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“Are you just looking to make a living? Then China has plenty of opportunity”

Tom van Dam on NetEase's westward journey, and the problems facing companies with designs on China

If NetEase was a European company, its brand would be as familiar to you as Supercell. If NetEase was a US company, our editorial team would follow its dealings as closely as EA or Activision Blizzard. But NetEase is a Chinese company, one of the largest in a games market that is discussed more than understood, so even readers of a site such as this might know little more than its name. That is about to change.

In the last few years NetEase has grown at an incredible rate. In 2012 it earned 8.2 billion in revenue - around $1.3 billion at the current exchange rate - of which 3.6 billion ($550 million) was net profit. In calendar 2015, just three years later, it earned 22.8 billion ($3.5 billion) in revenue, taking home a 7.4 billion ($1.1 billion) net profit. That's a larger annual profit than either EA or Activision Blizzard, and at its current rate of growth NetEase may have surpassed both in terms of revenue by this time next year. The company's stock is similarly ascendant, more than tripling in value between the end of 2012 and the end of 2015.

"China is a big enough market on its own... There really wasn't much reason for us to try anything else"

And yet NetEase remains obscure outside of China, even among people working within an industry they all too readily describe as "global." According to Tom van Dam, the company's head of mobile business development, meeting with companies in Europe and North America often meant, "starting from scratch," as recently as two years ago, when NetEase's annual revenue was already on a par with Ubisoft. "We were a huge company, completely China focused and very successful on PC," he says when we meet at Casual Connect Europe. "The only thing people might have heard of was our co-operation with Blizzard."

This knowledge gap regarding Chinese companies was to some extent self-created. Being a dominant force in free-to-play PC MMOs in the world's most populous country brings with it a great deal of financial success, the kind that a company from Europe, the US or just about anywhere else would only realise through the plate-spinning demands of global expansion. "China is a big enough market on its own," van Dam says. "We made a good amount of revenue, so there really wasn't much reason for us to try anything else."

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Tom van Dam, NetEase

The incentive to do so emanated from a larger trend, as cheap smartphones arrived in China in plentiful supply. The country's gaming culture had been focused on PC for almost as long as it had existed, but upgrading hardware was never a significant aspect of consumer behaviour. Indeed, due to the ban on consoles, smartphones were the first gaming technology to expose the stasis in PC gaming hardware, where innovation was focused on business models and accessibility rather than performance. For the first time, Chinese people were embracing a regular hardware upgrade cycle in large numbers.

Four years ago, van Dam says, smartphone hardware in the country lagged behind more established markets in the west, but, "two years ago it reached a significant level, and now we're at the point where Chinese manufacturers are putting out hardware that costs a third of the average western phone. Samsung Galaxy, iPhone, they cost six, seven, eight hundred euros. You can get a similar spec phone in China for two or three hundred, which is able to play the same games."

The key to NetEase's success in mobile has been Fantasy Westward Journey, an IP that started as a PC MMO back in 2001. The mobile version was an instant hit, immediately rising to the very summit of the Chinese App Store's top-grossing charts and steadfastly refusing to budge - as App Annie's data (represented in the graph below) clearly demonstrates. Indeed, Fantasy Westward Journey is still the top grossing Chinese iOS game today, almost a year after its initial release. Another game based on a NetEase IP, Westward Journey Online, is at number three after a similarly consistent run of success.

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Four years ago, as China started to open up to smartphone hardware, NetEase made 85 per cent of its money from games, with almost 95 per cent of that coming from PC titles. Today, games contribute a similarly large percentage of the company's total revenue, but, van Dam says, "the majority of our revenue now comes from mobile. Within two years we shifted from being a PC-only company, to... well, our new ventures are now exclusively mobile."

"The majority of our revenue now comes from mobile. We shifted from being a PC-only company within two years"

NetEase could well apply the same thinking to mobile as it did to PC. China is already the most valuable mobile games market in the world and, along with Tencent, NetEase is at its pinnacle. Domestic growth will almost certainly drive the company even further forward, but signals that the time for international expansion had arrived were not difficult to find. For example, van Dam recalls his surprise at seeing the original, Chinese-language version of Fantasy Westward Journey become a regular fixture in the top 50 grossing games on the US App Store - see the App Annie graph below. With no marketing or UA spend, the NetEase brand and its IP had still managed to find a global audience, presumably within the Chinese diaspora.

"Translating those games into English would be a huge undertaking," he says. "Plus, we don't really think that those games will appeal to a Western audience. It's very nice to see [the game in the US charts], but I don't think we'd benefit from the translation. Instead, we have a lot of development that's going to focus specifically on the Western market."

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According to van Dam, NetEase has ten games ready to make the transition to Europe, North America and the rest of the world, with dozens more that will be considered depending on the fortunes of that first wave. "We've got so much content that's almost ready to go," he says. "It's more about, 'How do we do it in the right way?'"

For now, that means going it alone, eschewing the various beneficial shortcuts that come with finding local partners in favour of a slower process of experimentation and building knowledge internally. At this point, van Dam says, revenue is almost a side issue, because anything NetEase does make as it tries to understand these new markets will still be, "a few drops in the bucket," relative to its domestic business.

"We did a UA campaign, spending $100,000 to buy users. I can't recall exactly, but I think we got $2,000 back"

"Maybe two years from now we might come to the conclusion that we need to go with a partner or acquire the expertise. But we don't have that need right now. We can afford it... We're at the stage where we're not sure how it works, but we're not convinced we'll need a third party. We're a very learning focused company. Our brand name is important as well, so giving that to someone else?"

That last comment highlights a contradiction, one that probably doesn't sit well with the CEOs of western companies looking hungrily at China's 1.3 billion people. When a company like NetEase chooses to expand beyond its increasingly lucrative domestic market, working with a partner is simply an option, to be selected or discarded based on the nature and timeframe of its ambitions. When a company from Europe or North America wants to make a similar move towards China, however, working with a local partner - and thereby signing away a significant portion of revenue - is essential. Even a company the size of Activision Blizzard with a brand like Call of Duty must adhere to that rule, and though COD Online is still a new revenue stream, it's safe to assume that Bobby Kotick would prefer the independence, ownership and freedom that NetEase is embracing in its own global expansion.

Ultimately, the eastward journey now being undertaken by western businesses will solidify the dominance of China's incumbent superpowers. The necessity of working with a Tencent (or, indeed, a NetEase) combined with a top 50 mobile chart in which only five games were developed outside of the country - three of them by Supercell - suggests that China is a land of limited opportunity for foreign companies. Indeed, according to van Dam, the way Chinese gamers engage with products is entirely different to gamers in other countries, severely undermining the efficacy of established methods for building an audience.

"Chinese gamers get most of their news about what's happening abroad through the Chinese media," he says. "There's very little pro-activity among Chinese users to go out and find games. Clash Royale launched and it was widely reported on by Chinese games media, so Chinese gamers will check it out. It's not because there's massive awareness of the western market and Supercell.

"You have to go for China, and if you want to play in that top segment you'd better go all in"

"Direct user acquisition also isn't very successful in China. You can't buy users like you can in the west... For example, we did a UA campaign, spending $100,000 to buy users. I can't recall exactly, but I think we got $2,000 back. Those users don't monetise, and they can cost up to €50 euros a user."

So what, exactly, is the scale of the opportunity for western companies in China? For van Dam, the answer is contingent on two factors: how early and how fully you commit to the challenge, and the revenue you expect from those efforts. While the issues outlined above might seem intimidating to a smaller company, it's the larger organisations expecting to replicate existing success that are more likely to be disappointed.

"Are you just looking to make a living? Then China has plenty of opportunity," van Dam says. "Just get distributed a little bit and you can earn some money. If you want to make a good profit, then it's getting a bit tougher.

"Are you 10 people looking to make money? 100 people looking to make money? 1,000 people? There are many different levels, but it's not a market you can do additionally. You have to go for China, and if you want to play in that top segment you'd better go all in."

GamesIndustry.biz is a media partner for the Casual Connect conference. Our travel and accommodation costs were provided by the organiser.

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