In the past two decades of rapid development of China's game industry, the confrontation between the two leading companies, Tencent and NetEase, has never stopped. From the contest of products, to the capital game that later evolved into "buy, buy, buy", all the way to grab game studios.
The war spread overseas a few years ago.
In 2016, game producer Chen Xinghan needed a sum of money to push the new game to the Chinese market, at that time he had already made a name in the circle with "Wind Journeyer" (an independent adventure game released in 2012, originally a PS exclusive, and landed on the PC platform in 2019), and the new work showed strong artistry as always. If such a product wants to conquer domestic players, it needs a publisher that knows the local market well. Chen Xinghan has approached several Chinese companies, and Tencent, which has the largest social network and game marketing distribution channel in China, is his preferred partner.
This cooperation later made NetEase cut off. Tencent showed hesitation in the negotiation - "style avant-garde + free game mode" has the risk of being difficult to monetize, NetEase CEO Ding Lei flew more than ten hours to San Francisco, USA, talked with Chen Xinghan for several hours, and finalized the deal.
Three years later, Chen Xinghan's new work "Light Encounter" was launched in China, represented by NetEase, and the game content was basically the same as that of international servers. Unexpectedly, this product that Tencent is not very optimistic about (referring to the commercialization model) has exploded a little, repeatedly entering the iOS game best-selling list TOP50, the best time rushed to the second place, second only to "Honor of Kings", and then achieved more than 100 million global users, and was highlighted by NetEase financial reports for four consecutive years, during which Chen Xinghan's company thatgamecompany has twice received NetEase investment.
"Light Encounter" is regarded as a classic case of NetEase recruiting overseas talents
In fact, Tencent has had such radical times.
Before Chen, it had just completed a blockbuster deal to acquire Supercell, the developer of Clash of Clans and Clash Royale, for $8.6 billion. At that time, in order to seize the opportunity, Tencent's president Martin Lau took a 10-hour flight with a high fever and went to Helsinki (the capital of Finland) to discuss with Supercell executives. Tencent reportedly wanted to invest in Supercell for at least three years. Martin Lau himself is a "die-hard fan" of the latter, once beating "Clash Royale" to 97th in the world - whether it is a plus is unclear, but it does impress the founder of Supercell.
In recent years, Tencent NetEase has been more active in overseas expansion. In 2021~2023, they each invested in and established more than 20 overseas studios, ranging from millions of dollars to billions of dollars. At the same time, official announcements about "well-known producers joining" have continued one after another.
The fast-paced operation of capital stems from internal and external pressures. The game industry is always full of pressure, Liu Ming, CEO of Tencent Interactive Entertainment's international business, said, "This is the DNA of our industry."
The two heads at the center of the whirlpool are used to this.
Overseas territory: Tencent VS NetEase
In December 2022, Liu Ming said in an interview with GamesIndustry that Tencent has more than 20 R&D studios around the world. Self-built studios account for only a small part (such as TiMi has studios in Los Angeles, Seattle and Montreal, Photon has established Lightspeed LA in Los Angeles, and Liverpool in the UK also has a development team), and more mainly rely on investment. And now this data should have to be added.
Some manufacturers acquired by Tencent's subsidiaries were not included
Tencent's huge overseas territory stems from years of layout.
Its first overseas investment was born in 2005, just when Martin Lau joined Tencent. Under Liu's leadership, Tencent established the Investment and M&A Department in 2008, and has since had a professional investment team.
Tencent's early overseas investment was more Buddhist, but the rate of return was high. Riot bet on Riot in 2008, when the team was only 9 people, and the following year made the world-famous "League of Legends" (Tencent achieved 100% control of it in 2015). When Unreal Engine developer Epic Games was invested in 2012, Fortnite was not long after the project was launched, and six years later the game went live and made more than $5 billion a year. In 2016, it invested in Activision Blizzard (only 5% of the shares, Microsoft's acquisition process is underway), and then cooperated with Activision to launch "Call of Duty Mobile Game", which attracted as much money as Duanyou.
Before 2020, many well-known manufacturers can be found on its territory, in addition to the aforementioned Netmarble (developer of the "Paradise" series), Krafton (developer of "PUBG"), Ubisoft (developer of "Assassin's Creed"), Nexon (developer of "DNF") and so on. And most of them have developed into behemoths or global explosions before accepting Tencent's investment.
However, according to LatePost, Tencent's investment in the game field has been too successful, which has led to a reflection by Chief Strategy Officer James Michel, saying that the game industry should not have such a high return on investment, which only shows that Tencent has not failed enough. "Why are there not many cases of failure? That's because we don't see enough and invest too conservatively."
The speech took place in early 2020. Since the beginning of this year, Tencent's investment pace has accelerated significantly, shifting from conservative to "casting a wide net", including domestic and foreign markets. In 2021, when the domestic industry suffered a cold winter, Tencent slowed down its investment in Chinese manufacturers, but there were more capital actions overseas. In 2022, Ma Xiaoyi, senior vice president of Tencent, said in an interview with Gamesbeat that he used to spend only 20% of his time overseas, and now he spends 60% of his time in the global market.
According to a research report released by CITIC Securities in September 2022, since 2012, Tencent has invested in 33 overseas game companies, spending at least 97.867 billion yuan – which is almost equivalent to NetEase's full-year revenue in 2022. Tencent's banknote capabilities have made the overseas gaming industry feel threatened, and it was once ridiculed as "players with a multibillion-dollar budget who can do whatever they want."
Few companies have been able to remain calm about Tencent's bid. Funcom, a Norwegian developer founded for nearly 30 years, even used the word "greeted with enthusiasm" in the face of Tencent's acquisition plan.
NetEase started late. Its investment cooperation division was established in 2016, but it has only been in the last two years that it has successively settled overseas. As a result, NetEase had to avoid Tencent (and other giants) and focus on investing in small and medium-sized teams, especially start-up teams.
Among them, NetEase has also found a shortcut, that is, to keep an eye on the movements of star producers.
The director and executive producer of "Hearthstone" just announced his departure and co-founded a new studio Second Dinner, and Zhu Yuan, director of NetEase Game Investment, immediately came to the door and expressed NetEase's intention to cooperate with them. The NetEase executive spends hundreds of hours a year on Hearthstone, ultimately helping the company defeat multiple VCs to take minority stakes in the team.
If you don't leave, you can also poach the corner, and if necessary, go to the city where the gamer wants to stay to build a studio. NetEase's wholly-owned Naikoshi Studio in Japan is led by former Sega veteran Nagoshi Hiroshi, who served as the chief producer of the "Dragon" and "Eye of Judgment" series. Bloomberg first broke the news that NetEase was in contact with Naigoshi Chengyang, and soon after he left Sega to lead the team to join NetEase.
In a way, NetEase exists to prove that money offensives are not necessarily omnipotent.
According to sources, NetEase's wholly-owned acquisition of Quantic Dream cost only 100 million euros. The latter, with more than 250 members, is already the largest studio in all NetEase's investments, and its "Detroit: Become a Man" has sold more than 8 million copies worldwide. In its 25 years of existence, it has approached a number of potential buyers, but has remained independent due to the inability to agree on key terms; Until they met NetEase, they were promised that the studio could maintain complete independence in management and creation, and the two sides hit it off.
Including Chen Xinghan also expressed a similar view: "NetEase sees my game from the perspective of creators, while Tencent is more concerned about its commercial value. Although Tencent's bids are always higher than theirs, NetEase is very good at haggling."
From NetEase's overseas investment cases, it can be seen that "creative freedom" is mentioned quite frequently. It seems that NetEase is trying to provide a "sense of security" for investment targets, and creators' self-expression is put first. This investment strategy is very suitable for gamers with a strong sense of autonomy.
Only contribute capital and do not interfere with team operations, which is actually the same as Tencent in the early days.
In the past, whether Tencent took a minority stake or a majority stake, it was a shareholder with a very low sense of existence. In recent years, it has stopped insisting on "keeping its distance" from its portfolio companies, and will participate in the work of overseas manufacturers in a more direct way, including product agents, IP cooperation, and sometimes even provide Chinese R&D teams. This is a relatively obvious shift in its investment strategy.
The "League of Legends Mobile Game", which will be launched in 2021, was jointly developed by Riot and Tencent Photon Studio, and the operation of the national service was also handed over to Photon Studio. Ubisoft's Rainbow Six Siege, localization and re-distribution in China is handled by Tencent, and the two sides are rumored to be working together to develop the Rainbow Six and Assassin's Creed IP mobile games. Remedy (Max Payne developer, invested by Tencent in 2021) is also working with Tencent to develop a free-to-play multiplayer shooter game "Vanguard".
In addition, products such as "Starve: New Home" cooperated by Klei (the developer of "Starve", invested by Tencent in 2021) and Shengqu, and the FPS game "Metal: Hellsinger" developed by The Outsiders, a manufacturer of Funcom (acquired by Tencent in 2020), are all distributed overseas by Tencent's brand Level Infinite. Speaking of which, NetEase is "walking on two legs" overseas with self-research + investment, and currently does not invest much in issuance, and its best is still the Japanese market. Tencent's strategy is one more leg than NetEase's, and it plans to build its own distribution system around the world.
Looking back and comparing the territory of the two sides, you will find that Tencent has invested in a large number of independent studios in Europe and the United States in recent years, while NetEase favors Japanese producers. It seems that each has its own advantages, but in fact it has something in common.
Mihayou's global success has taught the industry a good lesson, and it turns out that content can also drive products. Many games in the European, American and Japanese markets are content-driven. As Ma Xiaoyi said, this is a mature market in the true sense of the word, and many gameplay are only turned to a larger market after success here. However, their commercialization plan is relatively conservative, just selling copy, if it is transformed into an evergreen model such as GaaS (Game as a Service), such as "Honor of Kings", "Genshin" and "DNF", success will bring a wave of rebound to the industry.
Tencent and NetEase have invested more PC and console manufacturers here, and in the final analysis, they are betting on new gameplay and breakthroughs. "After all, a company's creativity is limited... It must be admitted that the masters are in the people, and there are many countries that have done very good work (from Ding Lei)."
At present, some of Tencent's achievements have begun to appear. For example, Stunlock Studio, which participated in the previous two years, has only 35 members, and the city of Skövd (Sweden) covers an area of less than 20 square kilometers, so small that "the CEO can stand on the company's balcony and can find which house each employee has", and their vampire survival game "V Rising" sold 2 million copies on Steam last year. Then there is Fatshark, which invested in 2019, and last year launched its new work "Darktide (Warhammer 40K: Dark Tide)", which has repeatedly appeared at the top of the Steam weekly sales list.
NetEase may have to wait two or three years, and the games developed by the portfolio companies are estimated to not enter the market until 2025.
Going overseas is inevitable, but it is also difficult
It is an inevitable choice for Chinese gaming giants to go overseas. In addition to the peak of traffic growth, it is undeniably affected by policies: the uncertainty of the version number is one of them, and it may face the risk of "anti-monopoly" regulation.
Tencent, which is much larger, is obviously more anxious.
According to the Financial Times, a person close to Tencent's management team said that because Chinese regulators are cautious about Tencent's large domestic market share, Tencent has no choice but to go overseas. The report also said that Tencent did not disclose the size of all its overseas investments and had previously asked venture partners to remove their names from press releases issued by startups. Another Tencent insider expressed deeper concerns. He believes it is only a matter of time before regulators start evaluating and reviewing overseas portfolios.
Tencent also appears to be avoiding initiating deals in the name of the group. For example, the acquisition of British manufacturer Sumo Group, Danish developer Sybo, Polish team Bloober Team, Japanese game manufacturer Marvelous, and Dutch studio Gamebasic were all completed by different subsidiaries of Tencent.
On the other hand, Tencent and NetEase also have to face external pressure.
New forces, represented by Saudi Arabia's sovereign wealth fund, are launching a fierce attack on the overseas gaming industry, and it looks even less money. Today, mobile game revenue accounts for more than half of global revenue, Microsoft, Sony and other console manufacturers are ensuring exclusive content by snapping up studios, while also acquiring mobile manufacturers to try to expand into the mobile market.
Although Tencent and NetEase are confident in the field of mobile games, especially GaaS, Tencent can even provide a free tool list (to help developers establish community communication, provide anti-plug-in, server maintenance technical support and other resource support). Both are also attractive investors overseas, but the influx of new competitors may raise transaction costs, that is, they do not necessarily have an advantage in investment acquisitions in the future.
epilogue
Investment mergers and acquisitions are becoming more and more frequent in overseas gaming circles. People in these deals are often worried about the changes they are about to make. On this issue, foreign media PocketGamer once used "benefiting game studios and players" to describe NetEase's overseas investment strategy. Tencent also responded a year ago, when Ma Xiaoyi said in response to questions from the media that the acquisition was made because of increasing development costs.
"If you want to make great, innovative, high-quality games, the development cost could be $100 million, $200 million, $300 million. Small studios can't afford this risk, they need the support of large companies and platforms. That's why these acquisitions happen. The results are obvious. We will get more high-quality products." He thinks it's a good thing for players.
The following is the overseas game territory of Tencent and NetEase: