NetEase’s expansion to the West is in full swing

Since the beginning of 2023, NetEase has been rapidly announcing new studios, averaging one per month. These have either been established internally, or acquired.

-       It acquired SkyBox Labs (Canadian games studio) in January

-       It announced Spliced in February (a global remote-first studio with offices in the UK, but employees in US, Canada, UK, and ‘beyond’)

-       It took a short break in March but announced two new studios in May

-       In April, it announced Anchor Point Studios (based in Spain)

-       In May, it announced Bad Brain Studios (based in Canada)

-       Most recently announced PinCool Inc (based in Japan)

The cadence of these announcements has positioned NetEase as one of the world’s most active companies in terms of 2023 studio expansion.

An important part of our jobs as analysts is to look for patterns. So what do all these studios have in common?

Location: Each of the above studios are based outside of China, in North America and Europe (except PinCool). This is a clear effort to expand significantly to the western hemisphere, where it sees a growth opportunity.

Heavy-hitter leadership: All these studios are run by games industry veterans who have previously worked at Microsoft, Ubisoft, EA, Epic Games, Kabam, or Glu Mobile. This is not a ‘let’s deploy a bunch of scrappy start-ups and see if we hit the lottery’ kind of move. This, is a big bet, likely carefully planned and thought through.

Business models: All these studios are, in one way or another, engaging or have significant previous experiences with the free-to-play business model. The flurry of titles that will subsequently come will only add to the heated live-services games market. Stay tuned for MIDiA Research’s upcoming report on the future of the live service games landscape, where we will explores the second, third, and fourth-order implications of the current live services boom. (Spoiler alert, they hey day of live services is close to its peak, and it is going to get a lot more complicated for games companies over-dependent on live services to compete in the mid-term future. That is, unless you happen to be one that owns a LOT of the successful live service titles – a clear opportunity for the likes of NetEase and a small select few of others.)

The why?

The obvious read is to perceive this expansion as a strategic offense. However, diversifying beyond China also serves as a key defensive strategic play. Free-to-play games are vitally dependent on the amount of time players spend in-game (rather than number of downloads). Legislature in China has been implemented to limit gaming time for minors. This includes a three-hour limit per week for those under 18, a ban on playing games between 10pm and 8am, and the requirement for minors to use real names and ID numbers to play. These measures are leading to decreasing time spent on games, which creates a very real ceiling to the revenue potential of free-to-play games in China. Diversifying and expanding its portfolio outside of China, where no legal requirements on time spent playing exist, mitigates risk for NetEase and significantly expands its future growth potential.

If NetEase executes well, it can further cement its positioning as one of the small handful of global interactive entertainment companies for the mid-to-long term.

Watch this space.