China’s NetEase is focused on pumping out game after game — and for good reason. Blockbuster hits aside, most mobile games have a relatively short shelf life, with their popularity lasting from about three to six months, says Henry Guo, analyst at equity research firm M Science. A big part of NetEase’s success as a game developer depends on how well it can continue to deliver popular, successful mobile titles down the road, said Guo. On that front, NetEase has a good track record.
Its success is stretching from its home base in Beijing all the way to Wall Street, as NetEase stock has been on an upward trend for years. Over the past three years, NetEase shares are up more than 200%. “Our data and analysis suggest that PC games remain stable at NetEase and that its mobile games have solid momentum,” said Guo. “They’ve successfully transitioned several PC games to mobile that have been well received, and the market appears to like the stock.”
China has the largest gaming market worldwide with plenty of room for growth, presenting a prime opportunity for NetEase. China has more than 688 million internet users, but that’s just half the country’s population. Of that total, about 90% of internet users have mobile phones, which is where NetEase has been investing heavily to step up its game.
90 Games, 41 On The Way
Founded in 1997, Beijing-based NetEase has long had a formidable portfolio of popular games for the PC market. It now has a portfolio of more than 90 mobile games and with 41 in development. That’s kept NetEase in position to remain a top choice for both new and existing players and address China’s rapidly growing mobile culture.
NetEase has three core business segments: PC and mobile games, advertising services and e-commerce businesses, with games bringing in the bulk of revenue. It also operates 163.com — one of China’s most popular web portals — has a popular music streaming app and is also one of the largest e-mail service providers in China.
In January 2015, NetEase announced the launch of a cross-border e-commerce platform called Kaola.com, focused on selling goods from overseas merchants. Kaola is competing against China’s two largest e-commerce companies, Alibaba, Choi said Kaola continues to grow at a healthy pace with improving margins as the business achieves economies of scale against Alibaba and JD.com. Goldman Sachs in a report forecast that Kaola would reach revenue of $2.2 billion in 2017.
Its main focus, though, is gaming. Risks that could threaten its momentum include weaker performance of existing key game titles and new game titles, more intensive competition, weaker margins and execution.
Competing With Tencent
NetEase’s primary competitor in games is Tencent Holdings, China’s largest gaming company by revenue. Tencent also runs the highly popular messaging platform WeChat and social media properties, which it can leverage to promote its game lineup. NetEase is seen as the only real contender to Tencent in China’s online game space.
NetEase offers some of the most popular online games in China, including the blockbuster game “World of Warcraft,” under license from Activision Blizzard. NetEase has held an exclusive license for “World of Warcraft” from Activision and other titles in mainland China since 2009. In late May it brought Activision’s “Overwatch” to China.
“NetEase has long maintained great franchises and technology and has a strong reputation among developers and gamers,” said Lisa Hanson, a research analyst at Niko Partners. The research firm said revenue from online games in China topped $15 billion in 2015 and is expected to reach $20.4 billion by 2020.
Looking to bring its most popular titles to more English speakers, NetEase opened its first U.S. office, in the San Francisco Bay area in February 2015, where a research team is creating mobile games for Western markets. NetEase says that its strategy for its U.S. office is to take blockbuster hits from China and retool them to appeal to gamers in the U.S. and elsewhere. Chinese companies are having some success in expanding offshore via acquisition, as well as exporting their games, said Hanson.
Aside from its licensing deals with Activision and some others, NetEase develops the majority of its games in house, mostly the multiplayer variety, whereas Tencent licenses most of its games. “NetEase has strong in-house development expertise,” Guo said.
More Than One Player
More than three quarters of NetEase revenue comes from multiplayer games such as its popular “Westward Journey Online” franchise. Multiplayer games are best suited for PCs, but the popularity of desktop games is declining as more players migrate to mobile. That’s where NetEase is investing heavily to diversify around its pipeline of action role-playing challenges that appeal to a broad and growing audience. Mobile games remained the primary growth driver for NetEase in the first quarter. Its classic titles lead the way but newer games have been well-received by players.
“Westward Journey Online” and another mobile-player favorites, “Fantasy Westward Journey,” continue to dominate the Apple (AAPL) app store in China as two of the most popular games in the last two quarters. Newer games such as “Kung Fu Panda 3” and “The X-World” were launched in January and drew favorable reviews.
First-quarter revenue at NetEase rose 116 % in local currency year over year to US$1.2 billion. Online game revenue rose 104% to US$933 million while advertising services rose 32% to US$61 million. Its remaining business, including email and e-commerce, hit US$234 million, up 258%. Earnings per American depositary receipt rose 79% to US$3.12 a share. It ended the quarter with cash and short-term investments of US$4.4 billion. When NetEase reported first-quarter earnings on May 11, Onward Choi, NetEase acting chief financial officer, said many areas of its business demonstrated strong growth. “Our commitment to research and game development, as well as our deep understanding of Chinese audience preferences places NetEase at the forefront of market trends and player satisfactions,” Choi said in the earnings conference call. “Our mobile game pipeline explores a variety of genres and we are certain it will appeal to a wide audience of new and veteran players.”