NetEase Games Dominates the App Store Charts — How Long Can That Last?

NetEase Games' advantage rests on in-house development. Is its current lead a win for that strategy, or is its rival simply not running at full power yet?

Since late September, NetEase Games has made a striking showing on the App Store's Top Grossing chart: four of the top five games were its own. As of now, three of the top five are still NetEase titles — Onmyoji (《阴阳师》), Fantasy Westward Journey (《梦幻西游》) and A Chinese Ghost Story (《倩女幽魂》) — while A Chinese Odyssey (《大话西游》), which had held a spot too, now sits at No. 7.

On the September global game-revenue chart from App Annie, an app-data research firm, three NetEase titles made the top ten. Fantasy Westward Journey came second; A Chinese Odyssey and A Chinese Ghost Story took the last two places in the ten. Onmyoji, for its part, ranked tenth on the download chart.

Rewind two years and the company owning the charts was Tencent. In 2014, more than half of the Top Grossing top ten were Tencent games — ones you know well, like Plane Wars (《全民飞机大战》) or Speed Drive (《天天飞车》). At Tencent Interactive Entertainment's annual conference in March this year, most of China's game studios had picked Tencent to publish their mobile titles: Seasun, Changyou, Shanda, Giant Interactive. Tencent's dominance looked inevitable.

NetEase's run at the top inevitably raises a question: is Tencent losing it? Tencent holds only about four games in the chart's Top 20. Without Honor of Kings, the MOBA game billed as "League of Legends in your pocket," it would have been all but wiped out of the top ten.

Has NetEase really done so well that it has passed Tencent — the world's biggest game company by revenue — in mobile?

The charts point that way, but a ranking is not absolute revenue. In early August the App Store's Top Grossing chart changed: it was briefly renamed "Top Earning" before going back to its old name, a sign that the ranking algorithm behind it had changed.

"The [current] Top Grossing algorithm is complicated. It no longer just weighs revenue — it's more like a popularity chart, counting active users, paying users and so on," Gao Yang, an editor at the Chinese mobile-game outlet Chule, told QDaily.

Since the change, first-time spending by new users and repeat spending count for more, so a higher rank does not necessarily mean more money. Chart manipulation and self-funded top-ups muddy the rankings further. Even for products from companies as big as NetEase and Tencent, the real revenue figures are held only by the companies themselves.

Public data from other third parties and from earnings reports puts NetEase far behind. In Tencent's second-quarter report this year, mobile games brought in 9.6 billion yuan of 17.124 billion yuan in total game revenue. NetEase did not disclose mobile-game revenue for the same period, but its total game revenue was just 6.438 billion yuan — and that figure includes a PC hit like Overwatch. On App Annie's monthly ranking of mobile app companies by revenue, NetEase did jump from fifth in August to second, but Tencent's No. 1 spot is as solid as ever.

The numbers say one thing; plenty of players still name NetEase as the game company they believe in. Under almost anything Tencent licenses or launches, the complaints never stop: plagiarism, knockoffs, and "think about it — can you get stronger without paying?" are most people's first impression of Tencent's games. NetEase, apart from the outcry over forcing monthly cards on World of Warcraft players, still gets the benefit of the doubt from most players.

"NetEase is one of the few companies among China's many internet firms that users will call a company with heart," said Shen Xinhua, who works at a game company known for casual tower-defense titles. That quality seems to run through NetEase's products: NetEase Cloud Music, widely loved, or NetEase Yanxuan, which has always sold on quality.

On games, it is hard to argue that NetEase's are necessarily more fun than Tencent's — fun, after all, is subjective. But NetEase's games are different in a couple of ways. One is continuity. Fantasy Westward Journey and A Chinese Odyssey, NetEase's two Journey to the West titles, were as well known among players a decade ago, in the PC online-game era, as World of Warcraft was. Ported to phones, they largely kept their original quality and brought along the big player bases built up earlier, becoming evergreens on the App Store's Top Grossing chart: Fantasy Westward Journey has held the No. 1 spot almost without interruption since March last year, giving it up only recently to NetEase's newer game, Onmyoji.

The other is that NetEase has tried plenty of unusual things on mobile. Last year, for instance, it released two free puzzle games, Language of Flowers and Moon (《花语月》) and A Startled Dream (《惊梦》), whose art style and music make them hard to picture as the work of a big studio.

The best example is Onmyoji. If A Chinese Odyssey and Fantasy Westward Journey succeeded by living off the PC era, and A Chinese Ghost Story rose fast on tie-in marketing with Love O2O (《微微一笑很倾城》), the recent hit web drama, and its star Yang Yang, then Onmyoji's success caught everyone off guard.

When NetEase Games first announced the game on May 20, it drew little attention. "Ye Sheng," who would not give his real name, is an analyst in the strategy-analysis department of an established Chinese game company. He and his team first pegged the game for around No. 30 on the Top Grossing chart, and thought that with a few limited-time events it "might push into the top five." Too many Japanese-style games had failed to take root in China before: Tencent licensed and published Japan's hit Monster Strike, and shut it down in under a year.

In the end Onmyoji became last month's hottest game and the center of social-media talk — everyone comparing which talismans they had drawn that day and whether they had pulled an SSR, with unlucky players calling themselves "Africans" and threatening to cut off their "European" friends. A wave of fan work followed: the faint bromance between Shuten-doji and Ibaraki-doji, two characters whose other thing in common, besides gender, is that "Africans" can't pull either of them.

For players it is a game that takes a lot of effort and a lot of luck, and is fun enough to be worth it. For people in the industry, Onmyoji is a new breakout.

"This market had been quiet for half a year, and Onmyoji was exactly the breakout everyone needed," Ye Sheng said. "It let people see, 'ah, I can succeed doing this' — or put another way, a game nobody could make sense of finally succeeded. It offered a new genre and a new angle, something to borrow from, learn from, even copy. People needed a product like that."

NetEase's Onmyoji, in other words, showed developers across the industry a new way to win. Even professionals point out that the game's numbers system comes from Summoners War, a Korean hit from 2014, and that the adaptation arguably made it worse — but its "skin," meaning the anime character design, the story and the voice acting, still won over huge numbers of players.

NetEase's other game, Fantasy Westward Journey, was the same kind of breakout.

After it launched and succeeded in March 2015, the market filled with similar MMORPGs — mobile versions of what we usually call PC online games. Legend of Mir 2 (《热血传奇》), ZT Online (《征途》), Jade Dynasty (《诛仙》), JX Online (《剑侠情缘》). A PC gamer from ten years ago dropped into the present would be delighted, or at a loss, to find that a decade on, on this new device called a phone, people are playing almost the same games as before. Fantasy Westward Journey's pull in that market rests on NetEase's in-house development.

"What you accumulate by developing your own games matters. It's very hard for latecomers to break into a category like Fantasy Westward Journey — you have too little behind you, whether in technology, design, art, or the user base you've built up. You're always the one chasing. To catch up, either you wait for the leader to make a mistake, or you make something that really breaks through," Ye Sheng said.

In-house development is what defines NetEase. Tencent built its success on three licensed games — CrossFire, Dungeon & Fighter and League of Legends; NetEase has mostly made its own since the PC era. On mobile it started late, only putting out heavyweight titles after mid-2014, a year after Tencent moved into the market, but the development muscle it already had meant the shift to mobile didn't take long. NetEase released a little over ten mobile games in 2014; in 2015 the number was more than 80. Its official site now lists over 100 mobile games, of which only a dozen or so are licensed.

"When everyone thought a mobile game had a six-month life, NetEase made Fantasy Westward Journey. When everyone thought what mattered in an anime-style game was the cultural feel, NetEase made Onmyoji, a product focused on what's underneath," Sun Zhichao, head of MIUI ecosystem and games at Xiaomi's investment department, told QDaily.

"NetEase has shown up in the role of the strong developer... That is partly its years of accumulated development experience, development attitude and development talent. But it is also winning on volume — building many high-quality products aimed at different groups of users, even several products in each category, each a little better than the competition's, and then, when one or two break out, spending heavily to promote them, which creates a positive loop and strengthens the brand and the user base again," Sun said.

In China, though, a good game alone does not guarantee success. As Ye Sheng noted, the industry has a line it repeats: "The story inside the install package is only 30% of the story." The other two-thirds comes down to market conditions and distribution channels.

Onmyoji is the textbook case: the broad wave of anime-and-manga culture, plus precise targeting and the right channels. September 7 was a turning point — Chronicle of a Hundred Demons (《百鬼阴阳抄》), a fan song Onmyoji made with a cover-singing uploader on Bilibili, drew more than 500,000 plays across its various versions and introduced the game to a large audience that loves anime culture and Japanese onmyoji lore. A week later the song went up on NetEase Cloud Music, and NetEase Games gathered another round of users of its own. Now NetEase is even inviting players on Onmyoji-themed trips to Japan.

"Plenty of products nobody expected much from have done very well — Infinite Borders (《率土之滨》), Onmyoji and others — while some products that cost a fortune came back with nothing. Which proves there are no rules in this industry, only timing, terrain and people: timing is the market environment, terrain is market channels and users, people is the product itself. You need all three," said Jay Zhuang, who worked at NetEase Games and then Tencent Games and now runs a small game company of his own.

To some degree, timing and terrain are turning in NetEase's favor. Everyone interviewed for this story said in some form that traditional distribution channels matter less in today's mobile-game market — and channels are exactly where NetEase has little advantage. Traffic from apps like NetEase Cloud Music is no match for WeChat and QQ, the channels belonging to its competitor, Tencent.

Mobile gaming's demographic dividend is running out; this is no longer the era when users were both plentiful and easy to fool. Smartphone shipments are slowing worldwide, and according to a report by the foreign outlet Recode, the number of apps an American smartphone user downloads in a month has gradually fallen to zero.

The era of fast growth in mobile apps is over. Once, interchangeable apps crowded the whole market, and users did not know how to choose, or had no choice. Channels held the power; whoever could reach more users won.

"Players back then were easy to satisfy — you could feed them garbage and they'd eat it. Sure, that kind of user still exists today, but more players really do go looking for better games now. Eat enough garbage and you learn to tell one taste from another," Gao Yang said.

That is obviously good news for NetEase, a company more willing to try a wider range of products and whose quality is fairly dependable. The question is how long NetEase can hold the lead it has now as the market shifts.

In-house capability and a roster of studios strong at development are NetEase's advantage, but they also mean heavy spending on game development, which means low margins overall, and risk. At mobile gaming's fastest-growing moment, the past two years or so, NetEase reportedly had more than 100 projects running at once; that number has certainly come down. But no one knows when the next game on the order of Onmyoji will appear, and outside its own development, licensing and operating other people's games is not what NetEase does best.

The MMORPG wave on phones is passing — just as games like World of Warcraft faded on PCs, and moving to phones may only have slowed that, not stopped it. Shooters and MOBAs may become the new mainstream, and studios big and small are starting to try them. NetEase has released or is about to release shooters like Eternal Frontier (《永恒边境》), Tank Company (《坦克连》) and Codename S7 (《代号 S7》) — another uncertainty.

Tencent, of course, is a strong competitor that never goes away. Channels matter less, but that does not mean QQ and WeChat have stopped being Tencent's advantage. Without an exclusive title to pull them in, players may stop installing a given app or visiting a given store; but as long as they need their social ties, their WeChat or QQ will probably always be there.

"Channels carry much less weight than they did two years ago, but you have to separate them. There are two kinds of channel: Tencent, and everything else. What got weaker is everything else. Buying a user through a small outside channel costs tens of yuan; through Tencent's internal settlement it's less than one yuan. As for users choosing for themselves, that plays out mostly in fine-grained marketing, which is Tencent's weakness — which is why products like Onmyoji and Honkai Impact 3rd (《崩坏学院 3》) rise, both of them the result of fine-grained operations," Jay Zhuang said.

"NetEase's strength on the App Store right now is temporary," one industry figure who asked not to be named told QDaily. "This win is built on the fact that all of Tencent Interactive Entertainment's KPIs for the year were already met by June, in the first half. Word is that its KPI for next year will be set 30% above this year's — so if it keeps raising revenue in the second half, it's clearly digging a hole for itself."

Seen that way, NetEase's run at the top of the charts may just be Tencent saving its energy. And it's true: compared with the first half of the year, when it had both Legend of Mir 2 and Naruto Mobile, Tencent has not released a major game since June.

No one knows who will be on top of the charts next year — NetEase, Tencent, or a field with no single winner. For players, after all, it doesn't much matter whether Tencent or NetEase dominates. What matters more is who can put out more games that are fun to play.