Jenova Chen needed money to put his latest game out in China. It was 2016, right after Tencent Holdings Ltd. made a splash by taking over Clash of Clans studio Supercell Oy, and Chen was counting on the newly acquisitive internet giant.
But when Tencent passed, calling his novel mix of stylized designs and free-play too risky, it was the smaller NetEase Inc. that swooped in. Founder William Ding flew all the way to San Francisco and spent hours with Chen to seal the deal, unheard-of back then for the reclusive Chinese billionaire.
“He struck me as a product manager, not a banker,” Chen said last month. “NetEase looked at my game from a creator’s perspective, and Tencent cared more about the business aspect of it.”
That perception helped propel Netease’s evolution from struggling web portal to Chinese gaming giant. After more than a decade of toiling in Tencent’s shadow, NetEase’s gaming empire now surpasses Activision Blizzard Inc. or Electronic Arts Inc. in revenue in large part because of its reputation as a champion of developers, willing to bet on creative talent.
It portrays itself today as the anti-Tencent: a constellation of studios laser-focused on games and unafraid to take risks, while its bigger rival juggles a vast social media and fintech enterprise. Despite being just over a 10th of Tencent’s size, NetEase’s draw for many Chinese developers is a singular focus on gaming and a track record of original hits like Fantasy Westward Journey.
The trick now is to sell that to global developers. One of Ding’s oft-espoused mantras is “embrace your inner geek,” borrowed from Warcraft studio Blizzard. That could resonate with the game creator community, as NetEase and Tencent accelerate their international endeavors to escape a Chinese government crackdown. On Thursday, NetEase opened its first development studio in Austin, Texas — Jackalope, to be led by Jack Emmert, the comics and role-playing nut who helped forge enduring franchises such as DC Universe Online and Neverwinter.
NetEase’s rise as a bona fide competitor offers global game builders a second window into the $44 billion Chinese gaming arena — the world’s largest — and could undermine Tencent’s longstanding dominance on online entertainment.
It’s a stark reversal from a decade ago, when Ding’s outfit was best known as the mere local distributor of blockbuster games like World of Warcraft. In five years, NetEase wants to put its name on a quarter of new triple-A releases in the global market, through everything from self-development to investment and publishing. And by the same time, it wants to generate half of its gaming sales from outside China, executives said in exclusive interviews with Bloomberg News, revealing previously unreported targets.
“I don’t think it would be fair to think of us as a Tencent equivalent,” said Simon Zhu, the Seattle-based investment chief for NetEase Games. “For a platform provider, games are just one of the many ways to monetize traffic. For us, content and talent are everything.”
NetEase has a lot of ground to make up. It generates about 10% of its gaming revenue from abroad, versus about a quarter for Tencent. The disparity shows up in their investment portfolios, with Tencent placing far bigger bets on the likes of Ubisoft Entertainment SA and Activision.
Because NetEase can’t match Tencent’s deep pockets, it’s gambling on talent — people like Emmert or Toshihiro Nagoshi, the industry icon behind the “Yakuza” series who left Sega Sammy Holdings Inc. to join NetEase in January. Nagoshi and his team are now making a new console game for NetEase — an aggressive move given that neither Chinese company has a track record of developing titles for the Xbox, PlayStation or Switch, which are almost non-existent in their home country.
Other publishers in China and the U.S. had approached him too, Nagoshi said, without disclosing names. He turned down fatter paychecks because NetEase promised him more creative freedom.
“It’s not about how much investment or salary they are willing to give,” he said through a translator. “NetEase shows the greatest respect to creativity among all.”
Emmert too considered factors beyond mere numbers when he decided to throw in his lot with NetEase. For one, they promised to free the former studio CEO from meetings and spreadsheets. Importantly, it appeared to be full of like-minded souls. Zhu, the NetEase investment chief, says he spends four hours a day gaming.
NetEase’s gaming czar, Ding Yingfeng, invited Emmert to his Guangzhou office four years ago. During lunch, a staffer brought Ding a new card game he had just ordered, whereupon they struck up a conversation about Magic: The Gathering. That appealed to Emmert, who estimates his own comic collection weighs in at about 1.2 tons.
“This guy is super high-up,” Emmert said. “But he’s just a gamer. It was an incredible thing.”
NetEase intends to free up talent like Emmert and Nagoshi by adopting an outsourcing model not unlike the one Apple Inc. uses to get chips or its iPhones made, explains Vice President Ethan Wang. The idea is to let the talent focus on core mechanics and storylines for triple-A games, while offering them technical support in labor-intensive areas like art design and bug-testing. Over time, NetEase’s Chinese team will also pick up how to make top-notch console games in-house.
“The most important thing for games is creativity,” NetEase founder Ding said in an emailed response to Bloomberg News. “Even after successes, we need to keep polishing games and operate them for the long term, in the spirit of craftsmanship.”
Done right, it could finally help NetEase to gain recognition from the Western development community. Back in 2017, on the sidelines of the Game Developers Conference in San Francisco, Zhu had to spend most of his pitch meetings explaining who his employer was. “I would take it as a win as long as someone agreed to meet me for a second time,” he said.
Getting it right abroad has become imperative in part because of Beijing. Revenue for the first quarter is expected to grow 11% — the slowest pace in two years -– after regulators froze game approvals in July. While that suspension lifted last month, regulators have made plain their willingness to punish an industry it accuses of encouraging addiction and even damaging children’s eyesight.
Chen, the developer who swayed Ding years ago, is counting on NetEase once more. That investment helped him release Sky: Children of the Light to 160 million downloads since 2019. Chen has since expanded his team sixfold to 120 people and in March, TPG and Sequoia Capital injected $160 million into his studio Thatgamecompany.
“While Tencent can always outbid them, NetEase has a good nose for bargains,” Chen said. “They are going to invest in the leaders of each niche market in the game industry.”
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