Looking back at the earnings season of game developers in the first half of the year, whether it's earnings announcements or conference calls, the industry has an overall judgment that this is a difficult stage for the gaming industry, and this stage will be sustainable.
At a recent extraordinary shareholders' meeting, Lu Hongyan, Chairman and General Manager of Jibit, mentioned that the gaming industry has transformed from an emerging industry to a traditional industry. As a characteristic of traditional industries, profits may become closer to the industry average, with increasing investment but not necessarily increasing output. Many funds are also unwilling to invest in the gaming industry again.
First Financial has compiled statistics on the top ten gaming companies in terms of revenue in the first half of the year. In the context of slowing growth, an increasingly evident trend is that top tier companies continue to grow while mid to low tier companies accelerate their differentiation. Tencent and NetEase still lead in a fragmented manner, accounting for 80% of the game revenue of the top ten manufacturers. Mid tier manufacturers such as Century Huatong rely on popular games to drive revenue growth of over 50%, while some major players such as Perfect World are struggling to transition from profit to loss.
Jiang Xiaoxiao, Managing Director of CIC Zhuoshi Consulting, believes that top manufacturers can still maintain growth with their strong IP, resource integration capabilities, and global market layout. Meanwhile, mid to low tier manufacturers are facing transformation pressure. Some are exploring new directions such as mini games and overseas strategies, achieving certain growth, while others are experiencing a decline due to intensified market competition. In the current environment, game companies need to focus on innovation and diversification strategies to maintain growth, increase investment in cutting-edge technologies such as AIGC, and expand overseas markets.
Looking at the overseas and global gaming market, the wave of layoffs in both large and small factories continues, and the industry's downturn is widespread. Lu Hongyan believes that the "confusion" of overseas gaming companies has nothing to do with technological innovation or macroeconomic factors, but rather the intensified competition among Chinese manufacturers going global, leading to an early onset of anxiety. Industrialization may be a way for game developers to gain a competitive advantage, but over time, they will still return to the confusion of being completely immersed.
Tencent and NetEase account for 80% of revenue
In the first half of 2024, overall, the Chinese gaming industry maintained a growth rate of 2%. According to the "Report on China's Game Industry from January to June 2024" released by the China Audio and Digital Association, the actual sales revenue of the domestic game market in the first half of the year reached 147.267 billion yuan, a year-on-year increase of 2.08%. But if we look at the actual sales revenue of domestically developed games in China, it decreased by 3.3% year-on-year to 117.7 billion yuan.
Tencent and NetEase share the majority of the industry's overall revenue.
Tencent's gaming revenue in the first half of 2024 was 96.6 billion yuan, with a double harvest both domestically and internationally. In terms of the size of Tencent Games, after a difficult climb in the past two years, there has been a good growth. In the second quarter, due to the strong performance of "PUBG MOBILE" and the increasing popularity of Supercell games, Tencent's international market game revenue increased by 9% to 13.9 billion yuan, and local market game revenue also resumed year-on-year growth, increasing by 9% to 34.6 billion yuan, mainly due to the revenue growth of "Fearless Contract" and the release of "DNF Mobile Game".
Compared to Tencent, NetEase's revenue did not increase in the first half of the year, partly due to changes in foreign exchange earnings. NetEase's revenue from gaming and related value-added services in the first half of the year was 41.5 billion yuan, which is half of Tencent's size. During the same period, NetEase's net profit decreased by 1.61% year-on-year. According to the financial report, NetEase's foreign exchange loss in the second quarter was 240 million yuan, compared to a foreign exchange gain of 1.46 billion yuan in the same period last year.
Besides Tencent and NetEase, the absolute leaders in the A-share market are Sanqi Interactive Entertainment and Century Huatong, which are also the two gaming companies with revenue closest to billions, each with its own support in terms of revenue.
In the first half of the year, Century Huatong's gaming business revenue was 8.5 billion yuan, a year-on-year increase of 73%, and the company's net profit increased by over 30% year-on-year. In the first half of the year, Century Huatong achieved breakthroughs in both local and overseas gaming businesses.
The SLG "Whiteout Survival" developed by DianDian Interactive, a subsidiary of Century Huatong, is a dark horse in the gaming industry in the past year. It continued to dominate the revenue chart of overseas mobile games in July, surpassing a series of games from Tencent and miHoYo.
According to Sensor Tower data, with the release of the Chinese version of "Endless Winter" at the end of May, "Whiteout Survival"'s global revenue exceeded $100 million in June and increased by 5.4% again in July, with cumulative in app revenue exceeding $1 billion. In addition to this game, the financial report disclosed that the comprehensive revenue related to Century Huatong's flagship game "Legend" increased by about 80% year-on-year.
The growth support of Sanqi Interactive Entertainment is mostly small games. The revenue of Sanqi Interactive Entertainment in the first half of the year was 9.2 billion yuan, a year-on-year increase of 18%; The net profit attributable to the parent company was nearly 1.3 billion yuan, a year-on-year increase of 3%. For revenue growth, Sanqi Interactive Entertainment mentioned that the main reason is the good performance of the company's mobile game business, such as "Seeking the Way", "Dominance", and "Soul Prologue". Both "Seeking the Way" and "Soul Prologue" are popular mini games. Since their popularity last year, "Seeking the Way" has consistently ranked among the top sellers on WeChat mini games.
In 2024, the behavior habits and interest preferences of global users will become more fragmented, and lightweighting will gradually become one of the major trends in the global gaming industry. Sanqi Interactive Entertainment has taken advantage of this trend. The "China Game Industry Report for January June 2024" shows that in the first half of 2024, the revenue of mini games (mini program mobile games) was 16.6 billion yuan, a year-on-year increase of 60%. The revenue of the mini game market has maintained rapid growth for three consecutive years.
Kaiying Network has also driven revenue growth through small games, with revenue increasing by nearly 30% in the first half of the year. Small game products such as "Sword and Fairy: A New Beginning" have made significant incremental contributions, while "Monster Alliance" has entered the top ten of the small game bestseller list. Kaiying also caught up with the trend of going global, with products such as "Monster Alliance" being promoted to markets in Southeast Asia and other regions, driving its overseas revenue to increase by 335% year-on-year, reaching 126 million yuan.
However, the mode of mini games relies on a large amount of purchasing investment, which may lead to the phenomenon of increasing income without increasing profits. In the first half of the year, the operating costs and sales expenses of Sanqi Interactive Entertainment increased, with sales expenses reaching 5.3 billion yuan, a year-on-year increase of 25%. The financial report shows that this is mainly due to the company's continued increase in traffic investment for games such as "Seeking the Way" and "Dominance". Kaiying Network's mobile game operating costs increased by nearly 46% in the first half of 2024, and marketing expenses increased by nearly 104% year-on-year.
Jiang Xiaoxiao believes that mini games usually have the advantages of low development costs and short development cycles, which makes them an effective means of quickly entering the market and acquiring users. However, with the intensification of competition, especially on popular platforms, manufacturers need to invest more funds to acquire high-quality user groups. This high purchase cost may result in the customer acquisition cost of small games approaching or even exceeding their revenue, thereby compressing the overall profit margin.
Although mini games can bring growth in the short term, their cost-effectiveness depends on whether manufacturers can effectively control the cost of purchasing volume through precise advertising, optimized retention, and increased user payment conversion. In addition, Tiktok and other platforms have issued new sharing policies, giving small game developers a higher share ratio, which may promote the profit growth of manufacturers.
The global gaming industry is in a period of confusion
Looking back at the top ten game revenue manufacturers in each financial report, the two leading positions are stable, but the seats behind them may change and rotate from time to time. For example, Jibit, which was awarded the title of "Game Maotai" by investors due to its stock price once surpassing Maotai, has not been ranked in the top ten this time due to the decline in popularity of its main games and the downturn in its performance in recent years.
At the shareholders' meeting, some investors asked Jibit whether the difficulty for second - and third tier game developers to produce high-quality products has increased compared to a few years ago, given the current stage of development in the gaming industry. Lu Hongyan believes that this is not only more difficult for second - and third tier game developers, but also for all game developers.
Top tier manufacturers with traffic are more likely to make money, just like opening a coffee shop without paying rent. Manufacturers with years of experience will also have an advantage, as they can do many projects well. However, Lu Hongyan believes that they will also feel increasing competitive pressure.
From the perspective of competition results, in 10 or 20 years, some companies will emerge, while others will disappear. The probability of disappearance of second - and third tier manufacturers is definitely higher, and those who are easy to survive are often the top. However, the characteristics of cultural and creative companies do not necessarily mean that second - and third tier companies will disappear. Taking the recently popular "Black Myth: Wukong" team as an example, Lu Hongyan said that they are now top tier manufacturers, but in 2020, they may not be a new team with much popularity.
Everyone has the opportunity, but it will definitely be very difficult to seize it, "said Lu Hongyan.
Among the top 10 manufacturers, Zhongxu Future and Perfect World, whose performance has turned from profit to loss, are more prominent. Zhongxu Future is the parent company of Greedy Games. In the first half of the year, its revenue decreased by 5.1% year-on-year, with a net loss of 385 million yuan, compared to a net profit of 300 million yuan in the same period last year. Zhongxu's future revenue mainly comes from legendary games such as "Original Legend", which have entered the later stages of their lifecycle and are facing problems of user churn and slowing revenue growth.
On the other hand, Perfect World, which is in a period of transformation and turbulence, was once one of the top five manufacturers with nearly 10 billion yuan in revenue. In the first half of this year, its revenue was 2.7 billion yuan, a year-on-year decrease of 38%, and its net loss was 177 million yuan. Perfect World stated that several of the company's in operation games have experienced a decline in revenue due to the impact of product lifecycle. Additionally, the company has adjusted its product layout, conducted talent echelon sorting and personnel optimization, resulting in related expenses. In addition, during the reporting period, Perfect World's "One Punch Man: World" was publicly tested in multiple countries and regions overseas, but overall performance did not meet expectations.
In July of this year, Perfect World announced that both the CEO and co CEOs had resigned. The semi annual report mentioned that according to the development needs of the company and in line with the project sorting at the business level, "the company has made corresponding adjustments to the management team to make the job matching of the management team higher
As a result, many companies that have not yet appeared in the top 10 are also declining. Lu Hongyan believes that the gaming industry has entered a mature stage from its infancy. "Games are still far above the average profit of the entire industry, but as time goes on, it will become closer and closer to the average profit of the entire industry
Tencent President Liu Chiping mentioned in this conference call that Tencent performed well in the second quarter, but the challenging business environment of the gaming industry in the past few years cannot be ignored. For example, the market and players' expectations for new games are increasing, and a new game must have very high quality or obvious differentiated gameplay to attract users. He believes that the gaming industry still has great potential for development, but it is cyclical, and once creativity stagnates, the industry is prone to a downturn.
As the CEO of Thunder Games, Zhai Jian has been keeping an eye on game investment. He has found that in the primary market of games, he can still encounter some good teams after careful observation, but there are not many teams, and the overall scale is much smaller than before. "The funds are basically industry funds, and external funds should be basically gone
Zhai Jian believes that the difficulty of investing in this industry has increased macroscopically, "which means that the winning rate has decreased and the odds have increased. Therefore, it should be seen that there has been an overall decline in both the amount of funds and the willingness to actively invest
In fact, the global gaming industry as a whole is relatively sluggish, and the wave of layoffs sweeping the global gaming industry has not stopped. Game Industry Layoffs will provide real-time updates on global layoffs in the gaming industry, with the latest number of layoffs reaching 11500, exceeding the total number of layoffs in the entire gaming industry in 2023 (approximately 10500).
According to the "Games Market Trends to Watch in 2024" released by Newzoo, a game market research and data analysis company, the global gaming market revenue is expected to reach $189.3 billion in 2024. The report shows that the global gaming market experienced a recovery in 2023 and is expected to grow slowly in 2024 and beyond. From 2021 to 2026, the average annual compound growth rate of the entire market is expected to be 1.3%.
Lu Hongyan believes that the downturn in the global gaming industry has nothing to do with technological innovation or macroeconomics. "It can only be said that the gaming industry is becoming increasingly fierce in the future, and the difficulty and requirements for making products are becoming higher and higher. It is normal to feel confused in this situation
The confusion overseas is not actually due to macroeconomic issues. Lu Hongyan believes that many Chinese manufacturers are intensifying competition by going abroad, and everyone has entered an anxious period early. "Simply put, there is too much supply, making it harder for good products to stand out
Industry searches for new stories
Game developers are all looking for new stories, and AIGC is the most attractive one, with few companies not mentioning AI in their financial reports. Another topic is single player games. Recently, "Black Myth: Wukong" has driven the popularity of single player games. However, as a traditional gaming direction, it may be difficult to become a new story.
Back in 2016, Lu Hongyan stated that he would not approve of the direction of "Black Myth: Wukong". At that time, the number of Steam users in China was less than 10 million. "Although there was significant growth in the later period, our judgment at that time was that there were relatively few truly traditional single player players among Steam users. With such a large number of users, the project's performance after launch would not be ideal
After the release of "Black Myth: Wukong", Lu Hongyan expressed that he has gained a new understanding of the user base in the single player market. "I think we can increase investment to support producers in achieving their dreams." However, he said that he will not plan to invest too much in single player games just because of the popularity of "Black Myth: Wukong", but will provide more support to producers who choose this track.
Manufacturers have been talking about how AI can be applied to games for two years, and its application in art painting and intelligent NPCs has become quite common.
Lu Hongyan stated that Jibit has been using AI related tools. On the one hand, in terms of AI drawing, the current AI tool technology is relatively mature and has advantages in speed and price. The team will let AI replace outsourcing to complete some relatively simple and repetitive tasks, thereby reducing costs; On the other hand, in prototype design, AI tools are also used when planning to describe prototypes to art, which can make the description clearer and convey requirements more clearly.
Some fresh content in the financial report is AI native gameplay. Giant Network mentioned that the AI laboratory, in collaboration with the "Space Kill" project team, has developed the "AI endgame challenge" gameplay, which is based on the Multi Agent Large Model (Multi Agent LLM). Players engage in battles with AI and need to pass levels to continue playing. The Multi Agent game technology framework is the core support for this AI gameplay.
In the issuance process, the management of Huiliang Technology mentioned at the investor communication meeting that with the launch of GPT-4 last year, AI has brought about changes to the entire advertising process. "Currently, it has not been reflected, but technically it has a possibility. Models can better understand multimodal information, including images and videos." In the future, big models can conduct comprehensive analysis of the performance of the entire industry and good ideas like humans, form a research result, and then generate creative materials for intelligent advertising based on this result.
The management believes that with the maturity of multimodal capabilities, the value of generative AI in the field of game marketing will be unleashed in the coming years, and over 90% of customers in the market can gradually replace manual advertising with AI, resulting in significant efficiency improvements.
In addition, there are also many highlights of AGI investments by game developers. From the disclosure of financial reports, Sanqi Interactive Entertainment has placed bets on many large model companies, directly or indirectly investing in companies such as Zhipu Huazhang, Baichuan Intelligence, Moon Dark Face, and Silicon Core Technology. In the AI+computing field, it has invested in companies such as Jixin Technology, Huixi Intelligence, and Huayi Quantum. Sanqi Interactive Entertainment stated that it will focus on investing in areas such as pedestal models, AIGC, AI+computing power, and interactive sensing.
It is still difficult to estimate to what extent generative AI can reduce costs and increase efficiency. The data mentioned in this financial report and conference call can serve as a reference.
NetEase executives revealed during the earnings conference call that their self-developed AI technology has been applied to the entire process of game industrialization, and AI technology has improved the work efficiency of key links by up to 90%. In addition, NetEase has also included an assessment of AI applications in its new recruitment process.
Sanqi Interactive Entertainment's financial report mentioned that AI technology has improved the operational efficiency of various aspects of the company. Through training on our own art assets, we have developed and distributed AI-2D drawings for various business lines, with a monthly output of over 280000 sheets. In the process of character artwork, Sanqi Interactive Entertainment stated that implementing a new AI based 2D art production process can save an average of 60% -80% of work hours, and the platform can also produce over 80 videos and 200 audios per week.
Jiang Xiaoxiao told First Financial that the current progress of AIGC's implementation is mainly reflected in improving game development efficiency, enhancing content creation capabilities, and promoting personalized experiences. For example, through AI technology, developers can generate game scenes, character designs, and plot content more quickly, significantly reducing development cycles and lowering labor costs.
On the other hand, although AIGC makes some repetitive and technical tasks easier, game development still requires core abilities such as creativity, planning, and user experience design, which cannot be completely replaced by AI. Jiang Xiaoxiao believes that the application of AIGC in game development is still in the development stage and needs time to be improved and popularized.
When it comes to whether AI will completely change this industry, Lu Hongyan's answer is "hard to say", and he still uses AI as a tool.
Most likely, we won't be the first to develop AI native games. It could be a lab that produces AI first, and then others will build on their foundation, "said Lu Hongyan." We haven't seen any research results that are particularly close to practicality yet, but it's hard to say if there will be a sudden explosive growth