NetEase must rethink its appeal to Western gamers, even as it out sells Nintendo
Chances are few outside of China have heard of NetEase Inc., though it makes more money from games than Nintendo Co. Now it wants recognition, but first it’ll have to learn what makes Western gamers tick.
The company is on a global hiring campaign and exploring acquisitions or investments in foreign studios, so it can earn 30 per cent of revenue from overseas by 2020, said Ethan Wang, vice president of NetEase Games. The goal is to sustain the outsized growth that swelled its market value eightfold since 2012 to about US$40 billion, while creating an outlet from a saturated home market fought over with Tencent Holdings Ltd.
That would mark a shift for the internet conglomerate founded by billionaire William Ding that -- till now -- has mostly shunned deals. Yet the more immediate challenge may be figuring out the alien rhythms of non-Chinese players. Despite being among the first wave of mainland internet companies to debut in the U.S. -- at the height of the dotcom bubble -- NetEase is still very much confined to home.
“Whenever we demonstrate our titles worldwide, people can see our self-made titles have very high production values,” Wang said in an interview. “But the problem is that while we may make very good games, we are not familiar with the rhythm of overseas users, their ways of playing games.”
Investors are projecting 46 per cent revenue growth when the company reports earnings Wednesday. That’s half the pace from a year earlier but still indicative of the effectiveness with which it’s employed a mix of lifestyle, entertainment and news to create China’s second-largest online portal. It logged more than 8.3 billion page views in June, lagging only Tencent’s QQ in China.
The Hangzhou-based company remains best-known for bringing titles like Overwatch and Starcraft to local players. And with the stock on pace for its fifth straight annual gain, its market value has overtaken stalwarts such as Electronic Arts Inc.
While it still plays second fiddle to Tencent in gaming, self-developed hits such as Westward Journey have helped it outpace its larger rival’s market gains over the past half-decade.
One way to galvanise growth is to seek out foreign markets. Just as American giants from Google to Uber have failed in the world’s most populous country, Chinese companies have so far struggled to make their mark abroad. Yet NetEase is bent on making it in the U.S., while Tencent itself prepares to quicken its overseas operations by bringing its biggest hit, Honour of Kings, to Americans.
Win or lose, their ambitions could have implications for a games industry NewZoo estimates will be worth US$109 billion this year -- bigger than Hollywood. Tencent’s already spent billions acquiring Supercell Oy and Riot Games Inc., picking up super franchises Clash of Clans and League of Legends. NetEase is now looking over its own potential targets, Wang said.
“The Chinese market represents slightly over a quarter of the world’s $108.9 billion in gaming revenues,” said Jelle Kooistra, NewZoo’s head of product development in mobile. “Although that is very significant, it still leaves an even greater opportunity overseas.”
NetEase is one of the few remaining Chinese internet players still able to thrive alongside Tencent and Alibaba Group Holding Ltd., which between them dominate sectors from e-commerce to social media and online streaming. Almost as valuable as Nintendo, its hyper-growth helped make its founder China’s sixth-richest man with a fortune of some US$18 billion. Despite that breakneck pace of expansion however, the company lags its main rivals in stock valuations. Jefferies analysts led by Karen Chan estimated last week NetEase trades at about a 40 per cent discount to the global gaming sector’s average of roughly 24.5 times 2018 earnings.
Tencent’s size -- it’s roughly 10 times as large -- and reach across social media and services may give it an overwhelming edge at home over the long run. Of the 100 biggest cash-making games on Apple Inc.’s iOS system in China during the first half, 27 were Tencent’s while just 10 were released by NetEase, according to research group App Annie.
That’s why NetEase has been tentatively pushing abroad since late 2014. While it became adept at producing viral hits in China, it’s still learning the nuances in key markets like the U.S., Wang said. He describes Clash of Clans as a title where players “spend money to buy time”.
In contrast, the domestic gaming market is dominated by free-to-play models that allow extensive sessions for customers, who then spend money on items like weapons or outfits.
NetEase has over 100 mobile titles either released or in development, with most aimed at Chinese users. NewZoo’s Kooistra said few of its titles have managed to chart overseas, and those that did owed much to overseas Chinese gamers or culturally similar markets such as Taiwan. He estimates no more than 5 per cent of its mobile revenue comes from outside its home country.
One way to get up to speed quickly is by hiring, Wang said. NetEase has around 70 staff in the U.S. alone but more are on the way.
“Our hiring depends on the projects. But really our overseas job listings are totally open. If we spot good talent we’ll take them all,” Wang said. The ultimate goal is to boost revenue from abroad. “We hope that by 2020, if we’re talking about three years’ time, that ideally 30 per cent will come from overseas.”
The company’s engagement with foreign customers is starting to pay dividends. Onmyoji -- where players collect decks of cards to battle rivals with swords and spells -- briefly topped download charts in Japan and South Korea and is now getting translated into English.
One reason NetEase’s looking to pick up the pace is that, apart from Tencent, smaller rivals are beginning to take steps abroad.
Cheetah Mobile Inc., FunPlus, Elex Wireless and Doodle Mobile are among home grown peers whose titles regularly appear in top-10 charts. App Annie estimates that non-China revenues from such companies during the first half rose more than 2.3 times from the same period of 2016 -- thanks largely to the acquisition of foreign studios.
“NetEase is more conservative in acquisitions,” said Marie Sun, a Morningstar Investment Service analyst. “Compared to Tencent, the growth of NetEase’s online games business was mainly through organic growth.”
NetEase however recognises it needs to get away from its traditionally conservative bent. It’s been researching potential M&A targets, without limits.
“When it comes to it, there’s frankly no clear guidance of ‘you can only spend X amount to buy a company,”’ Wang said. “CEO Ding will oversee this.”