2022 proved to be a challenging year for the Chinese mobile gaming industry, thanks to a lengthy freeze on game licensing and the imposition of new restrictions on young gamers. As one of the country’s – and the world’s – biggest mobile game makers, the year saw NetEase face several significant challenges, and the company’s latest annual report delves into the state of play.
The company reported total net revenue of 96.496 billion yuan ($13.991 billion), compared to 87.606 billion yuan ($13.930 billion) in 2021 and 73.667 billion yuan ($10.634 billion) in 2020. This suggests that, despite the Chinese market’s turbulent year, NetEase remains on an upward trajectory.
Games and related value-added services proved to be the most profitable sector for the company, accounting for 74.556 billion yuan ($10.881 billion) in 2022, 77% of the total net revenue for the year.
The report specifically highlights the continued strength of the company’s mobile gaming portfolio in its strong performance.
“Our mobile game portfolio now consists of over 100 diverse games, and we expect to continue introducing new mobile games each year for the foreseeable future, which we believe will contribute to future growth in net revenues from this segment,” reads the report.
Trouble in China?
The report candidly identifies several significant risks to the company’s future performance.
The company notes that the limits imposed by the Chinese government on playtime among minors “may materially and adversely impact [their] business, financial conditions, and results of operations.”
The report also notes that “any difficulties or delays in receiving approval from the relevant government for [their] new games or expansion packs” could have a significant impact on their performance.
“All games we release in China require government approvals. Moreover, even after certain games have received government approvals, certain expansion packs with material changes to the content and additions to the descriptions of those games may require further government approvals. We cannot be certain of the duration of any necessary approval processes, and any delay in receiving such government approvals may adversely affect the profitability and popularity of such games.”
Like many Chinese companies, NetEase is attempting to circumvent the country’s restrictions with international expansion, however the report does note that this leaves the company vulnerable to “risks associated with international operations”, including difficulties in anticipating the preference of gamers in foreign markets, unexpected changes in regulations or economic conditions, and difficulties in adapting games and business models to address factors such as cultural differences and consumer preferences.
The open and honest state of play
It appears that NetEase are sending a message to the Chinese government by identifying the risks of international expansion: lift restrictions or see not only a downturn in one of it’s biggest companies, but the Chinese games market as a whole. It’s a move that could potentially come at its own detriment as it reveals its own weaknesses in its efforts to leverage its strength.
Perhaps pressingly, the report notes that NetEase may struggle in maintaining the profitability of its mobile gaming offerings in contrast to online titles. In 2022, online games accounted for 92.5% of the company’s gaming revenue, in part due to revenue sharing arrangements needed to have its mobile games listed on app stores.
“We have devoted and expect to continue to devote a significant amount of resources to the development of our mobile games, but the relatively lower profit margins and other uncertainties make it difficult to predict whether we will continue to succeed in making our mobile game operations profitable. If we do not succeed in doing so, our business, financial condition and results of operations will be adversely affected.”
We listed NetEase as the top mobile game maker of 2022.
