NetEase

Games Strategy
2020

Asia Games Market Intelligence: NetEase Games Strategy

Profile
NetEase is a Chinese internet technology company founded in 1997 that provides services across
content, community, communication and commerce. It is the second largest video game company
in China, operating more than 140 mobile and PC games across a wide variety of genres. NetEase
is known for its high quality self-developed IP, for localising hit foreign games in China and for its
collaboration with leading global game companies to develop new titles based on licensed IP. The
company has a strong track record of working with partner companies such as Blizzard, Marvel,
Microsoft (Mojang) and Warner Brothers to localize existing titles and develop new titles, for
China and global markets. The company generated approximately $7 billion in games revenue
during 2019.

2020 goals:
1. Strengthen content creation capability
2. Build new studios and enhance existing studios
3. Retain user base and reach new users globally

In this report we examine NetEase’s strategy to grow its gaming business in 2020 and beyond.

NetEase is in a strong financial position, reported positive H1 2020 earnings

NetEase is the #2 video games company in China by revenue, behind Tencent, and according to
our estimates NetEase is now larger than heavyweights of the industry, such as Electronic Arts and
Activision Blizzard. With market cap of more than $65 billion, the company is valued around the
same amount as Nintendo.

NetEase financials for H1 2020

Revenue +/- % Operating Profit +/- %

RMB 35.26 billion -5% RMB 9.03 billion + 32.2%

($4.99 billion) ($1.28 billion)

Asia Games Market Intelligence: NetEase Games Strategy

NetEase Gaming segment for H1 2020

Segment Revenue +/- %

Online Games (Total) RMB 27.36 billion + 17.5%

($3.87 billion)
- Mobile Games RMB 19.43 billion + 15.7% YoY
($2.75 billion)
- PC Games RMB 7.93 billion + 22.3% YoY
($1.12 billion)


Q2 2020 was the 9th consecutive quarter with online games revenue exceeding RMB 10 billion, 8th
consecutive quarter where both PC and mobile games revenue have increased year over year.

NetEase is resilient. While China’s PC games revenue declined 4% YoY in 2019 because of the 2018
freeze on new game licenses, NetEase still had an increase of 13.7% YoY for PC game revenue that
year. Even during the 9-month freeze in 2018 NetEase grew total online game revenues 10.8%
YoY, defying the industry trend.

NetEase Online Games Revenue
16,000

14,000
PC Game Mobile Game
12,000

10,000
MILLION RMB

8,000

6,000

4,000

2,000

-
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2020

(Source: NetEase)

Asia Games Market Intelligence: NetEase Games Strategy

The secret to NetEase’s success over the past two decades has been original content creation and
innovation leading to successful franchises based on self-developed IP. In 2019, 90% of NetEase’s
revenue came from self-developed games, a testament to the strong internal development
capabilities the company has. This is notable as NetEase licenses and publishes some of the largest
foreign games in China such as World of Warcraft, Overwatch and Minecraft, yet these only make
up 10% of total revenue from online games. A newer focus on international growth is driven by
publishing self-developed games based on original IP or IP from global partners. Overseas revenue
accounted for 11% of NetEase’s online games revenue in 2019, and we anticipate that will rise.

It can be many months before a game is granted an ISBN (license) for distribution in China and as
such NetEase hopes to build international versions of its games that can either launch alongside
the China release (once approved for ISBN) or launch prior to the China release to ensure
development and marketing costs can be recouped quickly. This is also part of NetEase’s strategy
to increase its presence in the global games market.


Evolution of NetEase’s key franchises based on self-developed IP

Historically, NetEase was known for its high-quality MMORPG games, such as Fantasy Westward
Journey Online (2004). The PC game, which was themed on cultural lore of Journey to the West,
provided players with a compelling online experience, and by 2007 it was one of the most popular
titles in China with over 1.5 million peak concurrent players. NetEase used its experience from the
success of this title to create new MMORPG games based on differing themes including Westward
Journey Online, Tianxia and Ghost, all of which are successful franchises.

Legacy titles get expansion packs and new content regularly to keep players engaged. Fantasy
Westward Journey has become an evergreen IP for the company and its revenue grew at a
double-digit rate in 2019, despite being 15 years old and an MMORPG – a genre that has lost
momentum overall. More recently they have adapted the hit PC games for mobile, extending the
lifecycle of the IP and increasing overall engagement and spend by reaching the much larger
mobile gaming audience. The Fantasy Westward Journey IP has grown significantly since its mobile
game release in 2015 and is set to grow further this year with a new title in the franchise, Fantasy
Westward Journey 3D, which provides a new graphical style and additional gameplay features.

Asia Games Market Intelligence: NetEase Games Strategy

FWJ PC FWJ Mobile FWJ 3D (Mobile)

NetEase has also cultivated new IP in different genres since its such success with FWJ on mobile,
aiming to capitalise on the large and diverse mobile games market in China. Onmyoji was one of
the first and most successful new franchises launched by NetEase outside of the MMORPG genre.
The mobile turn-based strategy game launched in 2016 and is based on Japanese mythology. It
was designed to reach the more than 300 million anime, comic, games (ACG) fans in China, and
the development team integrated a number of traditional Japanese elements into the game,
including using Japanese voice actors for the China release. The game has remained a top grossing
title in China for nearly 4 years and has spawned content both in games and beyond. It is also
popular internationally.

Onmyoji (NetEase)

Asia Games Market Intelligence: NetEase Games Strategy

NetEase has been quick to react to new trends in the market and has created teams internally to
develop new games in up and coming genres. When the battle royale craze started in 2017,
NetEase was one of the first developers to create a mobile battle royale game, titled Knives Out.
With more than 300 million downloads worldwide, Knives Out has become one of the most
successful mobile battle royale games on the market, especially in Japan where it has topped the
iOS grossing chart multiple times. When asymmetric battle arena games were popularised by
Dead by Daylight, NetEase partnered with Behaviour Interactive, the developers of the game, to
create their own asymmetric battle arena game titled Identity V. NetEase now has a number of
successful franchises across multiple genres and is moving beyond its reputation as a game
developer only known for MMORPGs.

Knives Out (NetEase)

NetEase has accumulated years of game development and marketing knowledge from its
MMORPG titles and is now successfully applying this to create new IP in new genres. The company
continually tweaks and optimises each new game over the long term, driving user engagement
and spend through new content updates, items and new monetisation methods.

NetEase self-developed titles are either PC to mobile game adaptations, which bring popular PC IP
to mobile, or are brand new games designed specifically for the mobile gaming audience. We
believe that NetEase has proven itself in original content creation and that its next steps will be to

Asia Games Market Intelligence: NetEase Games Strategy

grow its newer successful titles into mega franchises while also developing new IP that can
succeed both in China and the rest of the world. The company is also looking to expand its mobile
game franchises and new IP beyond mobile, to PC and console, which is ironic in a sense as the
company started as a premier PC game developer.

NetEase continues to be a strong partner for overseas games companies looking to enter China

NetEase has had a JV with Blizzard since 2008. NetEase currently operates Blizzard’s World of
Warcraft, Starcraft, Diablo, Hearthstone and Overwatch in China, as well as esports tournaments
for the games and an esports team in the Overwatch League. The success of this partnership with
Blizzard has led to the joint venture agreement being extended through 2023.

NetEase is also a key partner for Mojang, a subsidiary under Microsoft, who are the developers of
Minecraft. NetEase worked with Mojang to create a custom version of Minecraft for the China
market that was launched for PC and mobile in the second half of 2017. The Chinese version of the
game is free to play, to reach a larger number of users, and is monetised via skins and servers in
the game. There are more than 300 million registered players across both platforms in China and
the game recently received an update that added many bedrock edition features.

More recently, NetEase confirmed that it was working with The Pokémon Company to localise and
release Pokémon Quest in China, an action adventure game for smartphones. NetEase has already
added a PvP mode to the Chinese version to increase the appeal for Chinese gamers. NetEase has
also worked with Konami to license mobile games in the Pro Evolution Soccer franchise and
Square Enix to publish its Million Arthur mobile game. NetEase is the new Chinese operator of EVE
Online in partnership with CCP Games, taking over operations from Tiancity. Creative Assembly is
also working with NetEase to bring games from its Total War franchise to China while Taleworlds
will work with NetEase to bring Mount and Blade II to China.

Asia Games Market Intelligence: NetEase Games Strategy

List of partners / Games & franchises published in China

Partners Games / Franchise

Blizzard – joint venture WoW, Starcraft, Diablo, Hearthstone, Overwatch

Mojang (Microsoft) Minecraft China

The Pokemon Company Pokemon Quest

Konami Pro Evolution Soccer

Square Enix Million Arthur

CCP Games EVE Online (previously held by Tiancity)

Creative Assembly Total War

Talewords Mount and Blade 2

Mattel360 (joint venture with Mattel) Uno

NetEase in Japan

Japan has become the largest games market for NetEase outside China, accounting for nearly 80%
of its overseas revenue. Japan is a notoriously hard market to crack for foreign game developers
but NetEase has been able to learn from Japanese game developers that it has worked with in the
past to successfully tailor its titles to appeal to gamers in Japan. NetEase first found success in
Japan with titles such as Onmyoji. NetEase opened an office in Tokyo to support the game and
launched a three-month marketing campaign for the title that incorporated the virtual world of
Onmyoji into the real-world using video.

The game first launched in China during June 2016 and NetEase created a localised version for
Japan that released in February 2017. Onmyoji succeeded in Japan due to its high-quality art style,
deep immersion into Japanese culture and mythology, a fair gacha system and localised content

Asia Games Market Intelligence: NetEase Games Strategy

updates to keep players engaged. NetEase also ensured the game was authentic to players,
utilising Japanese voice actors. The game has now grossed over $60 million in Japan and helped
the company gain a foothold in the country. In addition to offering familiar experiences to
Japanese players, NetEase has created new experiences that have global appeal to increase its
presence overseas.

NetEase’s knowledge of Japan set itself up for success in mobile battle royale, in the form of
Knives Out. Knives Out was successful in Japan as it was the first battle royale game to launch on
mobile and bring the genre to the core gaming audience in the country, it provided a new unique
spin on the popular shooter genre and because NetEase supported the game with content
updates as well as collaborations with popular Japanese IP such as Tokyo Ghoul and Evangelion.
NetEase has monetised the title with in-game cosmetics and a battle pass and the title has grossed
over $1.2 billion in Japan to date.

NetEase did the same for Identity V, a 1v4 asymmetrical horror multiplayer game. NetEase worked
with Behaviour Digital to develop Identity V, which is a title that plays similarly to Behaviour’s
Dead by Daylight. Behaviour originally released Dead by Daylight on Steam, which again meant
that it did not reach mainstream success in Japan due to the small PC games market there.
NetEase created Identity V specifically for mobile devices and utilised the unique 1v4 gameplay to
create an addictive multiplayer game for the global market. The game released in Japan in June
2018, a few months after the Chinese release. Knives Out and Identity V have become NetEase’s
top performing titles in Japan, accounting for more than 80% of the company’s total revenue in
the country to date.

NetEase is further looking to expand its presence in Japan by releasing new mobile games, as well
as porting existing titles to console. In 2019, NetEase released Knives Out for Nintendo Switch and
PlayStation 4 in Japan to reach the more than 23 million console players in the country. While
NetEase has been successful in Japan, it has not yet been able to conquer the west and is now
looking to do this through partnerships with global gaming companies.

Asia Games Market Intelligence: NetEase Games Strategy

NetEase is working with global partners to reach a global audience and expand its offerings in
China

Alongside success in Japan, NetEase hopes for global success with IP that will resonate in China
and abroad. NetEase has taken a number of steps to reach a global audience with its self-
developed games, particularly as the domestic market growth rate softens. International growth is
based on four actions:

1) Localising existing titles for the global market
2) Designing new titles that appeal to the global market
3) Focusing on localisation and culturalization for each market
4) Develop IP-based games (self-developed or licensed) that appeal to gamers in China and
abroad.

The fourth point has become more important for NetEase over recent years with the company
working with a number of partners to license popular IP and create self-developed titles based on
said IP for both the China and global market.

Partners Self-developed games based on licensed IP

Mattel – Joint Venture UNO, Phase 10

Blizzard – Joint Ventureq Diablo Immortal

CCP Games EVE Echoes

Warner Bros. Harry Potter, Tom and Jerry, Lord of the Rings

Marvel Marvel Duel, Marvel Super War

While most of NetEase’s initial attempts have not become huge hits, we note that there are still
titles in the pipeline that can perform well globally. We believe that these initiatives will allow
NetEase to have a much stronger presence on the global gaming stage and will help increase its
overseas gaming revenue from 10% of online gaming revenues to approximately 20% in the next
two years.

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Asia Games Market Intelligence: NetEase Games Strategy

In addition to developing its own games and licensing games, NetEase has invested in a number of
overseas game studios and technology companies to expand its global games network, primarily
focusing on companies that can benefit NetEase in some way. NetEase initially invested in small
game studios such as Reforged Studio, Counterplay Games, Red Accent Studios and Motiga. Since
then it has invested in a number of larger studios:


Target Company Date Investment type

Bungie June 2018 $100m, minority

Improbable July 2018 $100m, minority

Second Dinner January 2019 $30m, minority

Quantic Dream January 2019 Minority

Behaviour Interactive July 2019 Minority

Bossa Studios November 2019 Minority

As NetEase looks to expand overseas to become a global games and entertainment company, the
firm has begun to open new studios overseas with one in Montreal and another in Tokyo.

NetEase opened its Montreal studio in November 2019, becoming the first research and
development studio located outside China for the company. The company is hiring dozens of
developers over the next two years to help produce games that have global appeal. NetEase is
focusing on hiring industry veterans with experience in art, design and technology. Notably,
NetEase is hiring staff that have worked on console games in the past, which signals that its
Montreal studio may take a cross platform approach to development in the future.

In June 2020, NetEase established Sakura Studio in Tokyo, Japan. The studio was set up to focus
exclusively on next generation games for console and is hiring industry veterans that have worked
on console, PC and mobile games in the past. Tetsuya Akatsuka, ex Bandai Namco, is the current
studio director and will be in charge of creating new game IP for the global market, with a focus on
next generation consoles. Sakura Studio also has a location in Guangzhou, China that will work
with the Tokyo studio.

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Asia Games Market Intelligence: NetEase Games Strategy

As NetEase expands overseas, it is looking to capitalise on global gaming trends. While NetEase
has found success in China developing games exclusively for mobile and relying on old school
MMORPG’s for PC, it has ignored the growing premium console and PC space overseas which is
worth over $30 billion. NetEase is now looking into creating games that will appeal to console and
PC players around the world in its efforts to grow revenues overseas.

NetEase showcased new titles at its annual 520 games conference

NetEase held its annual 5.20 conference on May 20, 2020, where it showcased more than 60 titles,
including 27 new and unreleased games. The company reiterated its commitment to becoming a
user focused games and entertainment company with the goal to become a leader in the global
online games market. Despite aiming to become a global leader, this conference is still very much
aimed at the Chinese gamer audience.

Notably, The Ragnarok was announced as the company’s first serious attempt to reach core
console and PC gamers overseas. It is a AAA open world RPG that is developed for PC, console and
mobile with cross play between each platform. The game, based on Norse mythology, includes
PvP and PvE gameplay and advanced traversal mechanics, an action-based combat system and a
unique mission structure. It has been in development for 4 years and will look to compete with
other premium AAA titles such as Warframe and For Honor. This is part of a recent trend among
Chinese game developers as they look to develop games for the global market.

The 27 new titles are on the following page:

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Asia Games Market Intelligence: NetEase Games Strategy

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Asia Games Market Intelligence: NetEase Games Strategy

Pan Entertainment content utilised to build value of IP

At its 5.20 event, NetEase announced that it was furthering its pan entertainment strategy. With a
broad portfolio of self-developed titles, NetEase has utilised its game IP across various pan
entertainment formats such as spin off games, movies, TV, music, comics and more. Building on
established IP introduces existing audiences to new forms of entertainment, increases
engagement with the IP and is less risky than developing a new IP. It also introduces new
audiences to the IP through non-gaming content. Onmyoji’s was NetEase’s first truly pan
entertainment IP that has touched each corner of the entertainment world. Starting with the
original game in 2016, NetEase has developed multiple spin off titles including Onmyoji Arena
(MOBA), Onmyoji: The Card Game (CCG), Onmyoji Chess (Auto Chess) and Onmyoji: Yokai Koya
(Simulation).

At the 5.20 event, NetEase announced even more spin off games including Code: Onmyoji Idol
Project (Idol simulation) and Code: World which is a new next generation MMORPG game based in
the Onmyoji universe. Onmyoji has also expanded through merchandise, fan art, a musical stage
production, a film and a cartoon series. An Onmyoji Cafe & Shop also opened last year. Onmyoji
has become a true pan entertainment IP for the company and NetEase has already started to
replicate this model across all of its top IP.

Continued focus on legacy IP and games

NetEase had an entire section of the conference dedicated to its most passionate fans, those that
have played NetEase games for years and are familiar with legacy IP such as Fantasy Westward
Journey, Westward Journey, Ghost, Revelation and Justice. This will remain a focus.

Collaborations with partner companies strengthens showcase

NetEase announced at its 5.20 conference that it would continue to work closely with partner
companies to develop new games, license games for release in China and also supplement its
existing titles with collaboration content. This strategy has allowed NetEase to strengthen its game
offerings and draw in new audiences to its titles.

New genres targeted to reach a wider audience

NetEase announced new titles across multiple genres to attract a wider audience, mostly on
smartphones. These include Cyberpunk themed games, roguelike games, racing games and dating
simulation games.

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Asia Games Market Intelligence: NetEase Games Strategy

Notable games presented during the event include Ace Racer, NetEase’s first attempt at a realistic
simulation racing game. Code T a new cyberpunk themed simulation game for mobile that is
capitalising on the popularity of Cyberpunk 2077. Code Moon, which is a new RPG / roguelike
game that is infused with Japanese culture and a light novel graphical style. Super Mecha
Champions is a mecha action shooter game that is inspired by the Japanese Gundam franchise.
NetEase also showcased For All Time which is a dating simulation game and NetEase’s attempt to
capitalise on the growing number of female gamers in China. Games such as Love and Producer,
developed by Paper Games, have shown that there is a market for games targeted solely at
women and NetEase’s new title combines romance, time travel and high-quality art to appeal to
this audience.

This approach is becoming a larger focus for NetEase as it looks to tap into niche but growing
genres on mobile and beyond. The company is developing multiple titles in these new genres and
then investing resources into the games that show the most promise after launch, with the aim to
become a leading developer in as many genres as possible.

Esports is a growing focus for NetEase

In 2018 NetEase confirmed it would spend d $160 million on esports initiatives in China to create
esports tournaments for its games, as esports is booming throughout Asia and the world. An
additional $47 million was spent to train streamers, shout casters and esports players. In 2019,
NetEase announced plans to invest $710 million in an esports park in the Shanghai Qingpu district.

The company has focused on creating an esports ecosystem around its published titles through its
NeXT initiative which it introduced in 2018. The initiative is designed to promote the esports
ecosystem through tournaments that can cultivate professional esports players across NetEase’s
games. The 2020 Spring tournament, which kicked off in April, hosted 139 professional
competitions across more than 20 NetEase titles. NetEase also runs the NetEase Esports College
League which was established to build a Chinese college esports ecosystem. The two events
support the incubation of professional esports players, commentators, managers and operators.

NetEase has been able to successfully promote its NeXT brand thanks to partnerships with more
than 20 live streaming platforms and with major brands such as China Union Pay, Nvidia,
Alienware, Zotac and others. The company has also exported this model overseas, running
tournaments for games like Knives Out and Identity V in Japan. More than 500,000 players and
90,000 teams signed up for a chance to compete in the first Knives Out esports tournament in
Japan. NetEase is also the official operator for Blizzard esports in China, operating tournaments for
Overwatch, Hearthstone and Warcraft. It is also the owner of the Shanghai Dragons Overwatch
team.

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Asia Games Market Intelligence: NetEase Games Strategy

NetEase is investing in a gaming ecosystem

In addition to developing and releasing games, NetEase is aiming to create a gaming ecosystem,
primarily around 5 key areas, to grow its position in the games industry. The 5 key areas include:
Developers, Community, Live Streaming, Distribution and pan entertainment content.

Developers: NetEase runs a fully comprehensive recruitment programme for graduates called
NetEase Game Academy where it offers more than 800 internship positions each year. Applicants
can receive 1 on 1 mentorship, industry related lectures and the ability to create their own games.
NetEase also works with third party developers to create content for its games such as Minecraft
through its developer support program.

Community: NetEase runs the Da Shen social platform which has more than 50 million users,
including many key opinion leaders. It aims to be a gaming version of Facebook with a mix of
official information and user posts for games. NetEase also runs a game membership club which is
a reward system for players. Paying to become a VIP member can also yield additional rewards
such as additional discounts on items, in game perks and priority customer service.

Live Streaming: CC Live, NetEase’s live streaming platform, now has 40 million monthly active
users and the company has utilised the platform to promote NetEase’s games and esports
tournaments. The company is increasing its investment in the platform to build an ecosystem
around NetEase orientated streamers, making the platform the number one destination for
gamers who play NetEase published games.

Distribution: In addition to direct distribution of mobile and online PC games, NetEase recently
launched a new standalone PC games store called ‘Fever Game’ that focuses on buy to play
games. This signals NetEase’s intent to compete with Steam and WeGame in the future, as it
acquires more PC games in the future. The company is also exploring cloud gaming and recently
began testing a cloud gaming distribution service last year. The company has partnered with
Huawei to explore the cloud gaming space.

Pan entertainment content: NetEase continues to invest in the creation of new games, TV shows,
movies, comics and other media formats that utilise existing IP. NetEase also has an interactive
reading platform which hosts animation, comics and interactive novels.

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Asia Games Market Intelligence: NetEase Games Strategy

Summary

NetEase is continuing to transition from a company that focused on high quality MMORPG games
and the China market to a company that is developing high quality titles in multiple genres, across
multiple platforms, for the global market. At its 5.20 event, NetEase outlined its strategy for the
future while staying true to its roots. The company is focused on expanding its established IP
through the development of new games and pan entertainment content, while also working on
games in diversified genres that are either based on new IP or IP licensed from partners, all with a
goal to succeed on the global stage. NetEase is also looking to go beyond mobile with increased
investment in new studios and partner studios that will focus on the creation of multi-platform
AAA games.

This strategy is supported by a growing gaming ecosystem that aims to retain old users and
acquire new users through esports, live streaming, community content and derivative content.
NetEase is also investing in new technology such as cloud gaming and 5G to open up new ways to
distribute games. The company recently raised $3 billion through a secondary offering on the
Hong Kong Stock Exchange, after US and China tensions flared up and the prospect of being
delisted from the Nasdaq was raised. With this move, NetEase is able to become more stable and
focus on its long-term strategy to become a global games company.

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