Stakes High as China’s Game Makers Gamble on Overseas Markets

As large and small developers attempt to expand abroad in the face of a tough domestic market, industry insiders warn of soaring costs and culture clashes.

“Go global or it’s game over.” It’s a phrase often heard in China’s video game industry these days.

For many Chinese game developers, overseas expansion is seen as their only chance of survival. “More so now than ever,” said one industry insider. “Last year, virtually every company was looking abroad.”

Tightening regulations at home are one key factor. The General Administration of Press and Publication’s decision to restart its approval process for domestic online games in mid-2022, after a nine-month suspension, and to issue licenses to imported games for the first time in over a year, provided a boost to the industry. However, the prospect of more licensing freezes, as well as policy adjustments to prevent minors spending too much time gaming, could make life difficult for developers looking to release new games for some time.

While the global gaming market has continued to grow, the domestic scene is close to saturation. A report by the China Game Industry Research Institute showed that, in the first half of 2022, China’s gaming population shrunk by 0.1% year-on-year to 670 million, while market revenue fell by 1.8% on the previous year to 147.79 billion yuan ($21.9 billion).

On the upside, overseas companies — whether focused on PC or console gaming — have been relatively late to mobile gaming, giving their Chinese competitors an edge.

According to third-party data site AppMagic, seven of the 30 top-earning mobile game developers in 2022 were Chinese. Tencent, NetEase and miHoYo claimed the top three spots, having generated a combined $10.35 billion in annual revenue.

Leveling Up

According to Tencent’s Q3 financial report for 2022, the company’s domestic gaming revenue fell by 7% year-on-year, while its overseas revenue grew by 3%. This came in a year when Tencent was particularly aggressive in its overseas expansion.

One strategy has been to hedge its bets through investments and acquisitions. According to a CITIC Securities report, of the 12 investment and acquisition projects Tencent carried out in the games sector last year, ten targeted overseas companies. This included buying shares in Triternion, the developer of “Mordhau,” and partnering with Sony to purchase a 30% stake in FromSoftware, the developer of “Elden Ring.”

In addition, the company set up several overseas research and development bases, including two studios in California: LightSpeed LA, to develop AAA games, and Uncapped Games, which will focus on real-time strategy games for PC.

Tencent’s domestic studios have also taken steps to globalize. “Some divisions of (Tencent subsidiaries) TiMi and Lightspeed have already relocated to Singapore,” said Wu Xulan, former director of overseas operations for NetEase Games.

In the meantime, the company has spent big bucks on securing distribution deals to increase its global reach, such as paying as much as 200 million yuan to Perfect World for the rights to distribute “Tower of Fantasy” overseas. “The competition for high-quality titles is ferocious,” said Feng Qiang, an industry insider working in distribution. He said that once Tencent secures the rights to a game, it spares no expense in marketing. “Having seen how much it has spent on elaborate advertising campaigns, we figure that some of those projects must lose money — but clearly, they’re willing to absorb these losses in the hope of gaining a stronger foothold overseas.”

In 2022, NetEase invested in at least ten overseas businesses, mostly targeting the AAA gaming market. The company also increased the number of its own international studios, opening four more to take the total to six: three in Japan, two in the United States, and one in Canada.

NetEase’s expansion strategy is to target globally prominent intellectual property. Having already secured the rights to the Harry Potter series and “The Lord of the Rings,” it is now working on deals with Marvel and Warner Bros. Interactive Entertainment. “NetEase is increasingly opting for blockbuster projects,” one industry source said. However, results so far have been mixed. “Diablo Immortal” was a resounding success, but “The Lord of the Rings: Rise to War” and “EVE Online” failed to meet expectations.

Compared with Tencent, NetEase has not focused as much on distribution. “It’s an old-school mentality: a good product is everything,” said Wu Xulan. “Their efforts are mainly centred in Japan; not much movement in Europe and North America yet.”

Though NetEase has spent huge amounts of money, the benefits of its endeavors last year are not yet obvious. In 2022, the company’s global mobile games revenue reached $2.29 billion, $600 million of which was generated by “Fantasy Westward Journey,” a game that went online back in 2015.

The overseas studios that the company has invested in or acquired could take years to deliver new products. Yet observers say what NetEase really needs is fresh output, and soon.

High Scores

The unpredictable nature of the video game industry is a factor every developer has to contend with. For example, one of the biggest hits of recent years has undoubtedly been miHoYo’s “Genshin Impact,” which topped the sales charts in more than 30 countries including China, Japan, and the United States. But beyond praising the game’s quality, few within the industry could confidently pin down exactly why it’s so successful.

37Games, another player on the rise, began its global expansion as early as 2012 with the release of “Puzzles & Survival,” an innovative fusion of the match-three and simulated life genres. The warm reception that title received saw the developer gain prominence, and in the past two years it has achieved a global turnover of 5.6 billion yuan. Veteran game producer Wang Jing said that the success “goes to show that they’ve accumulated enough insight to crack the overseas market.”

That said, the next challenge is sustainability. Feng Qiang said he expects 37Games to encounter the same problems now facing Lilith and FunPlus.

Lilith made its overseas debut relatively early, quickly carving out a niche by going all-in on two genres: card games and simulators. However, its level of innovation has seemingly trailed off. Downloads continued to dwindle throughout 2022, with revenue mostly coming from products on the market for two or three years, such as “Rise of Kingdoms” and “AFK Arena.”

“King of Avalon” by FunPlus was the first Chinese game to rank No. 1 in terms of revenue on Apple’s App Store. In recent years, despite a conscious effort to continue to innovate, it has begun to lag behind.

Wang Jing summed up what these developers have in common: “When they have a product that performs well, they just content themselves with basic updates (such as revising tutorials and other content for new players). When they distribute in different countries and regions, they do only the bare minimum in localization. It’s not innovative enough.”

Market Gamble

Even if their plans to go global end in failure, the top Chinese developers know they can survive as long as they have a solid range of successful titles back home. However, for smaller companies, breaking into the harsh domestic market has become virtually impossible, leaving them with no option but to brave the cut-throat conditions abroad.

“The Southeast Asia market has gotten to the point that you now need millions of yuan to gain any kind of foothold. In North America, it’s not even worth trying to launch a game without a minimum budget of tens of millions of yuan,” Wu Xulan said. “Smaller developers are living in constant fear.”

Wu Feng has been working with small and medium-sized companies in the industry for years. He said that it’s common for companies to spend hundreds of thousands of yuan on a launch that doesn’t work out and then go bust.

Even something as straightforward as localization has many developers struggling, he said. For example, Arabic is read right to left, while Chinese and English are viewed left to right, meaning that translation into certain languages requires adapting the user interface. Some try to cut costs by using machine translation, with predictable results for the user experience. “Southeast Asia is very different from, say, Latin America, but most developers don’t have the resources to carry out that kind of market research,” he added.

A potentially greater challenge to smaller companies is user acquisition. Until recently, to attract new players, mobile game developers have relied on purchasing traffic data to use when creating advertising campaigns and promotional offers, increasing the likelihood of a decent return on their investment. However, this model is becoming increasingly hard.

A game industry worker introduces their oversea product in Chongqing, 2021. He Penglei/CNS/VCG

A report by Mobvista and Sensor Tower shows that since the iOS 14.6 update in May 2021, the cost of advertising in blockbuster mobile games has increased by 78%.

Wu Xulan said that user acquisition is “essentially a black box” — it can be hard to explain why it works for some but not others.

“Chinese companies are eager to apply the domestic playbook. But most of the time, it doesn’t quite work,” added Wu Feng. “In China, you can post exactly the same promotional content on multiple platforms and usually at least one of them will get you actual paying users. But overseas, it’s often counterproductive.”

In 2022, Apple and Google also both updated their privacy protection policies, resulting in it becoming more difficult for developers to purchase data on target userbases. “In the past, companies would buy traffic in rapid cycles: Once one userbase had been exhausted, they would move on and invest in another,” said Wang Jing. “It’s a lot harder now to accurately target users.”

Wu Feng said Apple’s revised policy means that not only is it no longer possible to access the behavioral data of a single user on a certain app, but even the aggregated data of, say, ten people is off limits. However, according to his information, the policy could be dialled back.

The next important issue for developers is long-term localization strategies. “You need to connect with the local culture. For example, Christmas isn’t celebrated in the Middle East, so including Christmas activities in a game wouldn’t be appropriate there,” Wu Feng said, adding that this poses a tremendous challenge for studios. Wu Xulan agreed but believes many developers lack the bandwidth to think these things through. “All they can see is that, if they don’t go overseas, they’ll go bust,” he said.

Feng Qiang said that for local developers lucky enough to be allowed to launch in China, then the domestic market will continue to be the most profitable market. “If you go to great lengths to launch a product abroad only for it to catch on in just one region, then you usually still lose money,” he said, which makes it a tricky bet.

With the old user acquisition model pretty much a thing of the past, Wang Jing said that developers hoping to conquer unfamiliar markets ultimately need to find a way to create games that players across multiple regions can enjoy.

“Going global merely changes the venue. It still requires hard work.”