Chinese tech giant to slash costs and headcount at its metaverse unit, three sources familiar with the matter said.
The world’s biggest video game publisher had ambitious plans to develop both virtual reality software and hardware at an “extended reality” XR unit it set up in June 2022, for which it hired almost 300 employees.
It had created a concept for a ring-like hand-held game controller, but problems in achieving quick profitability and the huge investment needed to make a competitive product were among factors that led to a shift away from that strategy, two of the sources said.
One of the sources said the XR project was not expected to become lucrative until 2027, according to an internal forecast. The second source said the unit also had a lack of mind-blowing games and non-gaming applications.
The sources requested to remain anonymous as the information is confidential.
“Under the company’s new strategy as a whole, it no longer quite fit in,” the first source said.
Earlier this year, Tencent had also made plans to purchase gaming phone maker Black Shark, which it believed had supply chain and inventory experience that could strengthen its hardware push and add 1,000 people to the unit.
However, it eventually backed out from that deal because of Tencent’s shift in strategy, as well as increasing regulatory scrutiny and an expected protracted review process, one of the sources who had first-hand knowledge of the matter said.
The sources said that Tencent had urged most of the unit’s staff to pursue other opportunities, verified a Thursday report from Chinese tech news outlet 36Kr.
Tencent would not comment on the Black Shark deal and whether Beijing’s scrutiny had turned the deal sour. In regards the status of the XR unit, the company cited a statement to Reuters on Thursday that said it was reorganizing some business teams as development plans for hardware had changed.
The company also said on Thursday that it was not dissolving the XR unit. Tencent shares fell as much as 2.5 percent after Reuters’ report.
Tencent Metaverse Interest
The launch of the XR unit came amid mounting global interest in the metaverse concept of virtual worlds and had marked a rare foray into hardware for Tencent, which is largely recognized for software that includes a suite of games and social media applications.
It also joined a race against Western peers such as Microsoft (MSFT.O) and Meta Platforms (META.O), which are developing their own metaverses and have their own virtual reality hardware projects.
One of the sources said that Tencent had toyed with virtual reality about seven years ago for a short while, and its interest in the area had been renewed in 2021 after discovering new breakthroughs in pancake lenses and more powerful displays. Robust sales of Meta’s Quest headset was also a driver, the person added.
Buy Crypto NowBut last year marked one of the hardest years for Tencent since it was founded in 1998, with revenue hit by a regulatory crackdown and headwinds from measures to prevent the spread of COVID-19.
Highlighting such strains, its founder Pony Ma in December demonstrated a rare show of frustration at a year-end meeting when he reprimanded senior managers for not working hard enough and said the company needed to concentrate on short video for future growth.
Several tech companies including Google and Meta have announced job cuts as they seek to cut costs amid mounting fears of a global recession.
Pico, a virtual reality (VR) headset manufacturer owned by TikTok’s Chinese developer ByteDance, said on Friday it was slashing a small number of employees, after local media reported the start of hundreds of layoffs earlier in the week. A source with knowledge of the matter said 200 staff were affected.
