Tencent, China’s largest video game company, is reportedly in early talks with Meta Platforms Inc., the parent company of Facebook, to become the exclusive seller of Meta’s Quest 2 virtual reality headset in China, where the largest number of internet users reside. The discussions also involve Tencent’s interest in publishing Chinese versions of existing video games for the device. 

However, various issues would need to be addressed before a deal could be finalized, including concerns over how user data would be handled, macroeconomic conditions, regulatory compliance, and possible scrutiny from the US and Chinese governments due to the involvement of two of the biggest tech companies in the world. Additionally, the companies would have to navigate China’s strict regulations on video games.

As of now, Meta’s Quest 2 headset and its apps are not officially available in China, but consumers can purchase devices from parallel importers on e-commerce platforms such as Taobao and JD.com and use a virtual private network to bypass China’s internet firewall. Tencent and Meta have not commented on the reported discussions, which were first reported by Chinese tech-focused media outlet 36Kr.

If a deal is reached, it would be a significant move for Meta to connect with Chinese consumers again, as the company has struggled to make progress in the market since Facebook was blocked in China in 2009. Nevertheless, Meta has maintained an active presence in China, focusing on courting Chinese advertisers that target consumers outside of the country. The company runs an office in Shanghai and is actively recruiting engineers for its VR business.

The metaverse, a more immersive version of the internet experienced primarily through VR devices, has attracted significant global interest in recent years. Meta is the dominant player in VR headsets globally, with Pico, owned by TikTok parent ByteDance Ltd., working to catch up. Pico has been investing in online marketing and offering subsidies to users to boost sales, and the company’s market share has grown to 10% from 2% over the past year, while Meta’s market share fell to 80% from 85%, according to research firm Wellsenn XR.

Both Meta and ByteDance face a long timeline for their VR businesses to become profitable, with weak global demand and cautious corporate expansion and development being major factors. Last year, Pico sold just over half of its target of 1.8 million devices, and the company has recently laid off around 200 employees. Meta’s revenue from its Reality Labs division, which includes its VR business, declined 17% in Q4 2022 due to lower sales of the Quest 2 headset, which was released in 2020.

Meta could tap into one of the world’s largest video game markets by partnering with Tencent, where Pico has the majority of its user base. However, the stricter regulations on video games in China present a challenge. Video game companies in China must obtain government approval to charge players for a new game, but VR games are still a gray area. While Tencent began selling Nintendo’s Switch consoles in China in 2019, they have published fewer than 40 titles due to the strict licensing rules. Pico has responded to Beijing’s video game restrictions by requiring users to register with their real names and limiting the game time of users under 18 years old. It suggests that VR games may be subject to similar rules.

Tencent is looking for new sources of revenue beyond its slowing video game and advertising businesses, and the potential partnership with Meta could help. In the summer of 2021, Tencent set up a team to focus on VR, including developing devices, but the business was burning cash while Tencent was trying to cut costs and focus on profits. Last week, Tencent announced that it was shutting down some businesses and offering internal transfer opportunities to many of the team’s 300 employees, indicating a change in its development plans for hardware.

When Pico was seeking a buyer in 2021, ByteDance outbid Tencent with an offer of around 9 billion yuan ($1.31 billion). Months later, Tencent withdrew its proposal to acquire Blackshark Technologies Co., a Chinese maker of smartphones designed for playing video games. This was a deal that Tencent had considered to strengthen its capability in entertainment hardware.

Sony Group Corp. is launching the PlayStation VR2 headset in China on Wednesday, which will be used with Sony’s PlayStation 5 consoles sold through state-run Oriental Pearl Group Co.