NETEASE
What will emerge from this bag ?
WILLIAM DING, NETEASE's CEO is the typical Chinese entrepreneur: he is not a missionary like the entrepreneurs of SILICON VALLEY, but essentially pragmatic, ready to change gears and connect his company to disparate activities, provided it works.
The 2000 IPO document explained NETEASE's business:
We are a leading Internet technology company in China. We pioneered the development of applications, services and other technologies for the Internet in China. Using our Internet technologies, the Web sites operated by our affiliate, Guangzhou Netease Computer System Co., Ltd., or the Netease Web sites, offer Chinese Internet users Chinese language-based online content, community and electronic commerce, or e- commerce, services. According to a survey by the China Internet Network Information Center, or CNNIC, dated January 2000, the Netease Web sites were ranked the second most recommended by Chinese Internet users. We believe we were the first Internet technology company in China to offer a free Web-based e-mail service that supports both the Chinese and English languages. Unlike many other Internet companies that provide Chinese language Internet services, we are focused on Internet users in China. Most of our employees are Chinese nationals; their cultural and linguistic insights enable us to tailor our services to the needs of Chinese Internet users. Our average daily page views for the seven-day period ended May 31, 2000 exceeded 20 million
we can see from the beginning that NETEASE is a catch-all for the Chinese: media (content), social network (community), e-commerce. The mission is not as pure as GOOGLE (organizing information on a global scale) or FACEBOOK (bringing people together all over the world). This may explain why NETEASE is the eternal POULIDOR* behind companies like ALIBABA or TENCENT. From this patchwork, an activity emerged and was a real success: the free email service offered through the 163.com website, which has about 760 million registered users. But mail, because of its very decentralized aspect, is very difficult to monetize. WILLIAM DING could not build his company on it.
NETEASE's speciality was to attract users to its sites, in particular thanks to the free email function it offered. In 2000, there were already 27 million registered users. The question was how to monetize them. Since e-mail is not profitable, you had to look elsewhere. In 2001, NETEASE acquired the assets of a company that developed and introduced in China the first massively multi-player online role-playing game (MMORPGs). The idea was to use its websites to distribute this type of game. In 2001, WESTWARD JOURNEY ONLINE was created, NETEASE's flagship game until today. In 2002, games already accounted for 16% of turnover. In 2003, online games gained momentum and accounted for 36% of turnover. Here is how the company defined its gaming offer:
Our online games business focuses on offering massively multi-player online role-playing games to the Chinese market, known as MMORPGs. MMORPGs are played over the Internet in “virtual worlds” that exist on game servers to which thousands of players simultaneously connect and interact. We both develop and license online games that are targeted at the Chinese market, and we strive to provide the highest quality game playing experience to our users. Our current MMORPG titles include our in-house developed titles, “Westward Journey Online Version 2.0” and “Fantasy Westward Journey”, and one licensed title, “PristonTale.”
Our MMORPG titles can be accessed from any location with an Internet connection by registered users of the NetEase Web sites. Players of these games select a specific character to begin play. Over the course of play, these characters build up experience and enhanced game capabilities, wealth, weapons and other possessions, all of which may be carried over into subsequent gaming sessions. Players develop their characters according to choices they make within the construct of the game and interact with computer operated characters as well as with other players that are playing on the same network server. Players are able to communicate with each other during the game through messaging or chat, allowing them to coordinate their activities with other players to form groups and achieve collective objectives
We can make some deductions from this brief history of the company:
NETEASE, from the beginning, sought to take advantage of the massive effect of the Internet and maximize engagement on its sites: no matter what the application, as long as there was engagement, i.e. time spent actively. Engagement provides monetization opportunities in a zero transaction and distribution cost world.
Starting from engagement, NETEASE set out in all directions for monetization (search engine, community, e-commerce) and allowed more focused competitors (BAIDU, ALIBABA and TENCENT) to emerge and dominate. It should be remembered that in 2003, WILLIAM DING was the richest Chinese. His fortune is now estimated at $15.3 billion, less than half that of JACK MA or PONY MA.
WILLIAM DING has finally found its niche with online games. But instead of constituting an Internet aggregator, taking advantage of its customer base and their commitment to dominate supply, NETEASE has locked itself into a niche, certainly a large one but a niche nevertheless: 40 billion dollars in China are spent on video games and 150 billion dollars in the world. By comparison, the global TV market is about twice as large.
Always giving priority to engagement in accordance with its original model, NETEASE has specialized in proprietary games with massive potential diffusion. The company has succeeded with some games including WESTWARD JOURNEY. These community games (multiplayer) can engage players for many years. Once these games have been created and some success has been achieved, the objective is to upgrade them with new versions (a bit like IOS) to maintain commitment. NETEASE has 550 million registered players on its various PC and mobile games. Roughly speaking, a user is monetized at $14 per year, compared to $25 for FACEBOOK, $9 for TWITTER and $6 for SNAP.
NETEASE, as TENCENT has an excellent business model based on engagement, extensible at low marginal cost, but it remains in the league of double-digit market capitalizations instead of the three digit figures of Chinese Internet giants. Engagement and monetization are linked to video games. In this field, NETEASE excels: starting from a game inspired by Chinese classical literature (a little like PUY DU FOU is inspired by the history of France and has enjoyed great success for years), the company has capitalized on the commitment of its players to distribute Blizzard Entertainment games in China (WORLD OF WARCRAFT, OVERWATCH, etc.). NETEASE also uses the recurring cash flows of WESTWARD JOURNEY, which targets a Chinese audience to launch new, more international games: INVINCIBLE in 2015, ONMYOJI in 2016 and IDENTITY 5 in 2018.
The great interest of engagement internet business models is that marginal turnover is very profitable. The strategy is above all to increase turnover, either by winning new customers with existing products or by selling new products to existing customers, because achat sale is marginally profitable. In the first case, we leverage products that have already been amortized, in the second case, we save commercial costs and strengthen engagement. NETEASE's potential in video games remains linked to this niche. The number of players in the world is estimated at 2.4 billion: NETEASE already has 23%. There is certainly still potential, especially internationally, which represents only 10% of its video game sales. But it is difficult to believe that NETEASE will grow more than the gaming industry, knowing that there are tough competitors.
Finally, NETEASE's competitive advantage today is based more on its intellectual property of multi-player games than on its distribution base. And that is precisely the difficulty compared to ALIBABA and TENCENT. The latter can more easily leverage their user base to offer new services consistent with their main offer: WECHAT is a good vehicle for marketing games, trading, paying, listening to music, etc. The game world is still quite closed today. This is why WILLIAM DING's numerous attempts to diversify are a dead end and each time come up against giants better equipped to succeed. The most important diversification is to constitute an import platform for foreign branded products, with the Chinese middle class being particularly fond of this type of product. NETEASE deploys resources in this activity but has very little chance against ALIBABA. E-mail is not a good vector to promote e-commerce, nor is gaming; NETEASE ils always late to the party .
The question for NETEASE, if it wants to compete with the Internet giants, is how to start from the game to promote other services and improve monetization.
Current trends provide a key:
The impressive success of TWITCH shows that a community can be created around game stars (15 million active daily users) and even other less talented players.
Tournaments are gaining ground: the FORTNITE World Cup brought together tens of millions of players in July and the final took place in the ARTHUR ASHE stadium. Videogame.com describes the atmosphere and the possibilities of monetization:
Arthur Ashe Stadium, the world's largest tennis stadium, the site of the US Open finals and the American heart of tennis. But also in the real miniature amusement park that has grown around the stadium, inviting spectators to come and have fun in the morning while the matches are only played in the afternoon. Here, dozens of stands offer thrills, make-up, dances and quizzes, each attraction being carefully designed to refer to the game. Fortnite is now a universe, a brand that is being exported. Seeing the line of several hundred meters that extends from the surrounding subway station to the stadium entrance at 8 a.m., you realize that the title may not be so far from following in Harry Potter's footsteps and having its own theme park.
The progress of virtual reality blurs the differences between virtual and real worlds, so that games can mix the two realities and bring different people together (players and non players).
The consequence is that games can attract a large audience that is not necessarily a player (as football can be watched by non-athletes): peer to peer relationships become more important than the challenge. Like FACEBOOK or YOUTUBE, games become networks and have their own rules of the game with status search. The influencers (NINJA type) will be at the top of the pyramid. Games will be used to connect people, like any good social network, to have a good time together. From then on, the services offered will be able to multiply around relationships between people and monetization will increase considerably beyond the usual channels.
The question is whether NETEASE, China's leading gaming company, can take advantage of this opportunity to regain control over TENCENT, which owns 40% of EPIC GAMES, the developer of FORTNITE. The option is uncertain but not expensive.
*French cyclist who never won the tour, but often finished second.