Tencent, NetEase Rivalry Threatens Smaller Game Developers
Qiu Zhili
/SOURCE : Yicai
Tencent, NetEase Rivalry Threatens Smaller Game Developers

(Yicai Global) August 7 -- Chinese gaming firms have found it hard-going during the first half of this year, with the exception of the biggest developers. For market insiders, there only exist three companies in the sector -- NetEase, Tencent and the rest -- while many feel that the industry has increasingly become a game only for the rich.

Overall revenue growth in the video game industry is at a historical low, and user number increases are slowing. Developers have put many new titles on hold citing unfavorable policies.

The leading players have clear advantages in terms of funding, game development, releases, sales channels, technology and data, resulting in ever-increasing market saturation. Some 17 of Apple's App Store's 20 bestselling mobile games in Greater China in the first half were from Tencent or NetEase, leaving only three spots in the ranking for other developers.

"To put it bluntly, large companies cancel more products in the first round of internal testing than all products released by a smaller developer," said Wang Xu, co-founder and chief analyst at industry research consultancy China Gamma. "Some products developed by major players are not profitable themselves but their value lies in the ability to stimulate user growth and boost uptake of high-revenue products."

"Most users flock to popular products with strong intellectual property, making traffic generation problematic for some less popular titles," Wang added.

Falling Short

The overall gaming industry is suffering from three big shortages in terms of products, traffic and users, Shanda Games Vice-President Tan Yanfeng noted. In the past, Shanda would launch some 100 new games every week during internal testing but the figure has dropped below 50 this year. Production capacity has been on the decline across the sector.

Weakening production is primarily attributable to higher access barriers and market concentration, making it harder for smaller game content suppliers to survive, Tan said.

The competition for traffic has shifted away from channel acquisition toward pricing, meaning that publishers have to pay higher prices to generate traffic. User growth is also close to hitting a plateau.

The total number of gamers in China grew by four percent on the year to 530 million during the first half of this year, while growth has been flattening since 2015, a recent market survey indicates.

"User growth is slackening in the gaming industry and new internet users prefer short videos and other entertainment products as a form of pastime to online games," Tan said. "On the other hand, all hardcore users are obsessed with major products and therefore pay little attention to new products emerging on the market."

The three big shortages are making marketing and user acquisition more difficult for many products, he added.

Going Abroad and Market Segmentation

Developers are looking for new battlefields after encountering the bottleneck on the domestic market. Looking abroad has become a popular choice for many game companies.

Foreign markets, particularly Southeast Asia, the Middle East, Africa and India, are the preferred destinations for many Chinese developers looking to build sales growth.

Overseas sales make up more than one-quarter of total revenues among almost 40 percent of major listed game developers from China, while 60 percent of them have achieved consistent increases in overseas earnings, a China Gamma report shows.

Overseas business volumes at Shanghai-based developer 37 Interactive Entertainment Technology have grown 15-fold in five years, indicating the massive market potential, Vice President Huang Xiaoxian told Yicai Global. The firm's gross earnings from foreign mobile game sales topped CNY1 billion (USD150 million) last year, accounting for about 15 percent of total revenue.

In addition to internationalization, many game companies are diversifying into smaller market segments to survive. For example, while ensuring core product operations and cash flow, IGG has diverted resources toward niche products such as casual mini-games and titles targeting female users.

Editor: William Clegg

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Keywords: Industry Analysis , Mobile Game Developer , TENCENT , Netease