Tencent in talks with Meta to sell Quest VR headsets in China

Tencent, China’s biggest videogame company, has proposed to Meta that it become the exclusive seller of Meta’s Quest 2 headsets in China, people familiar with the discussion said. Tencent has also sought to publish Chinese versions of existing videogames for the device, they said.

The discussions, which began in recent months, are still at an early stage and a deal might not be reached, some of the people said.

Among issues that would need to be addressed are how user data would be handled, whether global macroeconomic conditions would be right for a partnership, and whether any deal between two of the biggest tech companies in the U.S. and China could draw scrutiny from Washington and Beijing, the people said. The two companies would also face China’s tight regulations on videogames.

Currently, the headset and its apps aren’t officially available in China. People there can buy devices from parallel importers on e-commerce platforms such as Alibaba Group Holding Ltd.’s Taobao and JD.com Inc., and set up the headsets and download apps with a virtual private network to bypass China’s internet firewall.

Tencent and Meta didn’t respond to requests for comment. Chinese tech-focused media outlet 36Kr earlier reported the talks.

The deal, should it come through, would be a significant step for Meta to connect with Chinese consumers again after it struggled to make headway in the market following Beijing’s blocking of Facebook in China since 2009. Meta has remained active in China even after Facebook was blocked, largely focusing on wooing Chinese advertisers who target consumers outside the country. Meta runs an office in Shanghai and is actively hiring engineers for its VR business.

Global interest in the metaverse, a more immersive version of the internet experienced largely through VR devices, has swelled in the past two years. Meta is the dominant player globally in VR headsets, while its smaller rival Pico, owned by TikTok parent ByteDance Ltd., is working on catching up.

Beijing-based Pico has been investing in online marketing and offering subsidies to users to boost sales. Last year, Meta’s market share fell to 80% from 85% a year earlier, while Pico’s grew to 10% from 2%, according to research firm Wellsenn XR.

Meta and ByteDance face a prolonged timeline for their VR businesses to become profitable, with a weaker global economy leading to sluggish demand and a more cautious corporate stance for expansion and development.

Last year, Pico sold around 980,000 headsets, Wellsenn XR data shows, just over half of its target of 1.8 million devices. Pico in recent weeks has laid off around 200 employees, current and former employees said. A Pico spokesperson said it was firing some staff to streamline the team.

Meta recently said that revenue from its Reality Labs division, which houses its VR business, declined 17% in the fourth quarter from a year earlier becausae of lower sales of the Quest 2 headset, which was released in 2020.

A partnership with Tencent could help Meta access one of the world’s biggest videogame markets, where Pico garnered most of its users.

Another hurdle is China’s tighter regulations on videogames. In China, videogame companies must seek government approval to charge players for a new game, but VR games remain a gray area. Tencent in 2019 began selling Nintendo Co.’s Switch consoles in China, but has published fewer than 40 titles since due to the strict licensing rules.

Last year, Pico started requiring users in China to register with real names and limiting the game time of users under 18 years old in response to Beijing’s restrictions on videogames. That implies VR games are likely to be subject to similar rules.

For Tencent, the potential partnership comes as it seeks new sources of revenue beyond the slowing videogame and advertising businesses.

Last summer, Tencent set up a team to focus on VR, including developing devices, a rare move into hardware development. But the business was burning cash at a time when Tencent was cutting costs and focusing more on profits.

Last week, Tencent told staff at the team that it was shutting down some businesses and offering internal transfer opportunities to many of the team’s 300 people, employees at the unit said. A Tencent spokesperson said then that its development plans for hardware had changed.

When Pico was seeking a buyer in 2021, ByteDance beat Tencent with an offer of around 9 billion yuan, equivalent to $1.31 billion, which was much higher than Tencent’s bid, people familiar with the negotiation said. Months later, Tencent walked away from its proposal to acquire Blackshark Technologies Co., a Chinese maker of smartphones designed for playing videogames, a deal that Tencent had considered to shore up its capability in entertainment hardware, people familiar with the situation said.

In China, Sony Group Corp. is launching the PlayStation VR2 headset on Wednesday. The device should be used with Sony’s PlayStation 5 consoles, which are sold via state-run Oriental Pearl Group Co. in the country. Wall Street Journal