Beijing, November 14th (Reporter Sun Ruxiang) - It has been a week since the exposure of the corruption case involving personnel from relevant departments of NetEase. The latest news is that all personnel mentioned in the previously circulated anti-corruption list have resigned.
On the same day, NetEase released its third quarter report, which showed that its net revenue for the quarter was RMB 26.2 billion, a year-on-year decrease of 3.9%; The net profit attributable to the parent company was RMB 6.5 billion, a year-on-year decrease of 16.67%.
After the commotion, the attention of the public opinion on the corruption case of NetEase has become indifferent, but it does not mean that the discussion of the impact of the case on NetEase, as well as the market's deep thinking on NetEase's innovation and profitability, will also stop.
The consensus among experts interviewed by China National Radio Capital is that the impact of the corruption scandal is limited and not enough to shake the foundation of NetEase. More game players who have not been involved in corruption, as well as game products that have already formed a matrix, can keep NetEase's basic market stable.
At the same time, experts believe that there is no doubt that the outbreak of the corruption nest case must be a major internal control problem of NetEase, which will inevitably cause great damage to the overall image of the enterprise. NetEase's marketing channels all need to be restructured, and the nest case may bring emotional impact to the team and may also generate various unstable factors. It is unknown whether it will extend to other departments. All of these are the challenges that NetEase needs to face at present.
Looking further ahead, professionals assert that what can truly make NetEase fall is the significant drop in product quality caused by insufficient innovation.
In 2024, whether in the industry, market, or among players, there have been many criticisms of NetEase's gaming industry, including "not many 'bestsellers'", "the dividends have come to an end", "the quality is still in 2014", and so on. Experts believe that the above statement is somewhat in line with the reality, which is a microcosm of the entire Chinese gaming industry before "Black Myth: Wukong", but it is more evident on NetEase.
At the end of the day, gaming is all about IP competition. And our innovation in gaming IP is precisely the weakest point. Experts say that the most core problem is that game developers lack respect and research for game content.
In addition to insufficient innovation, NetEase is also facing growth pressure, and its performance in the first half of 2024 can be summarized as "increasing revenue without increasing profits". At the same time, the stock market has also timely responded to the decline in stock prices. According to Wind data, NetEase Hong Kong stock closed at HKD 119.500 per share on November 14th, a decrease of 38.65% from the high point of HKD 194.781 per share on February 11th, 2021.
Analysts believe that with multiple problems overlapping, it will be difficult for NetEase to completely emerge from the haze.
On November 9th, CGTN Capital submitted an interview request to relevant personnel of NetEase, but as of press time, there has been no response.
The impact is limited and not enough to shake the foundation of NetEase
Whether it is industry experts, professional players, or securities researchers, they all believe that the impact of the corruption scandal on NetEase is limited and not enough to shake the foundation of NetEase Games and even NetEase.
In this corruption investigation incident, the information conveyed more reflects NetEase's' proactive approach ', including internal proactive investigation of corruption, proactive response, clear reporting, and increased stern statements, among others. According to professional analysis, this undoubtedly adds points to the image and occupies a favorable position in the public opinion field.
As a gaming giant, NetEase's gaming business is its main source of revenue. Whether the outbreak of this case has touched the foundation of the gaming industry and how much impact it will have on NetEase may be more worthy of attention. Public data shows that in the second quarter of 2024, NetEase's net revenue from games and related value-added services was RMB 20.1 billion, accounting for nearly 80% of its total net revenue.
The corruption case has little impact on NetEase. The main reason is that NetEase's gaming sector is already very mature, and anyone can handle it. "The chief analyst of a leading securities media company confidently stated that NetEase's crackdown on corruption is twofold: firstly, it has reasons to take action, and secondly, it has prepared for future actions.
The foundation of games still lies in the quality of the game itself, or in the consumers themselves. From the information disclosed so far, it mainly remains in the marketing and promotion department, which directly affects the promotion effect of the product and will not affect the game itself. "Liu Yi, a postdoctoral fellow in cultural economics at Central University of Finance and Economics, said in an interview with CGTN Capital Eye that if NetEase's game products are indeed good, able to ensure quality, user experience and rights, then the impact of this incident may not be significant.
Game industry analyst Zhang Shule holds the same view, believing that NetEase's basic market will still remain stable.
The corruption scandal may indeed cause NetEase to lose some of its gaming backbone, but it will not change NetEase's tone in the gaming field. More game personnel who have not been involved in corruption, as well as game products that have already formed a matrix, can keep NetEase's basic disk stable. "Zhang Shule said that since the era of" Journey to the West "and the rise of online games in the 2000s, friends have been on the fast lane of agency. NetEase Games chose to research and innovate independently, which is the foundation of NetEase. This choice ultimately made it one of the" dual strengths "of domestic games.
Zhang Shule believes that this nest case is only a short-term impact and may bring a certain "pause" to the current work of some product lines of NetEase. However, as a "antivirus" for NetEase to break its arm and seek higher goals, the benefits outweigh the drawbacks in the long run.
It is worth mentioning that according to the analysis conducted by China National Radio Capital, the three individuals involved, Xiang Lang, Jin Yuchen, and Xu Ao, have all been responsible for the distribution of the "Journey to the West" series, which has always been the most profitable game on NetEase. According to rough statistics from China National Radio Capital, from 2015 to the first half of 2024, the net revenue of "Journey to the West" has exceeded 8 billion US dollars.
So, what impact will this case have on the "super single product" of "Journey to the West"?
Liu Yi believes that "Journey to the West" has been a successful game that has been tested for a long time. From the perspective of users, the impact of this event may be limited, unless it is due to personnel changes that affect the operation and maintenance of the game, which may have an impact on players and shorten the game's lifecycle.
The 'Journey to the West' IP, as the oldest, most influential, long-lasting, and online sequel product line among domestic original games, is not easily defeated by the problems of a few people. Zhang Shule emphasized that the tone, inertia, and innovation drive of this product line have become mature, and there may be some 'pauses' in development, but the impact is not significant.
The challenge still lies in restructuring all marketing channels
The outbreak of this corruption case may not have harmed NetEase's foundation, but it will still pay a considerable price.
Without a doubt, the outbreak of corruption cases is definitely due to a major problem in NetEase's internal control, which will inevitably cause great damage to the overall image of the company, "Liu Yi pointed out.
At present, the personnel involved are mainly concentrated in the marketing and promotion department, and what is even more worrying is whether it will extend to other departments.
Zhang Shule introduced that the gaming industry, as a form of the entire digital media industry chain, can be said to have various management loopholes in every link from research and development, operation to marketing, such as false advertising in marketing, outsourcing departmental projects to external companies established by internal personnel in research and development, etc.
As one of the longest running gaming companies in China, NetEase is indeed more prone to such hidden dangers and less likely to be discovered. Therefore, this scandal may indeed have a greater impact, "said Zhang Shule.
NetEase is a gaming company, and it is unlikely to extend to core departments such as research and development. However, there are also many companies in history that have played themselves to death, so it is not easy to draw a conclusion at this time, "Liu Yi added.
Even more deadly could be the damage to marketing channels and product promotion. NetEase announced that 27 companies related to fraud, corruption, and illegal activities have been included in the list of entities that NetEase will never cooperate with.
The marketing and promotion channels have been severely affected, which means that advertising suppliers need to reshuffle and completely restructure. Liu Yi believes that this will make it difficult to see effective voices in the market in the short term. In the current fiercely competitive environment, NetEase still faces great challenges in quickly establishing a brand new marketing network.
Liu Yi further reminds that the market is constantly changing, and if not handled properly, NetEase is likely to lose its current market share, resulting in a decrease in ranking.
According to the analysis conducted by China National Radio Capital, NetEase ranked among the top 15 mobile games in China in terms of revenue in the first half of the year. The Battle business unit involved, "Fantasy Westward Journey" and "Identity V," ranked second and fourth with revenues of 3.9 billion and 1.5 billion respectively, while "Journey to the West" ranked 13th with revenues of 430 million. What will happen to the top mobile games mentioned above in this case?
Zhang Shule believes that the above-mentioned games on NetEase have been in operation for many years and are running on track as a whole. Their inertia is strong, and some "interludes" during the operation process, as long as there are no "forced braking" events such as deleting databases, will not have too much impact due to the case issues.
China National Radio Capital also noticed that there were reports that the team of "Journey to the West" had quickly held a meeting to calm employees' emotions.
I personally think that such a thing will have a significant impact on the internal team and the overall morale of the employees. Therefore, it will be a challenge for NetEase's corporate governance in the future, "said Liu Yi.
Zhang Shule believes that the nest case will indeed bring emotional impact to team members and may also generate various unstable factors, which is a test of NetEase's enterprise management ability.
Innovation capability is the value foundation of enterprises
Industry insiders generally believe that although NetEase did not suffer any harm in the corruption case, there are hidden concerns. The market has criticized NetEase's innovation ability in recent years.
The only thing that can truly make NetEase fall is the significant drop in product quality caused by insufficient innovation, "said Zhang Shule bluntly.
Zhang Shule further explained that NetEase's position has been formed by continuously iterating and innovating categories and continuing IP over the past 20 years. If innovation stops, it will inevitably lead to difficulty in maintaining product quality. If the entire NetEase game presents this phenomenon, it will cause various problems in the current maintenance of seemingly diverse and high-quality games, and the development of sequels will continue to be delayed or short-lived after launch due to quality issues. That is NetEase's darkest moment.
At present, it seems that NetEase does have such hidden problems, and there have also been issues with new works not meeting the standards and being taken offline shortly after being launched, "said Zhang Shule, but there is no sign of comprehensive spread. Its overall innovation vitality and "hot selling" ability still exist.
However, some professionals believe that from "Egg Boy Party" to "Reverse Water Cold" mobile games, NetEase's previous "hot selling" game products have been able to grow rapidly, and most of them have benefited from seizing opportunities. Entering 2024, the competition in the industry intensifies, and the reality of NetEase's "insufficient new 'hot products'" is further exposed.
The "Shooting the Condor Heroes" released this year is adapted from Jin Yong's famous martial arts novel. NetEase has high hopes for this and invested 1 billion yuan, with a team of 600 people working for 6 years. However, in reality, according to DianDian data, the daily revenue of "Shooting Eagle" on the iOS platform was 220000 US dollars on its first day of release, less than 1/6 of the same period as "Reverse Water Cold". Since then, the daily revenue has also been declining. Users' feedback also shows that the game itself has quality problems, such as blurred picture quality, stuck mobile phone, complex playing methods, and young characters, which have been widely roast by players.
Liu Yi said that to be fair, the external opinions on NetEase's "not many 'hot products'", "dividends at the end", "quality is still in 2014" and so on, to some extent, conform to the reality. This is a microcosm of the entire Chinese gaming industry before "Black Myth: Wukong", but it is more evident on NetEase.
Liu Yi believes that "the dividend has come to an end" essentially means that the vitality of IP is deteriorating and moving towards its demise. The innovation of games does not necessarily mean the emergence of new games, but can also be the new growth of old games.
We need to move from the era of 'explosive products' to the era of time dividends, "Liu Yi said. Innovation aimed at' explosive products' is something that can be encountered but not sought after; Innovation driven by time is the methodology that every enterprise can replicate. An IP that does not aim for the long term is ultimately not a long-term solution.
We are used to adapting classical novels, online novels, and even foreign games, but we are not willing to tell a good story, just superficially and superficially. Liu Yi said that the trend of division of labor in the gaming industry is becoming more and more obvious, with technology integration, platformization, and AI. The advantages and thresholds of big companies in technology and art are slowly crumbling. This has made the competition in games increasingly focused on the IP itself, whose core is to occupy the mind.
At the end of the day, gaming is all about IP competition. And our innovation in gaming IP is precisely the weakest. "Liu Yi further analyzed the reasons for the lack of innovation in the gaming industry, stating that the core problem is that game developers lack respect and research for game content.
In addition to lacking innovation, NetEase is also facing growth pressure, and its performance in the first half of the year can be summarized as "increasing revenue without increasing profits".
According to the financial report, NetEase achieved a net income of RMB 52.338 billion in the first half of 2024, a year-on-year increase of 6.69%. Although it still maintains growth, the growth rate continues to decline. The net income growth rates from 2020 to 2023 were 24.35%, 18.92%, 10.15%, and 7.23%, respectively, which have dropped to single digits. The profit performance is even less satisfactory. In the first half of 2024, NetEase achieved a net profit attributable to its parent company of RMB 14.393 billion, a year-on-year decrease of about 4%, indicating significant pressure on its profitability.
The latest disclosed third quarter report shows that NetEase's net revenue for the quarter was RMB 26.2 billion, a year-on-year decrease of 3.9%; The net profit attributable to the parent company was RMB 6.5 billion, a year-on-year decrease of 16.67%.
From the perspective of gaming business, the performance of NetEase's existing games in the first half of the year seems to be unsatisfactory.
According to media reports, as one of the most popular games on NetEase, "Egg Party" has strengthened protection for minors. During the winter break in February this year, the daily revenue of the iOS version of "Egg Party" reached nearly 13 million yuan. However, at the end of the second quarter, the highest daily revenue fell to 5.29 million yuan. At the performance briefing for the first half of 2024, Ding Lei, CEO of NetEase, admitted that the user to revenue ratio of "Egg Party" is relatively low.
At the same time, the mobile game "Reverse Water Cold" launched in 2023 has topped the domestic download chart for several consecutive days. According to the 2024 Q2 report, the game's revenue has declined. NetEase also admitted in its financial report that "the net revenue of several mobile games has declined", ultimately leading to a month on month decline in gross profit of games and value-added services.
The stock market also responded in a timely manner. Data shows that as of the close of the Hong Kong stock market on November 14th, NetEase reported HKD 119.5 per share, a decrease of 38.65% from the highest closing price of HKD 194.781 per share set on February 11th, 2021.
Analysts believe that with multiple problems overlapping, it will be difficult for NetEase to completely emerge from the haze.