Top News

#1:  NetEase’s Latest Troubles, Earnings, and Path to Growth

It’s been a busy week for NetEase. The company reported that its publishing relationship with Activision Blizzard is ending, Chinese authorities released another batch of game approvals, and NetEase released its latest earnings results. Let’s quickly cover these and then discuss what’s in store for NetEase’s future.

To start, after much speculation about an unhappy 14-year relationship, NetEase and Activision Blizzard have finally made their split official. As we covered in yesterday’s Naavik Digest, NetEase will no longer publish Activision Blizzard’s games (like World of Warcraft and Overwatch 2) in China, and they will soon be unplayable. Following the news, NetEase’s stock dropped 10%, which will remove a small percentage of the company’s revenue. This isn’t about mobile, but obviously a strained relationship doesn’t necessarily bode well for future mobile partnerships. Through the grapevine, we’ve heard rumors of difficulties in the co-development of Diablo Immortal — NetEase's most significant launch since Harry Potter — and it was previously reported that Activision Blizzard and NetEase canceled a World of Warcraft mobile project because they couldn’t agree on terms. It’s possible that Activision Blizzard switches to a competitor like Tencent for publishing (and perhaps eventually co-development), which is a clear step back for NetEase.

Also, as we’ve covered previously, the Chinese games market has its fair share of challenges — namely, the incredibly slow, lumpy, and seemingly unfair game approval process. Fortunately, China very recently approved a new batch of 70 games, one of which — Journey to the West: Return — was from NetEase. On one hand, it’s frustrating to see NetEase receive only two new approvals over the past year (Tencent is in the same camp); on the other hand, it’s good to see positive movement. Fortunately for NetEase, it had already been doing great work extending the lifetime of its biggest franchise, Fantasy Westward Journey, and additionally had a Diablo Immortal approved and ready to launch. There’s reason to think plenty more games will get approved in the future, but Chinese approvals are still a very unreliable system, which dramatically impacts the company’s long-term growth.

Furthermore, NetEase's latest earnings show that the company's online games revenue grew 9.1% year-over-year in the third quarter. Mobile represented 66% of that revenue, and mobile games revenue for the last quarter was 10% higher than in the previous year. The company attributed the growth in revenue to the continued success of its existing games, Fantasy Westward Journey and Infinite Lagrange, and newly launched titles. Although the report doesn't specify which of the newly launched games contributed to the growth, we can safely assume that Diablo Immortal's launch in China had a big effect on the results. As a comparison, its biggest competitor in China, Tencent, faced a 2% decline in the latest quarter primarily due to the decrease in its domestic market revenue. Both companies have been struggling, but NetEase’s growth has come out on top lately.

So what’s next for NetEase? If domestic revenue is being held back by the government and a long-time partner is walking away, where does NetEase go from here?

To start, not all hope is lost in China. It’s still a big market, and NetEase is a market leader, so the company will keep pursuing this avenue. As we mentioned, NetEase continues to double down on existing franchises like Westward Fantasy Journey. Its latest approved game — Journey to the West: Return — is part of the franchise and most likely a sequel to the previous games. And it’s not as if the company can’t spin up new hits; Diablo Immortal may have underperformed Blizzard’s lofty expectations, but it still amassed $85M in China in Q3. Also, Harry Potter: Magic Awakened has proven to be a hit in China, attaining $188M since it launched (although it appears to have since slowed down).

Of course, the most upside will be unlocked through international expansion. Historically, the company has developed and launched several mobile titles abroad, some aimed exclusively at the overseas market, but few have succeeded. The Lord-of-the-Rings-themed 4X strategy game had an underwhelming performance, and Dead by the Daylight underperformed after its launch in Japan. Although NetEase is famous for its MMORPGs titles, most of the games launched were from other mid-core subgenres. In most of these cases, the titles were developed solely by NetEase.

We can expect the company to start transitioning slowly from this strategy. In the short-term, we will still see it launching self-developed international titles. It already has titles like Harry Potter set to launch internationally, and if it manages to find success with the game overseas, it might invest in other MMORPGs with a western-friendly IP. Another possibility for NetEase is to partner and co-develop titles with international developers, focusing on the overseas market. Given the loss and ongoing frictions in the Activision Blizzard relationship, NetEase may be extra compelled to find new partners to collaborate with (for publishing and co-development).

We also know that NetEase has become more ambitious in its plans to open international studios. In the past year, the company has opened four new studios — two in Japan (its second biggest market) and two in the US. Additionally, NetEase is open to M&A, e.g., France’s Quantic Dream (behind games like Heavy Rain, Detroit: Become Human, and Star Wars: Eclipse). These moves are clearly not all mobile-driven — NetEase has long served gamers across platforms — but given the mounting pressures in China, there’s plenty of reason to expect that it will look to conduct more studio launches/M&A, as long as worldwide regulators permit it.

All in all, China’s regulatory shenanigans are causing companies like NetEase to adapt, which means working to build growth catalysts elsewhere in the world. Headwinds may persist, but eventually these new studios, co-development projects, investments, and acquisitions will churn out more notable games. Not everything may be a hit — they haven’t always been — but there’s still reason to expect NetEase to become a bigger player on the global stage. As this happens, it’s likely that NetEase’s portfolio of games becomes decreasingly made in China, too, with NetEase’s Chinese headquarters focusing mostly on building the MMORPG games that it is renowned for. In the meantime, we look forward to seeing how NetEase will do with its developing pipeline, Harry Potter Magic Awakens’ expansion to the West, and bringing Naraka (an action-adventure battle royale game) to mobile. We’ll also keep a watchful eye on regulators (inside and outside of China).

#2: Pixel United’s Earnings Reports Show That the Group Is Still Primarily a Slot Business 

Pixel United, the company behind hits Evermerge and Raid: Shadow Legends, just released its earnings reports for fiscal 2022. For those of you who might not be familiar with the company, Pixel United was formerly known as Aristocrat Digital and is the mobile gaming arm of land-based slot company Aristocrat. Pixel United is comprised of three different sub-companies, each specializing in a different genre: Product Madness (Casino), Big Fish Games (Casual), and Plarium (Midcore).

According to the latest earnings report, 2022 bookings for the group are down 1% year-over-year. Results varied for each genre that the group competed in. Casino, which is now entirely under the control of Product Madness, managed to grow bookings 5%, driven mostly by the growth of Lightning Link. Midcore, run by Plarium, declined 0.4% mostly due to a slight revenue drop for Raid: Shadow Legends, its biggest title. Casual, primarily run by Big Fish Games, shrunk by 20% due to the portfolio's maturity and Evermerge's decline in revenue. Given these results, social casino is now back to being the majority of Pixel United's business.

Let’s take a quick look at each section of the business, and then we’ll share our final takeaway.

Casino

Pixel United's casino (slots) results are surprising (in a good way). The slots market is in decline, and growth of 5% given the current situation is an achievement in itself. The growth came mostly from stealing market share from other titles, and Pixel United is partly guilty for Playtika’s casino demise. However, as Playtika pushes back and Lightning Link matures, it will take more work to keep up positive growth rates next year.

Slot games once under Big Fish Casino, Big Fish Games’ casino arm, are now in Product Madness' portfolio. Product Madness has proven to be a superior slot operator, and we will likely see minor optimizations there. Apart from that, Product Madness' entire operation is casino-based. As the company's expanded its offices around the globe, its strategy for casino games is likely beyond optimization only. We will probably see Product Madness try to further innovate within casino, but considering the market saturation, it will be challenging to succeed.

Casual

Big Fish Games, on the other hand, had very poor results. As merge became a more competitive subgenre, its biggest app, Evermerge, failed to maintain market share. You can see this play out in the chart below (Evermerge is the light blue) which tracks revenue performance:

Although Evermerge still holds the third position among the top-grossing merge apps, this soon might not be the case. The company additionally had already been struggling with losing market share in the solitaire and time management subgenres. Plus, the company had also been unable to launch any new successful apps in the last couple of years. Evermerge, which was actually developed by Neskin Games, was its first big hit in a very long time and represented the majority of Big Fish Games' revenue. In short, this is all bad news for Big Fish Games, and it doesn’t put them in a great position.

Big Fish Games' leadership has changed, and it’s possible that we will see better outcomes as a result of that. However, it is unclear whether Larry Plotnick’s — the new president/general manager — experience from Amazon Gaming might salvage the company. If Big Fish Games partners with Neskin again, it might still find some success in the merge subgenre, but this will be more challenging than before.

It should also be noted that Pixel United’s midcore developer, Plarium, is also delving into merge territory with Merge Garden's developer Future Play. However, given the game’s current results and Plarium's failure to scale casual games in the past, we are not very confident about this move.

Midcore

Overall, taking into account the post-COVID / post-IDFA slowdown in the market, Raid: Shadow Legends is not performing too bad. It still retains a top-grossing position in the RPG segment and has not lost market share to other team battler games. Still, the game has been on the market for years, and its revenue will likely plateau or decline.

The stagnation of the midcore revenue for Pixel United is primarily due to Plarium being a one-game-hit company and struggling to find its next big success. The company launched a new deathmatch game, Mech Arena, last year, but so far it has not scaled much. With more companies bringing AAA shooter games to mobile (Call of Duty, Apex Legends, Battlefield), it will be harder for Mech Arena to find its place among top-grossing titles.

The company has proven its success with RPG games, and we might see it reinvest more into this segment. Gacha RPG games are still a big part of midcore revenue, and given Plarium's success with Raid, the company will likely launch new RPG titles with gacha-collecting mechanics. In order to differentiate from Raid, it will probably move away from turn-based mechanics and could choose to experiment with action RPG games.

Furthermore, if the company decides to try its luck within the strategy subgenre, it could use the learnings from Vikingards and re-enter the 4X strategy subgenre. Nevertheless, there will still be plenty of more experienced and bigger companies to compete with.

All in all, Pixel United finds itself in an uncomfortable position. Despite one-off hits in casual and midcore, its strongest business is still in slots, and to be able to grow further in the subgenre, it will have to move from trend-follower to trend-setter. Outside of casino, we’re not sure if it possesses the background necessary to build and operate top-grossing casual games or expand midcore outside of western-focused RPGs. Unless it partners with other companies or hires enough casual game experts, its best bet to differentiate the business is through M&A. Of course, we’d be thrilled to be proven wrong, are rooting for the company’s greater success, and would love to publish an update that shares how everything turned around.

Game Launch Radar

#1: Battlefield Mobile

• Publisher: EA Games
• State: Soft Launch
• Territories: The Philippines, Indonesia, Thailand, Malaysia (Google Play)
• Classification: Shooter - Classic FPS-TPS

• Quick thoughts:

  • After the launch of Apex Legends, it is no surprise that EA would try to bring another shooter console IP to mobile.

  • Battlefield Mobile’s gameplay is very similar to the original and offers the main modes that Battlefield (and Star Wars Battlefront 2) players are already used to.

    • It provides the main game modes from the original game: Conquest, Team Deathmatch, and Rush.
    • Controls are, however, adapted for mobile and are highly similar to Call of Duty Mobile.
    • The game also offers Battlepass and Events, though they appear to be locked for now.
    • You can watch a video of the gameplay here.

  • The main menu UI lacks polishing, however.

    • Finding the match type selections menu is not trivial.
    • The store buttons lack emphasis.
    • Missions are currently featured under “Command Center,” which might not a perfect name for a mission hub.

#2: Mystery Matters 

• Publisher: Playrix
• State: Soft Launch
• Territories: India (Google Play)
• Classification: Puzzle - Hidden Object

• Quick thoughts:

  • Playrix might have started as a hidden object developer, but it has struggled to find outsized success in this subgenre. It tried to innovate in 2020 with Manor Matters HOPA & Decorate hybrid but failed.

  • Mystery Matters is its new take on the subgenre and shares many characteristics with its predecessor app.

    • It features a similar UI to Playrix’s puzzle apps.
    • The game's meta is narrative decoration.
    • It features match-3 levels, which are not optional and disruptive for players.
    • You can watch a video of the gameplay here.

  • The game also brings some nice changes that make it more appealing to hidden object players:

    • It features mystery puzzles that players have to solve along the narrative. This is a staple of hidden object, and it was not present in Manor Matters.
    • It features a female lead character; Manor Matters had a male lead. This is a nice addition, considering that most players in the subgenre are female, and almost all top-grossing competitors have female leads.

Other Game Announcements

• Pre-registration is now open for Talking Tom Time Rush. Link
• Game of the year contender, Immortality, just launched on Netflix. Link
• Rocket League Sideswipe on its one-year anniversary: a new mode and platform crossover. Link
• Honor of Kings is expanding into a full-fledged universe with three new games and a film. Link
• Total Football opens pre-registrations in Europe ahead of its November 2022 release. Link
• Supercell announces The Books of Clash, a comic book series based on the Clash universe. Link
• PUBG Mobile shifts into high gear with new Maserati partnership. Link

Company Announcements

• Big Pixel veterans Landmark raise $4.6M to keep building Sea of Souls. Link
• New Metacore games incoming as Merge Mansion hits $135M in revenue and 30M installs. Link
• Scopely swipes Amazon veteran Phil Hardin as new CFO. Link
• Reliance Games partners with Atari to publish city-builder & management game Citytopia. Link
• Noodle Cat Games, founded by ex-Epic devs, raises $4.1M in funding to support worker-friendly practices. Link
• Challengermode and PUBG partner to fund amateur esports tournaments. Link
• Big Pixel Studios veterans' Landmark Games raises a $4.6M investment for co-op mobile game. Link
• Hypercasual developer Rollic acquires Popcore. Link
• NetEase and Blizzard are suspending game services in China. Link
• Embracer Group’s mobile gaming revenue increased by 67% between July and September. Link

Ecosystem Announcements

• Apple wants game developers to help build its AR/VR device. Link
• New forecasts suggest that mobile gaming market will shrink 6.4% year-on-year. Link
• German games fund increases to $73M. Link
• Yahaha raises $40M for its user-generated games platform. Link
• Google Play revamps policies around kids’ apps. Link
• Ubisoft and Riot team up to develop AI for safer in-game interactions. Link
• Asia’s gamers will exceed 1B by 2026. Link
• InvestGame Q3 2022: Cooling investments and consolidation. Link
• Mobalytics and Overwolf join forces to expand competitive features. Link
• Subscription-based gaming to reach $24.1B by 2030. Link
• Chinese game makers see stock prices increase after state media recognizes the value of the games industry. Link

Content Worth Consuming

• Mapping the post-ATT future of mobile free-to-play gaming (Mobile Dev Memo): “In this article, I’ll provide an overview of how I believe the mobile free-to-play gaming category will continue to transform in the medium term now that ATT is better understood, and what developers should be cognizant of as they navigate that evolution.” Link
• The method in the madness - how to make a successful gate runner game (Pocket Gamer): “These are Crowd Evolution, Tall Man Run, and Count Masters, which combined have received 500 million in cumulative downloads. These games are not flukes. They’re savvy and well thought-out creations that have resulted in continued, long-term success. Here we’ll take a look at the different types of gate runner games, reasons why they’re so successful, and tips for making a successful gate runner game.” Link
• Identify the Mobile Apps and Categories Defying the Economic Downturn Report (data.ai): “data.ai's Identify the Mobile Apps and Categories Defying the Economic Downturn Report reveals the mobile performance data and the metrics where publishers need to maximize opportunities in those turbulent times.
• The interactive report drills down into the top 10 genres by downloads, revenue, and time spent across 18 countries in AMER, APAC, EMEA.” Link
• The specifics of publishing in China (Azur Games): “I’ve already written a piece about the licenses that game publishers need, about the difficulties of doing business in China from outside the country, legal issues, and more. Today we’ll take a look at a few more distinctive features of the Chinese mobile games market.” Link
• AI moderation will cause more harm than good (Gameindustry.biz): “And then there’s the question of moderation. You’ve got all these players engaged with your game, and that’s great. Now, how do you prevent a minority of them from being awful to the rest? Whether that’s by cheating, or in-game behavior, or through abuse or harassment on game-related communication channels, there’s always the potential for some players to make life miserable for others in what’s meant to be a fun, entertaining activity.” Link