China’s mobile game industry chain has experienced unprecedented changes in recent years. Accompanied by accurately targeted advertising from media platforms and the growing influence of millennials in shaping best-sellers, the scale of power has begun to tilt in favor of quality game developers, aptly demonstrated by the rise of miHoYo, developer of Genshin Impact, on the world stage. It seems that the industry has begun to experience the downhill domination of traditional game distributors, in the process ushering in the transformation from “Distribution First” to “Content First”.
The booming Chinese mobile game industry
It is undeniable that China’s mobile game industry has experienced unprecedented prosperity. The scale of China's mobile game market continues to grow rapidly; According to the Game Publishing Committee of China Music and Digital Association (GPC) , the sales revenue of China's mobile game market reached around 210 billion RMB in2020, a year-on-year increase of 33%, and accounted for 75% of the Chinese video game market. The scale of its MAU (monthly active users) is as large as 600 million, which means that 4 out of 10 persons in China are mobile game users, and the average monthly game time per capita exceeds 21 hours.
It is also noteworthy that overseas expansion hasbecome the focus of many game companies, as large overseas market potential continues to be a driving force for their continued growth. For instance, in the first half of 2020, the overseas game revenue of 37 Interactive Entertainment reached over 950 million, a year-on-year increase of more than 90%, accounting for 12%of its total revenue.
So far, Tencent and Netease maintain the robust Tier 1 competitors in the mobile game industry, with over30 billion RMB annual revenue (146.6 billion and 39.3 billion RMB respectively), whereas the Tier 2 competitors are expected to reach over RMB 10billion, including 37 Interactive Entertainment (三七互娱), Century Huatong(世纪华通), and Lilith Games (莉莉丝). Generally, the Tier 3companies are struggling to hit the yearly revenue of RMB 10 billion, including miHoYo (米哈游), Perfect World (完美世界), Bilibili(哔哩哔哩), and X.D.NETWORK (心动网络), among others. However, the growing domestic and international success of several mobile games developed by Tier 3 companies is creating anincreasingly dynamic competition landscape.
Genshin Impact becomes a big hit, fighting for monopoly in Android channels
Amid the competition of China's mobile game industry in the second half of 2020, a super dark horse emerged — miHoYo. Although the studio saw relative success in its previous venture, the Honkai Impact Series (崩坏学园), this shanghai-based company struggled to maintain investor confidence following the withdrawal of its IPO application in early September, 2020.
However, since the global release of Genshin Impact on September 28, 2020, miHoYo has secured its position in the global mobile game industry with the game's money-making ability and global influence. Sensor Tower believes that there are very few mobile games that have conquered the global market in a short period of time like Genshin Impact. PUBG Mobile, the mobile game earning the largest amount of revenue globally in 2020, reached a total revenue of $1 billion within 16 months after its commercialization. In contrast,Genshin achieved this milestone in less than half a year.
As a globally popular game, the biggest market for Genshin Impact is China. Upon its initial release in China, the game was only launched onBilibili and the iOS App Store, meaning that users could only download the game on the App Store, the Bilibili website/app, and the official Genshin Impact website. The reasons for this limited initial release stemmed from studio-wide dissatisfaction with the 50% commission fee of mainstream Android channels. It was not until earlier this year that miHoYo reached an agreement with Xiaomi Company and launched the game in the Xiaomi App Store with a commission rate of 30%. In fact, Genshin Impact is not the first mobile game to reject the 50% commission rate. Other games also include Arknights（明日方舟）by HyperGryph（鹰角网络) and Rise of Kingdoms （万国觉醒）by Lilith（莉莉丝). Behind this commision dispute heralds the reshaping and tremendous changes of the mobile industry chain.
*Note: Since Google Play is not available in China, the Android channels mentioned excludes this channel for discussion.
50% Take Rate: Glimpse of Mobile Game Industry 10 Years Ago
Traditionally, distributors in the mobile game industry chain have always had high bargaining power. The iOS App Store generally takes a 30% commission from the total price of paid apps and in-app purchases (CNBC: 15% commissions for small app makers), whereas the commission can be as high as 50% for Android app distributors, although this pattern has been continuously challenged since 2017.
Generally speaking, the participants in the industry chain include game developers, game publishers, and distribution channel providers. In China, smaller game developers focus on game development, while game giants such as Tencent, NetEase, and 37 Interactive Entertainment adopt the model of "development plus publishing" (but in recent years, smaller developers have also begun to get involved in publishing — this will be discussed in detail below). The downstream distribution channels of games mainly include “official hardware stores”, which include Huawei, Xiaomi, vivo and OPPO, and third-party app stores (Tencent App Store, iOS App Store, Baidu App Store, etc.).
Looking back at the history of the development of China’s mobile game industry, the 50% commission has not always been the standard, but three major industrial changes have led to its widespread implementation: the transformation of the smartphone industry’s business model, the rise of smartphone app stores, and the fierce competition from upstream companies.
When China's mobile Internet entered a golden period of development around 2010, the mobile game industry also ushered in explosive growth. At that time, the rapid growth of the mobile Internet penetration rate and the increasing popularity of smart phones brought dividends to mobile game developers. These developers could quickly release games in a short period of time and easily occupy the market neglected by the PC game giants. In order to increase income, they utilized Android channels, which had always been the mainstream in China, to quickly expand their user base. Following the model of Apple and Google, third-party app stores initially allowed app developers to retain 70% of all download revenue and in-app purchases. However, in 2011, an epoch-making product ushered in a new chapter — the Xiaomi 1 was a phone priced at 1,999 RMB but equipped with hardware competitive with phones from much higher price categories. With a subsequently low gross profit from hardware sales, Xiaomi started to innovate its business model and began to rely more on its Internet business income, including the operations of its app store and commission revenue.
This change in business model incentivized mobile phone manufacturers to more eagerly squeeze the market share of third-party application stores at that time. Since mobile phone manufacturers were able to easily block users from installing apps and direct them to their own downloading channels, it was inevitable that third-party application stores such as 91 Assistant and Pea Pod were doomed to fall into obscurity. As the market concentration of mobile phone brands continued to increase, many began to increase the take rate to 50%. In 2014, six companies including OPPO, vivo, Coolpad, Gionee, Lenovo, Huawei, and Meizu even established the Mobile Hardcore Alliance to increase the bargaining power of channel parties through joint negotiations.
Worse still, as the mobile game market was still a blue ocean in 2011, even if the take rate to distributors was high, developing games was still profitable for app providers. In addition, the competitive landscape at that time was very dynamic, with a large number of content providers and fierce competition, making it difficult to form an alliance to negotiate with channel providers. Thus game providers could only accept the industry rule of Distribution First, or Channel as King(渠道为王) in Chinese, and the revenue distribution model has since been difficult to shake.
From Distribution First to Content First
Nevertheless, the traditional channels are facing various emerging changes during recent years, including the rising influence of the millennial generation, increasing demand for high-quality games, and the rise of digital advertising platforms. This can be perfectly demonstrated by an increasing number of game developers that have refused to give in to the app stores, including the aforementioned Genshin Impact, Arknights, and Rise of Kingdoms.
The first change is that the influence of Chinese post-90s and post-00s players in the mobile gaming industry is increasing alongside their burgeoning purchasing power. Ten years ago, the main purchasing game users were of the post-80s generation, many of whom were loyal fans of PC-side online games. Even as their purchasing power improved, many of that generation still preferred mobile games of middling quality such as Legend that were popular in the era of online games. However, as millennials moves to the center of China's Internet arena and opened their wallets to the market, their preference for 3A games has allowed companies that focus on development and design to stand out, increasing the concentration of upstream mobile game developers. Under such a trend, some less competitive mobile game companies have been rapidly eliminated — according to Talking Data, the number of content providers in China's mobile game industry has dropped from 34 thousand in 2017Q1 to 29 thousand in 2020Q2. In addition, the millennial generation has various preferences for games, including modern genres like ACGN games, female-oriented games, or MOBA. The rise of Friend Times is precisely due to its ability to capture the market for female-oriented games, providing games to female with exquisite graphics, brilliant dubbing, and excellent plots, such as Mr. Love: Queen’s Choice, or Love & Producer (恋与制作人).
All in all, it seems that the industry has begun to experience the downhill domination of traditional game distributors, signalling an imminent transformation in market orientation from “Distribution First” to “Content First”. Nowadays, high-quality upstream game developers are obtaining increasing bargaining power due to the increasing market concentration, the rise of alternative distributors like advertising platforms, and game communities like TapTap and Bilibili. These changes may well signal a significant redistribution of value along China's mobile game industry chain.
All opinions expressed in this essay represent my personal views only.