The financial report is lower than expected, and NetEase Games has lost its self-developed "engine"

It has been a month since Blizzard games ceased operations in mainland China.

Before and after this well-known breakup in the gaming industry, Blizzard games were not remembered by players with the childhood halo of "Blizzard products must be high-quality". Instead, their reputation plummeted due to problems such as mocking players and low-quality game remakes in recent years. On the other hand, NetEase, which was frequently criticized by players in the past, became the party that people supported this time.

NetEase did not suffer any serious damage after leaving Blizzard. According to NetEase's 2022 third-quarter report, the contribution percentage of NetEase's net income and net profit from the games released by Blizzard in mainland China in 2021 and the first nine months of 2022 was in the low single digits. The expiration of Blizzard's authorization will not have a significant impact on NetEase's financial performance. Players are more hurt than NetEase - they can't play the Chinese version of Blizzard games for the time being.

As for the mobile game "Diablo: Immortal" jointly developed by Blizzard and NetEase and launched in 2022, although it has achieved good results, the joint development and distribution of this game is covered by another long-term agreement, and this breakup between the two parties has no impact on it.

After the storm, NetEase is still the same NetEase. It is the second largest gaming company in the industry and a leading gaming company with stable financial data. However, looking back at the works it has released in recent years, it seems that it lacks a game that is innovative in both R&D and operation, which can bring it both market and reputation.

NetEase announced on February 23 that its revenue in Q4 2022 was 25.4 billion yuan, compared with 24.4 billion yuan in the same period last year, and the market expected 25.832 billion yuan, of which the net income from online game services was 19.09 billion yuan. At the same time, the net profit in Q4 2022 was 3.953 billion yuan, far lower than the 5.694 billion yuan in the same period last year, and also far from the market expectation of 4.694 billion yuan.

The agents are uncontrollable, self-developed products are unreliable, NetEase Games is old, can it still make a living?

01 The road of self-development leads to krypton gold

In June 2000, NetEase, which had just been listed on the NASDAQ stock market in the United States, welcomed the bursting of the global Internet bubble in the millennium. On the day of listing, NetEase's stock price fell below the issue price of US$15.82, and the media called it a "bloody listing." NetEase's stock price then continued to fall, falling to a low of US$0.53. What made Ding Lei even more upset was that NetEase was suspended for four months due to financial problems and was on the verge of delisting.

In this life-threatening crisis, Ding Lei found a way out: games.

In 2001, NetEase acquired Guangzhou Tianxia, ​​a company that had launched China's first open graphics MUD engine and used it to develop the online game Tianxia.

Ms. Chen Suzhen, who was NetEase's COO at the time, said: "Converting huge user resources into revenue is one of NetEase's business priorities this year. On the one hand, we will continue to seek channels to provide users with value-added services and convert users into customers. On the other hand, we will strengthen cooperation with online entertainment, e-commerce, tourism and other industries to use NetEase's system platform and user resources to create revenue."

Relying on Tianxia's technology, NetEase developed the game "Westward Journey Online". Although this game failed, NetEase did not give up on this track. In 2002, NetEase launched "Westward Journey Online 2", laying the first cornerstone for its game empire.

In that year, NetEase Games’ revenue directly increased from 0 to 35 million yuan.

As a well-known classic IP, Journey to the West is undoubtedly a low-investment, high-return cash cow for NetEase, which started from scratch in the gaming industry. In 2003, NetEase launched another game, Fantasy Westward Journey, which had more than 2.71 million online users, setting a record for domestic online games at the time. NetEase's stock price also rose, soaring to $70, more than a hundred times higher than the low point two years ago.

It is not difficult to see that self-developed games are a life-saving grace for NetEase. And in the next twenty years, NetEase has also been deeply tied to "self-developed".

NetEase has developed its own NeoX and Messiah engines since 2007. The NeoX engine, also known as the "NiuX" engine, has provided technical support for "Westward Journey Online" and "Fantasy Westward Journey". These two IPs are still alive and well today, thanks in no small part to the NiuX engine.

If NeoX provided strong support for NetEase Games in its first decade, then the Messiah engine, which was launched in 2014, is NetEase's savior in the mobile game era.

Messiah is optimized for mobile platforms and has won more than 20 technical patents since its launch. Based on the Messiah engine, NetEase has launched several phenomenal mobile games, such as Tianxia, ​​Chu Liuxiang, and Knives Out, which topped the charts in Japan.

Whether it is the successful development of the early Journey to the West IP or the advent of mid- and late-stage game engines, NetEase Games' investment in self-research and development can often be recovered in multiples, which is almost an iron rule.

Diablo: Immortal, which was a big hit in 2022, is the culmination of NetEase's self-developed game. The game itself was jointly developed by Blizzard and NetEase, and the game engine also uses the Messiah engine. Although the game was once booed because of the designer's sentence "Don't you have a mobile phone?", and elements such as micro-transactions attracted collective negative reviews from players. But one thing cannot be denied, this game took five months to earn Blizzard and NetEase $300 million.

From a purely NetEase perspective, this is a qualified product in terms of business. With more than 20 years of experience in the gaming business, NetEase has a clear understanding of the payment habits of most domestic players.

The game revenue of Tencent, another major business giant, seems to be on par with that of NetEase, but Tencent's advantage actually comes from the social channels of WeChat and QQ, which bring small profits but quick turnover. The huge number of daily active users supports Tencent's magnificent revenue data.

However, NetEase's game revenue can enable a small number of people to spend a large amount of money.

On NetEase's official trading platform, Treasure Pavilion, the unit price of props for "A Chinese Odyssey" can reach 1 million RMB. Apart from these special lists, props priced at more than 100,000 RMB are also very common.

Some players of another old game, Fantasy Westward Journey, believe that most of the game content is valuable and can even make money from the gameplay. Regardless of whether the players have benefited from the game or not, NetEase is making a lot of money. In the third quarter financial report last year, Ding Lei specifically pointed out that the continued development of the Fantasy Westward Journey series is an important part of the growth of online game net income.

For a capital-dominated company, there is no need to replace this proven charging model, and the same is true for NetEase.

The only purpose of capital is to pursue profits. Judging from the current domestic gaming atmosphere, games endorsed by "krypton" still have a lot of room for profit. But what NetEase needs to consider is how long this model will last.

The 2022 China Game Industry Report also pointed out that as of 2022, the scale of Chinese game users has reached 664 million. After the growth rate slowed down significantly in 2021, it saw the first year-on-year decline of 0.33% in the past eight years.

The current domestic market is undergoing a transformation, with players increasingly favoring content-oriented games. Previously, there have been several conflicts between NetEase Games and players, including a large number of players quitting the game, including game anchor PDD. In major game markets and communities, the ratings of NetEase Games vary, and most of them are even negative.

The balance between interests and reputation became an issue that NetEase had to pay attention to in the future.

02 Development Team Battle Royale

NetEase, which prides itself on its "self-developed" products, also has its own anxieties.

In 2021, the 2-hour NetEase 520 press conference covered more than 60 products, with an average of 2 minutes to introduce a game. The game themes include steampunk, asymmetric confrontation, doomsday survival, and two-dimensional. In 2022, NetEase's 520 press conference announced the dynamics of more than 40 games. Although the number was significantly reduced compared with the previous year, the three major games "Naraka: Bladepoint" mobile game, "Against the Water" mobile game, and "Diablo: Immortal" made the press conference no less impressive.

Tencent, which competes with NetEase, only mentioned more than 10 new games at the "Spark2022" Tencent Games Conference. By comparison, it is not difficult to see that NetEase has implemented the idea of ​​mass production of games.

As more games are launched, many of NetEase's games are gradually ceasing operations. In 2021, NetEase successfully launched 16 games and removed, stopped service, or terminated testing of 17 games. After the game is removed from the shelves, the game team may be completely disbanded and reorganized into other studios, or directly disbanded and employees laid off.

This is an unsolvable contradiction after game development chooses to go for volume.

It is impossible for all the games launched by NetEase to be successful. Only those that bring enough profits to the company can stay. There is also a serious competition between the various game teams. As a member of NetEase Games, you are always engaged in a battle royale, and the winners will be the winners.

Another deeper contradiction is that when the employees' desire for profit as natural persons is added, this battle royale environment will drive the development team to "tie their own hands", which will in turn undermine the quality of NetEase games.

On September 9, 2021, NetEase's "Harry Potter: Magic Awakening" game was launched. In early December, a picture of NetEase's "Harry Potter: Magic Awakening" project team's year-end bonus of 880,000 yuan circulated online, which was out of tune with the wave of layoffs that was blowing out at the time. In response to the reporter's verification, NetEase's answer was: "It is indeed true, but for a game with a turnover of 2.3 billion in the first month, 880,000 per person is not too much, right?"

NetEase game team members have a salary base similar to that of a large company, but they also emphasize high risk and high return. In order to avoid risks and only pursue returns, the best way for employees is to adopt the old planning content and operation model that has been tested by the market, and add some innovation.

For this reason, NetEase’s self-developed games always feel like old games.

But the internal team can seek stability, but no one will be polite to NetEase when it comes to external risks. In recent years, the external market environment has also put enough pressure on NetEase. The NetEase game team, which is "trapped in its own cocoon", needs someone to step forward, but it has never come.

In fact, before this, the cold winter of game licenses had already arrived, and it had long been a consensus among manufacturers and players.

One month before the launch of NetEase's Harry Potter: Magic Awakening, news of the tightening of game licenses came out, NetEase's game department's ongoing projects were suspended, and employees began to transfer to other groups or quit their jobs. This cold wave continued until the beginning of 2022 and has not yet ended.

The signs of a shortage of game licenses in China actually occurred in 2018. The issuance of licenses was suspended for several months that year, and the actual sales revenue growth rate of the domestic game market hit a new low, and the number of game users also tended to stabilize. NetEase mentioned in its 2018 fourth quarter report that expanding its game business outside mainland China and deepening its global layout were one of the key points of this quarter's operations.

Today, the game license issue seems to be easing, which is an opportunity for NetEase to fight hard, but it is also a signal that the industry is returning to fierce competition. Perhaps it is time to solve the problems in the internal environment of NetEase's game department as soon as possible.

In addition, going overseas is also a step that NetEase must take.

NetEase's "Onmyoji" is a successful overseas expansion case. In 2017, "Onmyoji" was officially launched in the Japanese market. With Japanese-style graphics, plot, voice actors and highly accepted gameplay in the Japanese market, it topped the App Store free list on the first day of its launch and dominated the list for a whole week. "Knives Out" and "Identity V" that followed it also achieved excellent results.

Starting from the Japanese market, NetEase began to expand its overseas business, intending to open up markets in Europe, America, Australia, etc. through IPs such as Marvel, Harry Potter, and Diablo.

However, NetEase games often fail to adapt to local conditions, especially in Asia. When Diablo: Immortal, which brought NetEase a lot of money, was first released, it received a media score of 81/100 on Metacritic. However, players were dissatisfied with the game's micro-transactions and the cost of opening boxes and krypton gold, giving it a score of 0.8/10. Now its media score has dropped to 67 points, and the player score has been halved to 0.4 points.

The reason behind this is that the games that NetEase exports have not deviated from the domestic game operation logic. Even though NetEase has frequently invested in and acquired many game studios in recent years, the game development standards are still the same ones that NetEase has figured out over the past 20 years. Especially the krypton gold system, which is basically copied according to the standards of the domestic market.

At present, NetEase has opened a crack in the overseas market, but it still has a long way to go before it can completely open the door to the overseas market.

03 Conclusion

In the short term, making money is not a problem for NetEase Games.

According to NetEase's third quarter 2022 performance report, net revenue from games and related value-added services reached 19.1 billion yuan, accounting for 75.2% of total revenue. Sensor Tower data shows that in January 2023, NetEase ranked second in the revenue ranking of Chinese mobile game publishers, second only to Tencent.

The problems faced by NetEase are actually the problems faced by major domestic game companies. Due to the need for stable development, established game companies dare not make major adjustments to their game businesses.

There is only one miHoYo in China, and there is only one Genshin Impact.

NetEase has ideas for self-developed games in terms of innovation, but only a little bit. Therefore, no matter what theme of games NetEase launches, they all have a strong NetEase flavor. The signature "Naraka: Bladepoint" can't get rid of the shadow of PUBG; the popular "Egg Party" in January 2023, players always feel like playing "Fall Guys"; "Yanyun Sixteen Sounds", which sparked discussion at the end of last year, was linked to "Ghost of Tsushima" by the media. NetEase, which is labeled as self-developed, is losing its self-developed "engine".

It is true that the path taken by predecessors has been tested by the market and it is safe to follow it. But it is more worthy of people's admiration to take a completely new path.

For NetEase, it is too difficult to take a gamble. The chips are just the decision between the top management, but the bet is the confidence of investors.

To be or not to be, that is the question.

*The title image and accompanying images in the article are from the Internet.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.