NetEase Games, Hybrid Third Son

On May 25th, CLOUD MUSIC released its Q1 2023 financial report.

The data looks good. According to the report, CLOUD MUSIC's net income was 25 billion yuan, a year-on-year increase of 6.3%, and adjusted net profit attributable to shareholders was 7.56 billion yuan, a year-on-year increase of 47.8%, achieving the largest increase in the past year.

Looking closely, growth is still mainly driven by games. CLOUD MUSIC's social and entertainment business is not reliable anymore, and it did not continue its significant growth trend from the past. Q1 net income was 2 billion yuan, a year-on-year decrease of 5.2%. CLOUD MUSIC Youdao has also been in a difficult situation recently, with news of optimization of personnel in the hardware department. Q1 net income was 1.2 billion yuan, a year-on-year decrease of 3.1%. Only CLOUD MUSIC's games and related value-added services had a year-on-year increase in net income of 7.6%, reaching 20.1 billion yuan, accounting for 80% of CLOUD MUSIC's total revenue.

Games are the hope of the "village", and with the release of game licenses, CLOUD MUSIC's games have also seen the light of day. But in fact, it also has a lot of worries this year.

On January 24th, CLOUD MUSIC's cooperation with Blizzard officially expired, and the two sides are still quarreling. The most concerning issue for the outside world is how much money CLOUD MUSIC will lose after losing Blizzard. From the current financial data, the impact is not significant because Q1 had a hit game "Egg Party", and the data looks good.

However, it is still uncertain how long "Egg Party" as a casual game can remain popular. According to Qimai data, since April, its ranking, download estimates, and revenue estimates have all shown a downward trend.

At the same time, there is also a question mark as to where CLOUD MUSIC's next hit game will come from. At the CLOUD MUSIC game 520 conference that just ended, CLOUD MUSIC announced 11 new games. More than one CLOUD MUSIC game employee mentioned to Shenran that the new games released at this conference were actually lackluster.

From an external perspective, the position of the industry's second place has already been shaken.

In App Magic's TOP20 games with the highest global revenue in April, there is Tencent's "King of Glory", miHoYo's "Genshin Impact", as well as its newly launched game "Honkai: Star Rail", and games from Lingxi Interactive and 37 Interactive, but no games under CLOUD MUSIC.

In Sensor Tower's ranking of Chinese mobile game publishers' revenue in April 2023, CLOUD MUSIC was still surpassed by miHoYo and ranked third.

More than one CLOUD MUSIC game employee mentioned that as CLOUD MUSIC's CEO, Ding Lei is personally overseeing the game business this year. A CLOUD MUSIC game middle manager told Shenran, "CLOUD MUSIC needs the next hit game, so the internal pressure is relatively high." He has a feeling that "the company is changing."

Existing games, how much money can they make?

According to the financial report, in Q1 2023, CLOUD MUSIC's net revenue from games and related value-added services was 20.1 billion yuan, of which 92.7% came from online games, of which 72.3% came from mobile games.

Converted, CLOUD MUSIC's net revenue from online games was 18.6 billion yuan, and net revenue from mobile games was 13.45 billion yuan, a year-on-year increase of 16.3%, which may be mainly due to the contribution of "Egg Party". Before its appearance, the revenue growth rate of CLOUD MUSIC's mobile games was declining.

The net revenue of PC games was 5.15 billion yuan, a decrease of 560 million yuan from the same period last year, a year-on-year decrease of nearly 10%, which was the first decline in nearly a year. The reason behind it should be related to Blizzard's breakup, involving games such as "World of Warcraft" and "Hearthstone", which are mainly PC games.

In the financial report, "Egg Party" repeatedly mentioned is the biggest contributor.

This is a Party Game, players can challenge various levels with friends, and can also design maps in the "Egg Workshop" for other players to play. The game has attracted many female players, as well as post-00 and even post-10 young players. This game was personally supervised by Ding Lei, and received strong support and rich returns.

However, how long it can maintain its popularity remains to be seen.

According to Qimai data, "Egg Party" has been ranked first in the game free list since December 1, 2022, and has been ranked first until early April. For a casual game, this achievement is rare. However, the downward trend began in April. On May 18th, it was ranked 9th in the game free list.

On the iPhone device side, in terms of estimated downloads, the estimated downloads in March were 3.46 million times, and in April it was 2.76 million times, a decrease of 20%; in terms of estimated revenue, from March 1st to 24th, it was 23.45 million US dollars, from April 1st to 24th, it was 20.29 million US dollars, and from May 1st to 24th, it was 11.67 million US dollars, which continued to decline. On May 18th, the daily revenue once fell to 240,000 US dollars, the lowest point this year. There is no public data on the Android side.

"The momentum of 'Egg Party' has been relatively weak," a former CLOUD MUSIC game employee told Shenran.

Previously, Shenran mentioned in the report that this type of casual game needs to be supported by a large DAU and faces the problem of fast content consumption. Ding Lei said that he wants to treat it as a ten-year game. More than one industry insider has stated that there are not many precedents for casual games like this, and the difficulty of realization is very high. Let's take a look at other games. According to Sensor Tower, CLOUD MUSIC has more than 100 games, with a large quantity and a solid foundation. The top 10 games in April revenue were "Egg Party", "Fantasy Westward Journey", "The Edge of the Land", "Journey to the West", "Onmyoji", "Pro Evolution Soccer", "The Ghostly Tribe", "Diablo Immortal", "Journey to the West: Return", and "Endless Lagrange". Among them, "Fantasy Westward Journey", which was launched in 2003, still contributes to high revenue.

According to Qimai data, as of May 25th, on the iPhone side, except for "Journey to the West" and "Onmyoji", the other eight games have different degrees of downward revenue trends.

Among them, "Fantasy Westward Journey", which has always been strong, has already dropped significantly in revenue from the first half of 2023 to the present compared to the second half of 2022. The newly launched game "Journey to the West: Return" has seen a significant decline in downloads and revenue.

Of course, these are all compared to the past CLOUD MUSIC, after all, any one of these games is enough for some small and medium-sized companies to "eat" for a long time.

Can new games perform well?

CLOUD MUSIC still has many games to be launched.

According to Shenran statistics, as of May this year, CLOUD MUSIC has obtained licenses for four games, namely "Extraordinary Pioneer", "Fantasy Westward Journey: Time and Space", "Zero Mission", and "Seven Days World". There are three imported games, namely "Fantasy Life", "Assault: Shadow Legend", and "Audition: Party".

At the 520 conference, CLOUD MUSIC released 11 new games. However, more than one CLOUD MUSIC game employee lamented that some of them were lackluster.

The most anticipated game at this conference was "Nishuihan", which is a mobile game adapted from the ancient-style martial arts PC game. The PC game has already received good feedback, and CLOUD MUSIC has invested more in the mobile game. It has publicly stated that the team has more than 400 people, and it has consumed more than 700 million budgets before it was officially launched.

"This is a project that is expected to be a hit, it just depends on what level of hit it will be," said Lu Han, who is close to CLOUD MUSIC games. However, he also mentioned that this type of traditional martial arts theme is already a category with limited imagination space, "the audience is locked in the 80s and 90s, who have feelings for martial arts, and there are not many 95s and 00s who may be interested, so it is unlikely to expand the circle beyond traditional PC games".

In addition, there were not many eye-catching games at the conference.

Some games are a bit "old".

Lu Han introduced that "Three Kingdoms: The Killing of Heroes" is an old game that has been around for a few years, "it was developed by a Korean company around 2016 and 2017". For various reasons, the game has been shelved. Later, it obtained a license, "there is a feeling that it has to be launched, but it is actually not suitable for the current market. At that time, the games on mobile phones were relatively simple, and the experience they brought to players was also simple". Some games look average in quality.

Zhang Liang, an employee of CLOUD MUSIC Games, said that the project "Code 56" was made for several hundred million yuan in promotion, and it was said to be a "wasteland" style, but it turned out to be an MMO. A former employee of CLOUD MUSIC Games also said that the theme of "post-apocalyptic wasteland" was well-positioned, "but the actual gameplay and feedback released were not very good."

Some games have already been launched overseas, but their imagination in China is still limited.

The survival shooting mobile game "Extraordinary Pioneer" has been launched overseas, and its performance was not eye-catching before. The introduction of the game "Assault: Shadow Legend" is a good card game that has made a lot of money overseas, but it is not popular in China. Lu Han said.

What they regret is that some projects that looked promising before were cut off last year due to the unclear situation of the version number and the background of the company's cost reduction and efficiency increase. For example, the "Code: World" derived from the Yin Yang Master IP was considered a 3A work benchmarked against "Genshin Impact" at the time, but it was later removed, Lu Han said.

The biggest move of this press conference was to apply the UGC model used in "Egg Party" to multiple game products under its umbrella, but this also seems to be an attempt to find inspiration and obtain content among players.

In addition, going overseas has always been seen as an incremental source of CLOUD MUSIC Games.

"From the perspective of self-developed distribution, the growth is not as expected," an employee introduced to Shenran earlier. CLOUD MUSIC Games' overseas projects are somewhat inadequate. Previously popular head products, such as "Wilderness Action," "Fifth Personality," "Tomorrow," etc., have all declined to varying degrees.

The route of leveraging IP to drive the global market has also encountered difficulties. "Internally, they have begun to hesitate," said an insider. CLOUD MUSIC found that under this model, development costs are higher, R&D cycles are longer, and even successful projects that need to be shared with copyright holders cannot earn much money. "Last year, CLOUD MUSIC cut some mobile games because of this."

CLOUD MUSIC Games is both valued and cautious about going overseas.

In the Q1 financial report, CLOUD MUSIC mentioned that "Egg Party" will go overseas, which means it will face head-on competition with the same type of "Candy Man."

The international version of "Harry Potter: Magic Awakening" was delayed since Q3 last year and finally went online this summer. The game's first-month revenue exceeded 1 billion yuan, but its popularity and reputation collapsed shortly thereafter. It is now ranked 197th on the Seven-Mai data bestseller list. An insider said that the reason why it has not been sent overseas for a long time is because it is worried about repeating the rapid decline in the domestic market, so it has a long and repeated adjustment period.

Currently, the overseas market is still in a wait-and-see mode.

Worried about CLOUD MUSIC games?

CLOUD MUSIC games have undergone some changes this year.

The biggest change is that CLOUD MUSIC CEO Ding Lei personally oversees the business. An employee introduced that CLOUD MUSIC games are divided into two systems: CLOUD MUSIC Interactive Entertainment and CLOUD MUSIC Thunderfire. Among them, CLOUD MUSIC Interactive Entertainment is the main source of profit for CLOUD MUSIC mobile games. There were rumors earlier this year that two helmsmen, Ding Ding (referring to Ding Yingfeng) and Tianyou (referring to Hui Xiaojun), had resigned. The former was responsible for the Guangzhou region, and the latter was responsible for the Hangzhou and Shanghai regions. However, an insider denied this, saying that both of them had not resigned, but there were indeed some changes. "Tianyou is no longer in charge of domestic business."

Not only that, but more than one CLOUD MUSIC game employee mentioned that there are more reports this year.

An employee said that since mid-to-late December last year, middle and senior management have increased their upward reporting efforts. Some departments that originally had little communication with Ding Lei about business have also clearly added weekly and monthly reports. Zhang Liang joked with Shenran that it has now become a "daily report."

A CLOUD MUSIC game employee based in Guangzhou mentioned, "Previously, reports were only given to the boss (Ding Lei) on a quarterly or annual basis." This year, Ding Lei has clearly come to Guangzhou more often.

The reason for the increase in reports, he explained, is that the boss personally came to oversee the game and wanted to more accurately understand the progress of each product. "The process of communicating progress has become a more formal report."

Hands-on involvement is a good starting point, but some employees feel pressured as a result.

Some employees said, "Some reports are disconnected from specific business, and some are not easy to quantify at all times." "In order to satisfy the leaders and the leaders' leaders, some content must be created when reporting." On career-oriented social media, many people also complain about this. Some employees mentioned that they have to deal with various reports to their superiors and manage business production to their subordinates, which is very stressful.

Lu Han explained that Ding Lei hopes that the game can be more innovative. "He wants to change the business thinking and business form, and explore the value of users to a greater extent."

Many interviewees expressed some concerns about the lack of innovation in CLOUD MUSIC games. Zhang Liang said that many products are MMO and SLG (strategy games), which are very homogeneous. After watching the 520 press conference, he even felt that "the products that CLOUD MUSIC is making now are a bit out of touch with players' tastes."

A former CLOUD MUSIC game employee introduced to Shenran that CLOUD MUSIC games are self-developed by studios, and the development direction is divided into two categories: one is based on the accumulation of studios, and the other is guided by market trends. "It cannot be completely summarized as being out of touch with players' tastes."

He mentioned a dilemma in the model. Many popular games are driven by teams' self-creation, first thinking about what they want to achieve, and then considering revenue systems. However, under the pressure of revenue and KPI, many games are not self-driven, but are first considered for commercialization, making gameplay subject to payment. "Because there have been successful cases, everyone believes in this way." "But in terms of the game ecosystem cycle and the value generated, it is lower than the former."

In his opinion, CLOUD MUSIC is moving closer to the latter, and "Tomorrow's After" is an example of this, "This is a gradual process." The result is that "mobile games are too patterned and lack breakthroughs, although they are also trying, the current effect is not very good," he said. At present, there are still many products supporting CLOUD MUSIC games, and there is no anxiety, but in the long run, there will be anxiety.

"I hope that more fresh blood can join and make products for the next generation," sighed a CLOUD MUSIC game management.