Reflections on the popularity of "Black Myth: Wukong": Can AAA games save the valuation of domestic game companies?

"Black Myth: Wukong" has been on sale for a month and has achieved outstanding results. Taking the trackable Steam data as an example, as of September 21st, it has sold a total of 20.4 million copies, with a 96% approval rating, and total revenue reaching $970 million.

This sales volume also ranks 20th in Steam's history, surpassing the popular metaverse game "Cyberpunk 2077" that exploded during the pandemic. Due to the ongoing strong sales of "Black Myth" (ranking first in weekly sales), it is very likely to catch up and enter the top ten in history (currently the tenth place has 27.4 million copies).

Of course, the success of "Black Myth" is partly due to the strong support from the Chinese gaming community, but overall, it cannot be separated from the high-quality nature of the work itself. At least in "Black Myth," we see that domestic games have the ability to catch up with top global companies in terms of game quality and sales.

So, can the success of "Black Myth" help domestic game developers catch up with the valuation of top global gaming companies?

According to reports, the valuation of the developer "Game Science" has jumped from $300 million in 2022 to $1.8 billion after the success of "Black Myth." With only one title under its belt, the current focus is mainly on the upcoming DLC for "Black Myth." Based on the $970 million current sales of "Black Myth," this implies that the market values Game Science at less than 2x P/S, still significantly lower than around 5x for overseas giants like Electronic Arts.

Of course, the valuation of Game Science in the primary market already includes a discount, and whether revenue can continue to grow depends on future output. Moreover, not all major companies have sky-high valuations:

While Ubisoft Entertainment SA is expected to have a revenue of €2.4 billion this year, its current market value is even lower than Game Science, at only €1.5 billion (€1.7 billion), implying a PS ratio of 0.65.

So, what is the most crucial factor determining the valuation of a gaming company? Why is the market willing to give higher valuations to overseas companies with the same growth rate? Can the shift of domestic games towards AAA titles solve this "valuation bias"? This article focuses on the valuation difference between Chinese and American gaming companies, discussing the reasons behind the premium valuation given to AAA game companies by the market, and reflecting on the inspiration for domestic game companies. (Summary can be found at the end of the article)

I. Differences in Valuation "East" and "West"

Looking globally, the valuation of game companies has always been high, but it seems that Chinese game companies are an exception.

Dolphin Jun selected the top global game giants (focused on software) in the three years before and after the 2020 epidemic, including Activision Blizzard, Ubisoft, EA, Take-Two, Nexon, and the top game companies in China Tencent, NetEase, Giant Network, 37 Interactive, a total of 9 companies, to compare the trend of valuation changes:

It can be seen that the valuation (P/S) of overseas game companies rarely dropped below 4 times (excluding Ubisoft). However, Chinese game companies, after going through the valuation bubble period in the early stages of listing, have relatively lower valuations even when their growth rates are significantly higher than those of overseas giants. In the current downturn of the gaming industry after the epidemic, with the weakening performance, the valuations of domestic game companies (except Tencent) have also reached historical lows.

What causes the "East-West" valuation difference?

Of course, from a qualitative perspective, a common market view is that overseas game giants are proven high-quality companies with decades of experience, reflected in competitive advantages built on evergreen game IPs and leading R&D capabilities, hence giving them some valuation premiums is not unreasonable.

However, qualitative reasons are always not objective enough and not persuasive. After all, Tencent and NetEase have already ranked high enough in the revenue rankings, and they no longer need to prove their ability to make money.

Therefore, in the following sections, Dolphin Jun will further investigate the reasons from a quantitative perspective, focusing on several operational/financial indicators that affect valuation.

II. Better Growth Prospects? Overseas Giants Not "Outstanding"

The most direct factor supporting high valuations is optimism about current and future growth prospects. For tech companies in the early stages of development, the market is always generous in giving high valuations.

But game giants obviously do not belong to this category.

1. Inevitable Industry Trends

Let's first define the scope of discussion: for manufacturers of AAA games, there are game developers who specialize in products, as well as platform manufacturers involved in both software and hardware. The following discussion focuses on game developers mainly producing software products.

In the revenue structure of overseas giants, the proportion of console games and PC client games has always been significant. Although there have been significant actions in transitioning to mobile games in recent years, including self-developed transformations and immediate operations such as mergers and acquisitions, such as Take-Two's acquisition of mobile game developer Zynga in 2022, the latter also transformed from a PC web game developer by acquiring other casual mobile game studios

However, according to Newzoo, even before the outbreak of the epidemic in 2020, both console and PC games had already entered a mature stage of development: the compound annual growth rate (CAGR) of PC games from 2016 to 2019 was 3%, and the CAGR of console games during the same period was 9%.

Meanwhile, mobile games, which showed good development momentum during the same period (CAGR of 17% from 2016 to 2019), have not completed their transformation yet - mobile game revenue is not the main source.

During the epidemic, despite the dividend of the stay-at-home economy, the pipeline supply of major companies was delayed due to the impact of the epidemic. Without the stimulus of new products, players spent more time on the top "evergreen" games.

In this situation, although many old games have sustainable monetization methods (live services), they still cannot make up for the share lost by mainstream monetization methods such as "pay-to-download".

Therefore, the growth rates of almost all types of games have slowed down, but in a horizontal comparison, it is still mobile games > PC games > console games.

But when the stay-at-home economy dividend fades away as the global lockdown gradually lifts in 2022, online short videos, offline concerts, and other entertainment content continue to attract more user time. The time users spend on medium to heavy console/PC games is gradually eroded, or cut into smaller fragmented time.

2. Intensified stock competition, major companies are also caught in this cycle

In this situation, when multiple delayed works from before 2023 are all released on platforms, instead of seeing a variety of choices, there is a more fierce competition under the existing cake - in 2023, the top 25 games released for console/PC accounted for 75% of the total playtime, 90% of the revenue was taken by the top 43 games, while the remaining 10% needed to be divided among over 1400 games.

Even worse, users will not lower their standards for new games. In a limited player base and reduced game time, the vast majority of players gather around the higher-quality evergreen games.

The performance of EA and other major companies has indeed confirmed the above phenomenon: from the outbreak of the epidemic in 2019 to the present, except for Activision Blizzard, which is in a period of acquisition turmoil, the CAGR growth performance of other major game companies has outperformed the industry.

However, the problem arose before the epidemic: If we compare the growth performance of major companies and the industry from 2016 to 2019, except for Take-Two, which had a higher CAGR than the industry due to acquisitions, and Activision Blizzard, which had the blockbuster release of "Call of Duty", other major companies had a CAGR lower than the industry's 6% annual growth rate.

This indicates that the major companies with long-lasting appeal did not show "excess growth" compared to the industry from 2016 to 2019. Further reviewing the growth situation over the years, the revenue of major companies did not even maintain a stable growth trend, but fluctuated up and down for more than 20 years.

In that case, why can overseas major companies still enjoy a P/S valuation of more than 5x during this period?

III. Profitability: The economic accounts of AAA games

In addition to growth, the market also gives a certain "premium" to companies with excellent business models and strong cash flow generation capabilities. These companies often operate with light assets, have high profit margins, and their actual cash flow is more substantial and sustainable than the profits on the books.

Game companies generally belong to the category of high-profit margin. Among the several major companies selected by Dolphin, excluding periods of occasional operational anomalies, the operating profit margin generally ranges from 10% to 30%. The difference between the operating cash flow of game companies and profits is mainly brought by deferred revenue, equity incentives, and a small amount of depreciation and amortization expenses, which generally tend to be better than profits.

Among them, traditional buyout game revenue is recognized as income, while in the live-services model, revenue from in-game purchases and subscription fees needs to wait until players consume items or the subscription period ends to be confirmed as income. Therefore, cash flow is better than profits. (In the case of NetEase in the in-game purchase model shown in the chart below, the difference between free cash flow and operating profit is significantly better than EA, which mainly focuses on buyout games)

So, does the high valuation of overseas giants come from their higher profitability?

1. The 3A game with product thinking is not easy to make money

3A games are known for their high investment ( funds, resources, time), but it is obviously biased to easily conclude that a 3A game does not make money. However, it is indeed rare to have content that is both popular and profitable. How to make money more easily, how to make money more steadily, these are the unavoidable problems for 3A games.

Under the traditional "pay to purchase the full game" product thinking model, 3A game developers need to anticipate all the gaming experiences and potential needs of players in advance. This means that the high development costs are mostly spent before the game goes online.

This is undoubtedly a costly gamble , but if there is a successful predecessor, the chances of winning this gamble will be much higher. Therefore, for successful game developers, creating sequels is the experience summarized by major companies in the past thirty years of console game development. Behind this, it is actually the process of "creating IP - monetizing IP".

Therefore, for small and medium-sized game companies that do not have advantages in terms of financial resources, personnel scale, and successful development experience, the performance of new games is like opening a blind box. On the contrary, experienced major companies launching classic IP sequels have a much lower probability of failure.

However, developing IP series to maintain continuous income cannot completely cover the "huge investment" in 3A games, and the income requirements needed to achieve substantial returns.

For example, the game "Final Fantasy VII" released in 1997 is generally regarded as one of the first iconic 3A games in the industry (a presentation style that combines gameplay with movie-level content). At that time, the console game market had entered the fifth generation, with the emergence of Sony's PlayStation, Microsoft's Xbox, and Sega's last attempt with the Sega Dreamcast.

However, even with such a benchmark 3A game, the development cost of "Final Fantasy VII" reached $40-45 million, and the marketing expenses were over $100 million. In other words, even before the game was released, the developer Square Enix had already spent $100-200 million.

By 2023, the cumulative sales of "Final Fantasy VII" exceeded 14.4 million copies, generating total revenue of $864 million at a price of $60 per copy. After deducting 30% for hardware distribution platforms and subtracting the aforementioned development and marketing expenses, the developer's net profit was nearly $300 million, roughly calculated with a profit margin of 35% and an ROI of nearly 200%.

At first glance, this number seems considerable. However, the calculation above did not consider inflation factors (it is estimated that $1 in 2007 is equivalent to $1.7 in 2023), after all, this is a game that spans over 20 years (with a remake in between). If inflation factors are taken into account, the initial investment cost (development + marketing) would be around $300-400 million, **thus the recalculated profit margin would be 29%, and the ROI would also decrease to 70% **

However, the good thing is that at that time, 3A games and console hardware needed to complement each other, so the promotion of games was not mainly borne by the developers themselves. Hardware manufacturers, who bet on flagship games or exclusive blockbuster games, mostly dig into their own pockets to take the lead in marketing.

For example, the "Halo" series has always been the flagship product of Microsoft Xbox, so for the promotion of "Halo 3", Microsoft spent 200 million. Therefore, if you only look at the ROI of R&D costs for developers, then the ROI of "Halo 3" is 550%. The ROI of "Final Fantasy 7" mentioned above can also reach 600%.

A 5-6 times ROI is also the monetization level of most relatively successful 3A games. But compared to PC online games and mobile games, which have not suffered Waterloo, with an ROI of more than 10 times (Dolphin Jun calculated that the ROI of "King of Glory" is over 90, and the mobile game "Nishuihan" is expected to be 34), 3A games are not "AAA" enough.

The difference in the economic performance of individual products, reflected in the financial indicators of companies, shows that the operating profit margin of early overseas giants lags significantly behind domestic mobile game companies (EA vs. NetEase).

Even because of the need for continuous investment in R&D and the risk of failure for 3A products under intense competition, the profit margins of overseas giants will also experience drastic fluctuations. Compared to mobile game companies that are similarly affected by product cycles, the overall profitability stability of overseas giants will be higher.

In the figure below, EA, which mainly relies on the buyout fee system in the early 21st century, does not have a good profit margin.

2. Good products also need a good business model

Since the economic performance of 3A games is not as good as mobile games, why are the big players still insisting on 3A or heavy console games in 2023?

For example, EA, in the past five years, the proportion of PC games has increased rather than decreased, although the share of console games has decreased, but not rapidly, and it has rebounded in the 2024 fiscal year.

Dolphin Jun believes that the issue of economic performance lies not in whether the work itself is a 3A production, but in the difference in mainstream business models between console games and mobile games. And the slow transformation of big players into self-developed mobile games actually reflects that their core operation of mobile games is still in the process of understanding, focusing on "service operation" rather than "product sales" (similar to the difference between SaaS service operation and software sales). This point was also mentioned by NetEase management during the Q2 performance conference when asked about the 3A game plan after the success of "Black Myth: Wukong" The difference in mindset between product sales and service operations not only affects the content planning of games, but also mainly manifests in the differences in business models. If game revenue is divided into volume (number of players) and price (average revenue per user).

Then the revenue elasticity under product sales mainly depends on volume, while raising prices is not easy and is considered a one-time transaction; the revenue elasticity under service operations can achieve a dual drive of volume and price, by continuously updating content, on one hand, increasing user retention, and on the other hand, stimulating continuous payments, thereby increasing the user's lifetime value.

(1) The eternal $60 and the not-so-broad user base

Looking back at the history of console/PC game development, Dolphin Jun found that it seems that the price of each game has not followed inflation and "expanded" in sync. Even up to now, the standard pricing for most console or PC games is still at $59.99, which is commonly known as $60.

In the early 2000s, console games were already priced in the range of $50-60. However, there is a huge difference in per capita income between 2000 and 2023.

With price anchoring, game revenue can only rely on volume. Consoles, also known as home consoles, originated from the home entertainment vertical scene, and its specificity determines that the user base of consoles has a lower ceiling - on a household basis.

According to a Newzoo report, out of the 3.3 billion gamers worldwide in 2023, there are 660 million console players, with a penetration rate of 20%. However, if the target user base is taken as 1 billion internet households (excluding China, according to Netflix's calculation), then the penetration rate of console players exceeds 60%, which is already quite high, considering that not all households can be converted into medium to heavy gamers.

Correspondingly, there is a global user base of 2.8 billion in the mobile gaming market, so even if the annual spending of mobile gamers is only 40% of that of console gamers, the overall market size is still smaller than that of mobile games. The niche scale has accelerated the peak of the console gaming industry and brought about intense competition.

(2) 3A caught in an inefficient arms race

On the other hand, as revenue expansion is limited, the average R&D costs of leading manufacturers have multiplied:

The R&D costs of 3A games increased from $30 million in the 2000s to $100 million today, with some high-budget games even reaching $500 million. However, it was only in the 9th generation of consoles starting in 2021 that some new 3A games were priced at $69.99. But with the price increase comes more discerning users, and in this situation, it is no wonder that the economic viability of 3A games is declining.

Dolphin Jun believes that industry maturity combined with the inertia of 3A thinking has led major console manufacturers to seemingly fall into a vicious circle in the early 21st century during the seventh generation of consoles (2004-2012), where without investing more money to integrate new technologies, they cannot bring about better quality games. The concept of 3A was born with the gene of internal competition. In the early 1980s to 1990s (the third and fourth generation of consoles), the console games in Europe and America were stagnant due to the Atari crash, and Nintendo established its dominant position in that era with the rise of the NES.

In order to learn from Atari's lesson of loose quality control on third-party games, Nintendo set up a strict quality screening mechanism, and third-party games needed to be exclusively distributed by Nintendo, with Nintendo also collecting certain royalties. This was the first time an external force led the trend of quality.

The experience of being dictated by Japanese manufacturers was not pleasant. In order to regain the dominant discourse of European and American manufacturers, the 3A standard (with top budgets and technical support) was established among some major European and American manufacturers. Unlike Japan and South Korea's focus on creativity, having more money and leading in technology has always been the advantage of European and American major manufacturers.

With the popularity of the seventh generation led by Xbox 360 and PS3, and the explosion of games with movie-quality graphics in Europe and America, the concept of 3A gradually permeated the global gaming industry. However, at the same time, this heavy investment in technology and lack of innovation in gameplay led to an arms race among major manufacturers. In order to make users feel that spending $60 is worth every penny and download the game without hesitation, major manufacturers piled up the most advanced technology available at that time.

Taking EA as an example, in 2004, research and development expenses suddenly increased by 27% year-on-year, breaking the stable trend of single-digit growth in previous years. In the following 5 years, research and development expenses continued to grow at a double-digit rate. At the same time, marketing expenses and management expenses also expanded rapidly. However, the revenue did not expand synchronously during the same period, ultimately leading to a rapid deterioration of operating profit margins during the seventh generation.

(3) The Savior Descends from the Sky

Product thinking, as well as the arms race in hardcore technology, made the 3A major manufacturers overlook the significant impact of business models on revenue.

This is where overseas major manufacturers are relatively backward in their thinking. When in the early 21st century, Chinese online games began to adopt the continuous operation mindset of prepaid cards and in-game items, European and American major manufacturers were still struggling with how to sell more game software packages, namely the performance of one-time payment sales.

The Live-service model, favored by overseas major manufacturers in the years before the pandemic, exploded completely during the pandemic with the rise of the stay-at-home economy. The Live-service model is similar to the operation mode of Chinese PC online games, which abandons the one-time payment model and achieves continuous operation of a 3A masterpiece through continuous content expansion payments.

Compared to the criticism faced by Chinese games for their pay-to-win mechanisms, after overseas major games opened the Pandora's box of "in-app purchases," they still set payment points without restraint.

In addition to the common payment points in Chinese games such as loot boxes/cards and selling high-level characters/skins/equipment, overseas major games more commonly charge for DLC expansion packs, and multiplayer PvP games also charge each participating player a "participation fee" through the sale of season passes The Dolphin believes that the primary purpose of the season passes set by major game companies is not to generate revenue, but to stimulate frequent player activity, as players can earn enough points by completing seasonal tasks to exchange for the next season's pass. However, for players who lack time and energy, they can only buy it with real money.

And most importantly, the transition of AAA games from the buyout model to live services, rather than creating standalone sequels, can significantly extend the lifecycle of game products and game IPs.

Taking the pioneer of the Live Services model, the "Destiny" series, as an example:

Before "Destiny," traditional buyout games, even AAA titles, generally had a sales life of only about 1 year. For games with good sales, major companies usually maintain the popularity of the IP by developing sequels every 2 years. Therefore, the reliance on Pipeline for revenue growth is very heavy.

However, since the release of the "Destiny" series in 2014, adopting continuous updates and expansion packs operation, especially reflected in the 2017 release of "Destiny 2" with the version change to "base game free, DLC paid" live service model, it truly broke the ceiling of the game lifecycle.

Since the number of players on console platforms cannot be accurately counted, we have selected the player count of "Destiny 2" released on the Steam platform in 2019, maintaining a monthly MAU of 100,000 to 300,000 in the first half of 2024. Looking back on the history of over four years since its launch, each expansion update has actually brought a higher peak of players online.

Of course, the essence of live services is not only continuous development of DLC expansion content and exploring internal payment points, but also reducing the risk of "working in isolation" by increasing interaction and communication with players, and developing content that fits the trend of player preferences.

Therefore, when "base game free, expansion pack paid" was adopted by "Destiny 2" and tasted success, creating higher user retention, longer product lifecycle, and greater monetization value, the Live Service model quickly became popular among major companies.

EA's earliest game to adopt the continuous operation model was "FIFA 14" released in 2013, which introduced the "FIFA Ultimate Team" (FUT) mode for the first time, allowing players to build teams by drawing player cards and then compete online. The best-selling FIFA series game, "FIFA 18" (released in 2017, cumulative sales of 26.4 million copies by 2021), stemmed from significant improvements made to FUT, highlighting the importance of this mode **

Subsequently, EA also applied the live-service model to the "Madden NFL" and "Battlefield" series, which also received good feedback.

That is, in 2014 (FY2015), with the significant growth in high-margin live services revenue, EA's operating profit margin almost immediately increased. With EA's continued focus on Live services, in 2018, Live services revenue exceeded half of the total revenue, and by FY1Q25 (2Q24CY), it was close to 80% of total revenue.

IV. IP + service operation is the magic weapon, but the loss of creativity in AAA games is unintentional suicide

It is worth mentioning that without the success of "Destiny" creating the IP foundation, even the Live-Service model adopted by "Destiny 2" may not have easily succeeded. After all, for the business model of Live-Service to operate smoothly, having a certain player base is crucial, which points to the importance of building IP.

Looking back at the past performance of major companies, the biggest contributions are often from multiple iterations of IP game series.

For example, Activision Blizzard's top 3-4 games contribute 70% of revenue, with well-known IPs such as Call of Duty and Warcraft series. Take-Two's top 5 games contributed over 90% of revenue during 2016-2020, with the GTA series alone accounting for 50%.

However, merely having IP + continuous service operation does not guarantee that AAA blockbuster games will not encounter major setbacks. If games fall into the cliché industrial assembly-line development direction, users' repeated disappointments and fatigue will break the IP halo.

At the same time, under the internal competition of AAA game arms race, the costs incurred by developers are also increasing, further raising the requirements for recouping costs. It is not just financial costs but also time costs, which can erode players' expectations over time, causing game content to deviate from the latest trends in player interests, leading to embarrassing situations of more setbacks and difficulties in shining.

Therefore, this also results in, if current AAA games receive poor feedback, it is a double blow to company profits.

For example, Ubisoft, a major AAA company with many IP games such as "Assassin's Creed," "Rainbow Six," and "Far Cry," during the 2022-2023 fiscal year, which is 1Q22-1Q23 in the natural year, due to multiple game delays, the revenue for that period decreased by 15% compared to the previous year.

In other words, in the four years after parting ways with Steam, except for 2021 benefiting from the stay-at-home economy and 2024 relying on low base numbers and a rich pipeline for normal growth, Ubisoft's revenue was in decline for the other three years. The industrial assembly-line model did not bring Ubisoft increasingly good profit levels but instead eroded players' enthusiasm The low efficiency of operation is caused by the governance issues of the company.

In early 2023, Ubisoft proposed a new strategy - focusing on high-quality, open-world games with fewer but better titles. This was followed by a visible rapid increase in research and development expenses, which, coupled with the low revenue from the 2022-2023 pipeline, accelerated the erosion of profits (resulting in negative operating profit for the 2023 fiscal year). This temporary mismatch between investment and returns may not be a significant issue if future products are launched as planned.

However, with the highly anticipated blockbuster games "Skull & Bones" (9 years in development, $120 million investment) and "Star Wars: Rogue Squadron" (4 years in development, tens of millions of dollars) both failing, coupled with unresolved governance issues within the company, Ubisoft's stock price has begun a continuous downward trend.

V. Black Monkey has embarked on a new journey, but not everyone is destined for success

Combining the points , it is not difficult to see that the high valuations of overseas giants mainly stem from market recognition of three key logics: IP value (support for sequel revenue, reducing flop risk), business model upgrades (Live-service opens up monetization space and profit levels), and advantages of long-standing classics (players naturally turn to the historical blockbuster titles owned by the big players during supply shortages).

However, developing AAA games also comes with many practical challenges:

1. Developing AAA games requires a certain threshold. As benchmark works, the increasingly heavy upfront development costs, reliance on existing fame (high cost of promotion or successful previous works), and not particularly high ROI have deterred most small and medium-sized game developers. The current low efficiency due to internal competition, still dominated by financially and technologically advantaged European and American giants, makes it difficult to change the situation for now.

2. The economic accounts of AAA games are not as good as mobile games. Under the buyout system, profit margins are not substantial and unstable. However, with the optimization of the Live-Service business model, the outlook is becoming clearer - the overall product lifecycle value can be enhanced.

3. Overseas giants do not rely solely on the economics of AAA games; the greater significance lies in creating stable high-value IPs.

By relying on the "classic IPs with continuous development value + live-service model," and extending the lifecycle of flagship products with existing user advantages through sequels, expansion packs (paid unlock for additional content), and other means, most of the R&D costs for these old games have already been invested and confirmed in the early stages, resulting in potentially more substantial profit levels in the future, ultimately leading to a scenario of "the strong getting stronger"

4. The gameplay content is the core of the game. Repeating the old-fashioned gameplay will only consume the player base established by high-quality IP. This is especially equivalent to suicide in AAA games, as the high cost of AAA games cannot afford too many mistakes.

Looking back at "Black Myth: Wukong", as the first truly AAA game in China, the product quality itself is completely up to the TOP level, and there is no completely comparable benchmark. Therefore, it is inevitable to easily exceed expectations. However, it cannot be denied that the current PC sales of over 20 million, with a potential of 30 million, definitely have some emotional appeal.

But for the followers of domestic AAA games, they have to consider how big the real demand market is after "dehydration". In 2023, out of the 670 million gamers in China, there are 320 million PC gamers. On the other hand, console users are relatively fewer, with annual sales of just over 2 million in China, accounting for only 5% globally. By this proportion, it means that the active console gamers in China are around 30 million.

Although AAA games are not limited to consoles, console users may be the core users with the highest stickiness for AAA games. However, the user base here is still too small compared to the moderate gamers represented by mobile games.

Of course, this also means that the market potential is huge. Especially when the concepts of games among parents born in the 80s and 90s have undergone significant changes, the entertainment demand in family settings is expected to be further stimulated. However, for current game developers, the high upfront costs and market cultivation speed still need to be carefully calculated.

In conclusion:

After the success of "Black Myth: Wukong", game developers' reactions vary. Some developers immediately announced the advancement of several potential AAA projects, while others withdrew their originally developed AAA-like games. During the second-quarter earnings call of $NetEase(NTES.US), analysts asked whether the success of Black Myth would prompt NetEase to adjust its pipeline and increase the development plans for AAA games?

The response from NetEase management is also interesting:

"The global mobile gaming market accounts for about 50% of the gaming industry, indicating that the gaming industry is vast and diverse. Traditional AAA games often provide a cinematic experience similar to Hollywood blockbusters, including high-quality graphics, stories, and business models, with their unique internal logic.

Most Chinese game companies initially entered this industry through online games due to historical reasons. Online games are fundamentally different from single-player games; they not only have gaming attributes but also strong characteristics of internet community products. Therefore, many domestic companies, including us, are actually using the methodology of internet and community products to develop entertaining game products, whether they are mobile games or PC games. However, NetEase's overall direction will not change." "In essence, the emergence of Black Monkey will not disrupt NetEase's existing Pipeline plan. In fact, NetEase's overseas studios established in the past two years have been heavily developing console/PC games, including some AAA-level games. However, due to economic considerations, NetEase may not deviate from its original plan to increase investment in AAA games in the short term just because of Black Monkey's success.

Simply put, in terms of profitability, mobile games still take the lead. WeChat mini-games have surpassed 500 million active users in just two years, reaching a market size of 30 billion RMB, primarily due to the absolute advantage in user scale that mobile games possess.

The high valuations of overseas giants did not come overnight; they have all gone through multiple IP validations. Similarly, once they encounter consecutive failures, their valuation premiums will disappear instantly.

As users grow tired of old IPs and the risks of developing new IPs increase with the escalating AAA arms race, overseas giants are also making efforts to transition towards mobile games. This happens to be within the capabilities of Chinese game developers.

While AAA games are excellent, not everyone is destined for them. For many domestic game developers, especially those listed companies that need to consider shareholder interests, they must take one step at a time until the market is cultivated to a certain extent. In this regard, the financially robust Tencent Holdings Limited, by investing in independent studio AAA projects from the perspective of an investor, may be the most suitable approach at present.

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