Black Myth: Wukong has changed the investment logic of the gaming industry

Black Myth: Wukong, this game is the recent hit, almost globally obsessed with, also a milestone in the Chinese cultural industry.

With such success, A-shares quickly caught on to the concept, any related companies soared, and even the stock of one of the highways in Shanxi, one of the in-game locations, hit the limit up, truly a case of being ignored in the bustling city and having distant relatives in the deep mountains.

The game sector most relevant to Black Myth has shown mixed reactions to the success of this game. While Game Science is not a listed company, it has given other game companies hope for replicating success, but also indicates that their focus on prop fee-based mobile games is mismatched with the player experience and pricing, posing hidden risks to the pay-to-win game model.

Black Myth will undoubtedly change the investment logic of the entire gaming industry, but how exactly will it change?

1. How much money has it made?

Black Myth has currently reached sales in the tens of millions, making it the highest-selling domestic standalone game in history. However, considering the 4 years of development, the income is unlikely to be sustainable, and compared to mobile games with monthly revenues in the billions, many uninformed masses find it lacking.

For example, miHoYo, the developer of Genshin Impact, had revenues of 27.3 billion in 2022, with a profit of 16.145 billion. Based on this calculation, in 2022, Genshin Impact generated nearly 20 billion in revenue in a year, definitely surpassing Black Myth. As for Journey to the West, which has been enduring for 20 years, it now has revenues in the hundreds of billions in a year. Over the past 20 years, the revenue has definitely exceeded a trillion.

The top-ranked WeChat mini-game, Salted Fish King, is a lightweight game, with estimated revenues reaching around 4 billion in 2023.

For a domestic AAA game to sell over 10 million copies, priced at 300 RMB, resulting in 30 billion in revenue, is already groundbreaking. In contrast, there are many mobile games that have generated over 30 billion in revenue historically. In this comparison, the great success of developing AAA games can only match the small success of mobile games. Before Black Myth, there has never been a domestic buyout game with sales of over three million, so it's no wonder people were not optimistic about this path.

However, it is clear that Black Myth is continuously breaking expectations and overturning those who disparage it.

Based on the currently known data, the first week's sales across all platforms are estimated to be around 14 million copies, priced at 268 RMB, deluxe edition at 328 RMB, overseas price at 60 USD, with 20% overseas sales, conservatively estimated first-week revenue is over 4.5 billion RMB.

The game's full lifecycle is still long, with estimated final sales easily exceeding 40 million, plus subsequent updates with paid content DLCs, as well as potential revenue from IP licensing, toys, and more, this game could generate over 15 billion in revenue The main costs are hardware equipment, game developers, and accumulated salaries for outsourcing over the years, with disclosed figures estimated at around 500-600 million. There are also publicity campaigns before and after listing, but it shouldn't cost more than one billion.

The major costs come from the revenue sharing with the Steam channel and Unreal Engine, with a progressive rate on Steam, up to 20% for the highest sales tier. Unreal Engine takes 5%, so the estimated total cost for channels and engines is around 27%. Therefore, based on a 15 billion estimate, the final profit of this game will be over 10 billion, and the profit margin will continue to increase as revenue exceeds expectations.

Mobile game companies cannot achieve a net profit margin of over 60%, with the objective presence of a 30% Apple tax.

On average, the development time from the first PV until now is exactly 4 years, with an annualized performance of around 2.5 billion. For games with total profits of over 10 billion in their lifecycle, they can definitely rank in the top 20 in Chinese gaming history in terms of profitability.

Based on this data, if you want to scientifically evaluate the game, a reasonable valuation would be between 30-70 billion.

Games like Black Myth: Wukong are enough to transform the financial reports of all game companies except Tencent. It is definitely not as people say, with revenue lower than ordinary mobile games.

From now on, game companies will take Black Myth: Wukong as a benchmark to explore the development of AAA masterpieces, which is an inevitable trend.

2. Who Needs to Change

From a model perspective, the prop payment model for mobile games is still better.

Attached to the mobile carrier, without the high hardware restrictions of AAA games (PS, PC), playable anytime, anywhere greatly reduces the threshold for the masses to enter.

Furthermore, top mobile games have social attributes layered on top, digging deep into human vanity, with no upper limit on recharge amounts, while Black Myth: Wukong has limited payment amounts, and there's no way to become stronger by recharging 648.

Therefore, it can be seen that both the number of players and the upper limit of payment amounts are much higher. More importantly, the visual and design technical requirements for development are lower, with a lower participation threshold. It is not difficult to understand why this model has become the mainstream model for Chinese game companies.

The most profitable game companies globally are mostly in China, all of which are developers of prop payment mobile games.

And the few companies that have been most successful in the buyout-style single-player game history: Activision Blizzard, Take-Two, EA. Their performance and market value are far from being compared with NetEase, let alone Tencent.

Mobile games are the direction of commercialization evolution in the gaming industry. In recent years, global top buyout-style gaming companies have been focusing on developing mobile games, promoting online connectivity for standalone games, and in-game item payments. It's not that they don't want to do it, it's just not happening as quickly as they would like.

On the other hand, the industrial chain behind AAA games consists of: distribution platforms (such as Steam), hardware (Nvidia, Intel, AMD, Sony, Nintendo, Microsoft), with hardly any Chinese companies involved. Lenovo has a small presence in the PC market, but still plays a supporting role for Nvidia.

In the mobile industry, China is deeply involved. Additionally, domestic Android can bypass Google's fees, making it a better choice for developing mobile games and seemingly driving the entire domestic industry chain.

In a sense, "Black Myth: Wukong" represents a step back in history: buyout-style AAA games, the business model, and the industrial chain spillover effects are not good. Hardware also limits the consumer base and fails to generate sustainable operational benefits.

However, everything has two sides. The business model of mobile games is good - without the need to focus on graphics technology, one can still make a lot of money. But when everyone sees the advantages, they cease to be advantages. Such a good model will inevitably bring fierce competition. Almost all game developers in China focus on developing mobile games, but only a few can reach the top. With more people, even the best model cannot guarantee everyone making money.

Over the years, the average profit margin in the gaming industry has been declining.

From a financial statement perspective, developing mobile games inevitably incurs the 30% Apple and Android tax. Although the hardware requirements for mobile game development are much lower than AAA games, games need to be online and support the demand of a large number of players, which requires servers - something that buyout-style standalone games do not need to consider much. As a result, hardware and network costs offset each other.

With numerous new games released every year, how can one attract the attention of players who are already playing other games?

In terms of game costs, advertising and user acquisition have become the main expense items. The gaming industry has always been a major player in the Chinese advertising industry. As the number of existing games continues to increase and the number of players stabilizes, the cost of acquiring attention is becoming increasingly high In the gaming industry, it has become a norm to spend the same amount on advertising and user acquisition as the revenue generated in the first month, hoping that players will retain without further acquisition in the following month. This results in customer acquisition costs accounting for 20%-100% of the revenue. To ensure continuous profitability, game companies need to constantly provide new content for players to consume.

These are the costs of planning and operations, such as weekly updates on game items, launching events, and balancing gameplay, all of which incur significant expenses.

Taking all these factors into account, we can see that there are currently many losses in the stock market. For non-top game companies, achieving a profit margin of even 10% is not easy in the software industry, which is clearly less profitable than the manufacturing industry.

Source: gamelook

Among the top three companies Tencent, NetEase Cloud, and miHoYo, all have profit margins exceeding 30%. This indicates that the gaming industry is dominated by winners, with the largest companies being the most profitable. Top games with a large player base over the years require minimal customer acquisition costs in subsequent years, given their large scale that can dilute the operational planning team costs and hardware development costs. On the other hand, countless small and medium-sized game companies struggle in endless iteration cycles.

For example, a game company with 150 employees generated a profit of 10 billion, while compared to some familiar peers: A-share Giant Interactive has 1447 employees, and H-share IGG has 1984 employees. These two companies have had decent track records, but after growing to this size, they are unable to grow further. Without being able to break into the top tier for long-term returns, they can only continue to develop new games to explore, but with limited industry space, if the product does not go viral, the revenue will be limited, and the profit margin will be unattractive. To maintain their scale, they can only adopt a multi-product strategy, adding factors such as personnel for mobile game operations, hence the need for a large number of employees.

In contrast, single-player game developers only need to focus on development, while outsourcing tasks like network operations, allowing 150 employees to complete a game like "Black Myth: Wukong" The simplest road is also the hardest to walk.

Both Jibite and IGG are considered innovative companies, different from companies that specifically target middle-aged and elderly customers or those driven by buying traffic, such as legendary game companies or gambling game companies. These two types of game companies are essentially human harvesters, requiring minimal technical development personnel, with employees mainly consisting of advertising placement specialists and in-game purchase strategy designers, which can hardly be considered as game companies.

If we were to select elite talents from their thousands of employees, and use the accumulated funds to take a gamble together to create an excellent AAA masterpiece, would it be difficult?

The benchmark significance of Black Myth is to provide opportunities for small and medium-sized game companies with innovative R&D capabilities to compete with Tencent and NetEase. Instead of following the same path and engaging in thankless tasks with a large workforce, taking a different approach can also lead to success.

However, having a listed status becomes a constraint here. The characteristics of meticulous development of AAA games and early investment will inevitably lead to a complete financial collapse in the years before the game is listed, a risk that shareholders may not be able to bear. This is why in recent years, many new popular games have come from non-listed companies.

With the success of Black Myth, many domestic players have now equipped themselves with the hardware required for AAA masterpieces. In the coming years, the launch of new buy-to-play AAA games will be more easily accepted by players. It can be said that the next few years will be a golden time for many small companies in China to change their business models and achieve high profits through innovation.

As for major players like Tencent and NetEase, there won't be much change. Even if they produce a successful AAA game, the promotional significance outweighs the financial significance, as maintaining their leading position in mobile games is crucial.

As for whether the mobile gaming industry will be impacted, it remains to be seen if players, after experiencing beautifully crafted masterpieces, will be less willing to spend money on pay-to-win mobile games. For example, in the case of Black Myth, playing for over 100 hours is already quite fulfilling. Mobile games still remain the most popular choice for casual entertainment. Currently, the domestic mobile game market is not thriving, mainly due to intense competition and economic reasons.

Conclusion

The success of Black Myth is not enough to change the overall profitability of the gaming industry. It simply represents a scientific choice of taking a niche path, seizing the opportunity, leveraging national sentiment and cultural appeal to achieve unexpectedly high results, which is not easy to replicate.

However, this success opens up new possibilities for creative domestic game companies to explore new gameplay styles. It is important to closely monitor the trends of these small-scale game companies.

Apart from these commercial factors, there are many externalities worth considering:

As mentioned earlier, the channels and hardware for AAA games are controlled by overseas companies, making mobile game development more aligned with the interests of the Chinese industry chain. However, NVIDIA has relied on the enthusiasm of AAA game players for upgrading their graphics cards for many years, supporting its profits. Without the iteration of generations of gaming graphics cards, the current AI computing power would not have been possible.

Investing heavily in visual technology competition may not be as profitable as studying human nature and inducing comparison strategies. However, it will inevitably push hardware performance, promoting the development of the chip industry, which may not be reflected in financial reports.

Many game companies in China have been profitable over the years, but their accumulation beyond this is merely a set of methodologies on when to sell in-game items, gift packages, monthly subscriptions, and how to induce recharges, pricing, and discount strategies to achieve the highest recharge rates Black Myth: Wukong deeply integrates a lot of Chinese culture as its highlight, including scenery, music, and humanistic system. After being concretized, its acceptance has greatly increased, and it has been widely circulated overseas. Many foreigners have become fans of Journey to the West. This will be transformed into their motivation to travel to China in the future, their preference for Chinese products, and even improve the international image. These things may not be reflected in profits, but they are subtle and influential. At least now everyone basically knows that Sun Wukong is not Japanese. Presumably, this is also why many government departments are so actively involved in promoting it.

Looking back, the government's restrictions on game approvals and the heavy crackdown on the gaming industry can finally be understood. It's just that in the past, the profits generated by the Chinese gaming industry did not match its international cultural influence