China (Ep. 20)

Hello and welcome to the GameCraft Podcast. I'm your host, Mitch Lasky. I'm Blake Robbins, and this is a podcast about the modern history of the video game business. Episode 4 China. Blake, this episode is going to be really interesting because we're going to explore China as it exists today in the video game business. I think one of the things we've talked about over the last couple of seasons is the rise of China, all going all the way back to the free-to-play episode, steal this game, the first episode that we recorded, and China is a looming presence in the game business really in this century, and I think it was interesting time to take a look at where China sits today given some really interesting trends that are happening overall in the business. Yeah, look, China continues to be a major player, and depending on who you talk to, they might actually tell you that China's the number one player, whereas historically we would always think of America as being the number one here, but we're starting to see some real signals that China might be the number one sort of export of games right now. It's interesting because the Western publishers initially looked at China basically as a market where we could be distributing Western product because the historical pattern for American media businesses has been, everybody wants to consume American content, and so if we could get the John Wayne movies equivalent of our video games over to China, of course, they're going to do better than the native Chinese games. And I think what we're learning is that through a very clever strategy and through very clever use of natural competitive advantages that we'll talk about later, China has really built, as they have in the film business as well, a robust domestic business that doesn't really need Western product in the same way that America anticipated that those products would be needed. And so I think it's a unique circumstance we find ourselves in right now in the games business where China exists not only independently, but is rapidly becoming a kind of global superpower through the reach of their acquisitions and through the reach of their intellectual property. Yeah, like you said, China's always been this market, at least in the West where you're always trying to get into and turns out there's sort of the inverse happening as well where you know, the Eastern or China is looking at the West being like, oh, let's go and get these people as players. And we're finally starting to see that that really break out. And I'm excited to really dive into it. Maybe as a disclaimer, we're going to talk about it a lot about China in this episode mainly from the lens of two Americans. It would be really silly to not include a caveat around the implications of Trump and China and what's happening. You know, at the time of us recording this episode right now, we're sort of in the midst of seeing Trump's tariffs specifically targeted towards China, unclear what or if that means for the games industry in China, but really important to sort of just have that as an asterisk. We try and have these episodes be as evergreen as possible. That's obviously something that we cannot control in this specific episode. Yeah, like our AI episode from last season, I think this one may age poorly given what's happening with our fearless leader currently in his trade war that he's carrying out on a global basis. It's going to have particular implications obviously for China. And there are certainly scenarios in which China retaliates in a way that's devastating for the games business and that really cuts off a limb of the games business in terms of its opportunities to distribute in China or to utilize Chinese capital in particular, which has been secretly and stealthily behind a lot of major successes in the West. Yeah. And look, we won't try and view too much of this through exactly that one today because a lot of this is trying to keep it as evergreen as possible, but it's important to just have that as the asterisk of when we talk about sort of the soft powers or hard powers of China and the context globally, those things can all be flipped just based off of how this stuff plays out. So let's start and talk about China's competitive advantages today and historically, like why has China been in a position to become a global superpower in gaming? Yeah, I look, there's a bunch on Pac-ear and so I'm excited because it's sets up a pretty clear through line of how they've gotten to the dominance that they are today. So number one is clearly they're enormous, deep and highly trained labor pool. You know, they just have a manpower advantage and they've historically, although we're starting to see that change a little bit at the margins, they've historically had a cost advantage just because of the cost of living and the ability to pay, equivalent labor significantly less than the labor would command in the West and so that's obviously been an advantage for them across the board, not just in games, but in manufacturing and in many other realms. And so it's the one we need to start with because it's obviously one of the most important advantages that China possess is just high quality manpower. Yeah, there's one other piece within that which is sort of just the cultural mindset of, you know, they're known for working 996s and, you know, which is just way longer hours, but also maybe just purely thinking about winning and far more around like let's make a great business than maybe even let's build a great art form. Yeah, I think those may be ephemeral advantages because I think as we've seen in cultures like Japan or in Korea, those things have generational implications. You know, you think about the postwar generation in Japan and the fear that America had of Japan in the 1960s, 1970s of like Japan Inc and the rising sun in the East and all of this terror around that Japanese like collective labor practices and all of these other things were going to upset the American capitalist dominance. And I think it didn't turn out to be true and part of the reason it didn't turn out to be true is because the next generation of Japanese workers was like, fuck this. Like we're not going to work those hours and, you know, we're going to play video games or whatever. There's sort of a decadence that sets in with prosperity and I think we've seen it in a variety of cultures in Japan and Korea increasingly in India and I wouldn't be surprised if we are seeing it as well in China that the benefits of prosperity lead to a little bit of laxity when it comes to, you know, that willingness to kill yourself at work. Yeah. That's an important asset on that. So I appreciate that lens. I think the second competitive advantage that they've had is an interesting historical one and that is that they entered the gaming business really at a time when they didn't have to be burdened with the legacy of the package goods business or with the PC and console businesses. They started with PC, free to play, and mobile from the beginning. They really sort of like with telephony. They never had their sort of copper telephone infrastructure that had to be superseded by wireless. They started straight on wireless, basically. And so that provided them with a real advantage because they again didn't have to unburden themselves and retool like a lot of the major US publishers did around these new methods. They could dive in with both feet and there were further structural reasons which we'll talk about in later in this episode about why their market was so well-suited to move on to these particular innovations so quickly. Yeah. I mean, a pure example of that would be even just around monetization where in the East, you know, let's say, gotcha mechanics for monetization are way more accepted than they are in the West, where the West is thinking about still $60 package goods games. Don't really have that as clearly in the East. The third competitive advantage is an interesting one as well because you could almost look at it as a disadvantage. And that is that their government, the Chinese Communist Party, was very restrictive in terms of its approach to gaming from the get-go, banning consoles, limiting play hours, not accepting licenses for new products, like essentially sort of providing almost a curatorial slowdown function on the number of games that could be published in the market. And all of those limitations and issues really pushed the Chinese publishers in particular the bigger ones into a global perspective and allowed them to deploy their capital outside of China in ways that benefited their businesses in China. And a lot of their global dominance, I think, is the product of essentially that squeezed balloon where the limitations that the Communist Party placed on them in China led them to look abroad for growth. Yeah, exactly. I mean, when you're limiting things like licenses and you're making a ton of money off of your games, the natural thing is where do we possibly deploy this dollars? And of course, if they're long on gaming and they believe in gaming, globally is the only place they can go, and they were ahead of the curve, which we'll talk about a bunch on making some really smart acquisitions. And while they've been increasingly, this is really the fourth competitive advantage, while they've been increasingly focused on domestic product, both, you know, Tencent, NetEase, we'll talk about, but throughout the Chinese gaming market, there's sort of a retrenchment around local product as opposed to foreign product. They did benefit for many, many, many years from not having the proverbial, not inventive adheres syndrome, which a lot of Western publishers have suffered through. They looked out for acquisitions, for third party product, for intellectual property around the world, and, you know, Tencent in particular, but even Netties, although Netties is pulling back a bit as we'll discuss, Tencent is invested in some of the largest and most important companies in the West. And they've benefited tremendously from their outreach to companies like Activision, Riot, Epic, and others. Yeah, and look, even the consolidation or investment, you'll see these Tencent and Netties even have their hands in most of the big breakouts in China, just naturally off of their success. Tencent owns roughly 20% of Garena, right, which is Dominate's Southeast Asia. It's like they've done really, really interesting strategic job of kind of looking ahead and, you know, placing their chips on the table in ways that really benefited them both domestically and into broad. Couldn't agree more. So I think it's important to just wind the clock back a little bit of how these roots for the competitive advantage were formed. And, you know, we've talked about this in the Steel's Escape episode of all the way back in season one. But piracy was obviously a huge, huge part of what led to free-to-play being the dominant distribution method and business model of games in China. And so, maybe we just wind that back a little bit, which is, you know, in the early 2000s, China was sort of impossible to distribute games there without them being pirated. Yeah, it was considered a 100% piracy market, wrongly, although not entirely wrongly, by Western publishers, because of the lack of electronic distribution, the lack of free-to-play and the like, the distribution of packaged goods games there was just rampant piracy, basically, as much as 95, 98% piracy. And, you know, as we talked about in episode one of this entire series, when I was working at the Walt Disney Company, I remember Sandy Lidback, the general counsel of Disney going over to China and trying to negotiate these protective agreements that would enforce American intellectual property in China. And it was literally like trying to, you know, drain the ocean with a spoon. I mean, it was utterly impossible given sort of the cultural biases, and again, given the price points, it's like you couldn't insist on Western price points in China at that time when the buying power of the Chinese consumer was so limited. And any attempt to try and change pricing to accommodate the local conditions invariably resulted in gray marketing, gray marketing where goods were being purchased cheaply in China and then exported from China to the US to be resold at a profit. So there was kind of a no-win situation for the packaged goods publishers in China. And the fact that the domestic publishers started from a platform where packaged goods publishing was basically impossible was a tremendous advantage. Yeah. Look, it meant that free-to-play was basically just the DNA of gaming in China. And so, which obviously they end up being way further ahead on things like Gacha and so many other places, but they nailed microtransactions. They nailed the free-to-play model sort of out of necessity. Yeah, they were forced to innovate and at a time when the Western publishers were not forced to innovate and as a result, they ended up five years ahead. Yeah, yeah. Look, it's pretty amazing to think about again of all of these random sort of macro or structural things, but it really did set the DNA for China moving forward and they still are further ahead on free-to-play. I think the second historical route of this competitive advantage of China is the fact that consoles were banned. Again, something that looks like lemons turned into lemonade here, fearing the impact on youth and the decadent culture of video gaming that was going to poison the minds of the flowers of China, they banned video game consoles in 2000. And so really for a decade and a half or more, they have really had only a PC and mobile business. And in a sense, those two businesses being the most open businesses, the most open platforms for innovation, they benefited tremendously from that. The flip side, you could imagine consoles were allowed into the country. It would have been a situation where the Japanese companies, because of their proximity and despite the cultural hatred between Japan and China, dating back to pre-World War II, you still would have had a real advantage for the Japanese console manufacturers in China. And that never materialized. And Japan really never got a foothold in China in the video game business, in the way that you might have expected, you know, had you been looking at it back in 2000. And instead, it was really American publishers that benefited from the way that the Chinese market developed. Katz, it's sort of crazy, because they lift the ban in 2015, I think, and it didn't really mean anything at that point. You know, consoles are technically allowed and encouraged in China now, but it doesn't really mean anything. It's such a small market share, just purely off of the gaming behavior that exists or whether that's in the PC cafes or mobile in general. But yeah, they just skipped an entire thing. Some were to, you know, when you're talking about the telephony piece, they just skipped a whole section or chunk of gaming, and they don't even really know that that exists. Yeah, they also had publishers on mobile with much more market power than Apple, right? So they didn't also have the mobile problem that we talked about in the last episode, where, you know, mobile gaming was really defined by that duopoly of Google and Apple. And as a result, you know, subject to all kinds of crazy because of the way that those companies behaved, you always had a kind of open Android environment in China where local Android flavors were running in parallel with Google. You always had direct distribution there. You always had a lot of market power for the, for Tencent and particularly for WeChat in China that could route around a lot of the Apple dominance, particularly from a marketing and distribution perspective. And so they were able to also avoid a lot of the control issues that have kind of screwed up the mobile business in the West. Yeah, yes, specifically because of sort of the Chinese Communist Party being the overarching figure that, you know, obviously isn't going to let Apple or Google have too much power over those platforms. Yeah, and that leads us to really the third competitive advantage, which is protectionism broadly, right? I mean, the great firewall is its known, right, limiting American companies access to Chinese customers without the benevolent large s of the Chinese Communist Party and without the also the accompanying surveillance state that the Chinese Communist Party insists upon. And also in really the most important limits on the licensing of both foreign and domestic games for publishing that every game that gets distributed in China needs to do so under a license with the exception we discussed in the last episode around steam and its backdoor entry into the Chinese market. But in terms of legitimate distribution in China, you need a license. And the Chinese Communist Party has been very capricious regarding their granting of those licenses. There have been times where for months on end, no new licenses are granted or very, very few licenses are granted. And I think you told me when we started recording that annually, they're only granting like a thousand licenses. Yeah, yeah, yeah. I mean, there's so I was looking to it before we were recording this episode. And let's say 2017 was peak where they were they because a lot of this is public. So in 2017, they they went in over 10,000 games and that's domestic and international. And again, this is across PC mobile and council, because now you have council games that are trying to get in and you have to pass past few years. It's been right around a thousand games. And that is it's sort of the reverse of about 6% of the number of games that are published on steam annually. Yeah, yeah. We were talking about it before this, which is valve has gone completely opposite of this. You know, where they're letting, you know, we have 17,000 new games, you know, added last year or whatever. And these guys are now the curators. And so you can just imagine what that means when you're saying only a thousand new games are going to be greenlit. And again, this is greenlit by the government. And so it's not even by a specific place. Well, it's produced a really vibrant domestic industry because it's prevented the country from being dominated by foreign games on the one hand. So I think it's had that interesting benefit for the site, the development of the Chinese gaming industry domestically. And I think it's also probably benefited the games, obviously, that are licensed and official because those games can derive revenue broadly from the country in a way that the games obviously that are not or that have to come in through the steam back door, obviously going to be limited in terms of their ability to be broadly distributed. And so it provides in a way a perverse curatorial function for the Chinese market. Yeah. I mean, look, you can imagine the incentives of that, which is, let's say you are a ten cent or a netty's, the reality is the only games that you're going to greenlit or try and bring in from the west are absolute hits because the tradeoff is that you can go and build your own game and just by default because there's going to be fewer games that are out there. Your chances of heading are going to be higher. Also, your margin should be a lot higher, because you own that game wholly. And so, of course, that's how this should play out, which is these game developers are either focusing on their own domestic stuff or bringing the absolute best games. I think that's right. And I think you can see that when we turn to looking at some of the publishing success stories in China, looking at their strategies, you know, they have pursued those kinds of strategies, partnering with some of the biggest and most successful of the Western brands. And doing so often, in the case of Tencent, early, early on, before it was really clear that the businesses they were investing in were hits, they really had good taste in terms of their investment strategy to invest in companies like Riot, like Supercell, like Epic, for example, at times when they weren't quite at their peak, they didn't bypass the cell by date. They bought well in advance. And in those instances, they benefited tremendously in their both domestic market and also from the foreign revenue that they were able to consolidate. Yeah. And one other piece that I just want to reiterate that we talked about directly at the beginning of this episode is by having this great firewall or limiting the amount of licenses of games coming in, this actually pushes a lot of these developers to want to look towards the West or releasing games into the West. And so they're sort of the undercurrent of you are a great game developer in China, rather than even having to think about, am I going to get the license in China? I can actually just go and release that into the West. And so that's always been in the back door. And for a lot of, for a long time, that was sort of thought to be impossible, but as we'll talk about in this episode that, that became true. So let's start and talk about Tencent because they're the big dog in the Chinese market and have been so for quite some time. In fact, when I first started going to China as a game publisher back in the Jammed Hat days, Tencent was distributing my mobile games in China in 2003, just before they went public in 2004, same year that we went public. So obviously with vastly different results. But they have been around for quite some time. And I've been friendly with the management at Tencent really early on and have had an incredible dialogue with them over the last couple of decades. And it's led to some really fruitful partnerships between some of the companies that I've invested in and Tencent, both as a Chinese publisher and also as an investor in the West. I think, unfortunately, a lot of that activity has been curtailed as the American Cifius rules, which basically defined the ability of foreign companies to invest in American companies that are considered to be national security interests. And weirdly, a lot of both gaming companies, but particularly gaming companies that have a social networking component, have fallen onto that list of potentially sensitive entities that would include things like TikTok, for example, and other things you heard about the TikTok ban. That's a direct result of this, basically, and this unwillingness to allow Chinese companies to invest in sensitive American businesses, whether it's for privacy reasons or whether it's just for overall strategic reasons. And we've talked about Tencent before, which is Tencent, obviously, as we chatted in Wii games and really had built an amazing platform-based publisher, but also off the back of one of the most popular messaging apps and all those pieces. And so they had this amazing distribution edge, and to their credit, they thought a lot about how do we actually leverage the fact that we have this big distribution mode, or sort of the clear, three line, two Chinese users, and bring Western products over to them. And so they bolstered that sort of before, at least to my knowledge, they probably did that better than anyone else in China if go into the West and help bring those apps over. You know, interestingly, Shonda, a company that no longer really exists, at least as a meaningful competitor in China, they were a kind of early pioneer of Western licensing in at a time when that was easier to do in China. But they didn't do it that successfully, and a lot of the products that they pioneered ended up in the hands of other publishers over time. I think it's important to remember some of you, you just alluded to, which is that in many ways Tencent looks in China more like Microsoft looks in the West as a game publisher, their highly diversified games are important to them, and a driver of profitability. But they're in a billion other different kinds of businesses, and their primary business is basically a vast communications network, rather than, you know, being solely reliant on games. In many ways, NetEase looks a lot more like Activision, more of a pure publisher that sort of grew up domestically from the earliest days. And so when you think about Tencent and NetEase, it's important to remember that distinction that Tencent isn't as reliant on the game's business, perhaps as other publishers in the Chinese market are. Yeah, I mean, look, you can go through Tencent earnings, you know, granted it is a Chinese company, but try and go through their earnings and try and pick off what is Riot's revenue within there, right? You know, when Valorant comes out, are you able to track what is how well Valorant did? You won't be able to at all, because it is such a small blip in the grand scheme of their overall revenue. So we've talked about some of these foreign investments. I just want to run through a list of them, because it's so remarkable. And it shows you how strategic Tencent has really been at utilizing their balance sheet abroad to provide these strategic footholds and really important companies in the West. So they currently own 100% of Riot that they bought originally 51% of it when we divested back in, you know, many, many years ago. And they had negotiated a put agreement where Riot could essentially sell the remainder of their stock that wasn't being bought at the time to Tencent, you know, over a period of years. And that formula for the put was based on revenue and earnings combination. And ultimately, the success of League of Legends made those last tranches of shares insanely valuable to the Riot founders. And that was important because Riot had been delaying and dragging their feet around publishing a mobile version of League of Legends in China and frankly globally. And I think the founders didn't really feel like they kind of had the essence of League of Legends right on the mobile phone. But in the meantime, the Chinese managers of Tencent were looking at this as an enormous lost revenue opportunity like every month that went by. And so I think after they acquired the final tranche of stock and became the 100% owners - I think they put out the, what was it called the honor of Kings within months of acquiring that last tranche. Yeah. And honor of Kings to this day is still the top person game overall. Last year was still, you know, the top person game globally, which is sort of amazing on mobile. So 100% of Riot, 84.3% of Supercell, perhaps the most successful of the Western mobile publishers, 80% of grinding gear, 40% of epic games, the makers of Fortnite, and 38% of pocket gems, close to 20% of CLTD or Garena, which dominates the Indonesian and Southeast Asian gaming markets, 13.8% of Krafton, the makers of PUBG, and one of the sort of up and coming Korean publishers and now 10% of Ubisoft in a very complex deal that has them acquiring some of the key intellectual properties outright while at the same time investing in the existing publishing business to kind of keep it afloat as it was foundering a bit. Yeah. We were talking about this before the episode, but it seems like in a lot of ways they positioned themselves to get meaningful ownership of these businesses, sort of to be in the whole position where if there was an opportunity to buy the whole thing, they're going to be the ones to do it. Does that resonate with you? I've experienced it personally. It's like when I invested in Snapchat, they came to me very early on and were willing to participate without really questioning much of the valuation in the series B after I led the series A, and they ended up owning a very meaningful percentage of Snapchat, which of course they monetized through the IPO. They never felt the need to actually acquire the company. Similarly, when we pivoted Hammer and Chisel into Discord, we had an outstanding publishing agreement with 10cent for Faith Forever, the game that Hammer and Chisel was making, and I was able to negotiate a sort of debt for equity swap with them, and they ended up with a small initial position in Discord, which they've leveraged over time. They participated in the series B, and they've been buying stock on the secondary market to the point now where they're a meaningful owner of Discord, and so I think in the absence of CIFIUS, they might have actually been a potential acquireer of Discord, or at least of one of the competitors for the right to acquire Discord, and they do that very strategically, which is it sort of lowers their cost to acquire the company. They owned 10% of Riot at the time that they negotiated for the acquisition, and when they were bidding against other companies in the space who didn't end up with the asset, they were obviously paying 10% less than their peers because they already owned 10% of the company. Well, it brings up an interesting part, which is, we sort of have screwed around it a little bit in this episode, but one of the main reasons why, let's say, a Riot would have let 10cent own 10% at that time, like walk me through that thinking. Well, it was strategic access to the Chinese market, obviously, right? like we figured that we were in a much better position to get And the kind of premium placement and attention in China, if they felt that they had an equity interest in the underlying asset and that the success of Riot as a company would benefit Tencent as well as Riot. And so it was an incentive, basically, on our part to try and make sure that our publisher felt they had skin in the game. Yeah, so this is sort of the genius of Tencent's model of leveraging the fact that they knew they were sort of a gatekeeper or one of the few pasts to get into China was, hey, we're going to help you. Maybe we'll let you be one of the, you know, 100 games that we're going to green light this year through the CCP. Let us take an investment in you and own a real equity stake before we do that. Which is, again, this is all of the, like, weird structural stuff that happened behind the scenes, that these early decisions by the CCP, whether intentional or not, bolstered Tencent and Netty's and others to sort of become these dominant global players. Yeah, it was a different ecosystem than the US ecosystem or the European ecosystem for game publishing. And it required those companies, you know, like Riot and others that wanted to take advantage of that ecosystem to play a different kind of game than you would normally play. And I think Riot played it pretty successfully and Tencent played it successfully in their own way. And look, you were involved in Riot during this time, but it's very clear that Tencent actually played a huge part into the long-term success of Riot because China became such a huge part of that. With that question. Absolutely. Which is just amazing. And sort of speaks to, you can imagine the success story of that makes it that much easier for them to go and do all these other deals. So it's interesting then to think about Netty's in that same context because Netty's followed a very different pattern, but attempted to do some of the same things, maybe not quite a successfully. So you want to talk a little bit about that? Yeah. So Netty's is more of a, let's say pure play, domestic Chinese game developer. One of their biggest hits was this game, Fantasy Westward Journey. I'm sure in China, it probably had a different name. Let's say the English translation of that was a massive massive hit, one of the first real MMOs to hit in China. And they continued to dominate and perfect the free-to-play model and monetization in China. And in 2008, they sort of had this amazing opportunity, and I'm sure there was tons of negotiations with Tencent as well, but they ended up becoming the exclusive publisher of Blizzard in China. And World of Warcraft was really popular in China, so like, you know, that this was not a trivial thing. Yeah, yeah. I mean, like, they get to benefit off of World of Warcraft and ride the wave of that. And I imagine, you know, I haven't spoken with Netty's, you know, execs about this. But I imagine that was a very big moment of, oh, wow, we have one of the biggest games in the world, and we brought it here successfully. Let's continue to do that. So a different path than, let's say, maybe the overall savviness of Tencent thinking about the diversification and that pure play, whereas it seems like Netty's almost stumbled into it off of their own gaming love and obsession. Yeah. And then did a really good job with the Blizzard rights for 15 years. And, you know, that was really a bedrock and built a domestic business, sort of in parallel, obviously, starting from a really good position with fantasy westward journey, which was an enormous hit in China. They diversified onto mobile. They had a massive recent hit with Eggie Party, which we've talked about in previous episodes. And, you know, just throughout their history, have really built up a really great domestic business. Looking abroad, they tried, I think, sort of to play a little brother strategy to Tencent's Big Brother strategy, if you will. And I think they deployed, I would guess if I had to estimate well over a billion dollars of capital in the west, making equity investments in numerous studios in the US and Europe. Yeah. And looked, I would say their reputation within the games industry as a financier was largely that they had taste, you know, and in a way that maybe some of the other publishers out there, it was far more of, we just want to support this game, we want this game to exist. And again, you could sort of track that back, almost, you know, going to Blizzard, which is sort of the purest form of, we just love games and want to build like this love story for gamers. And so they really, a lot of the games, even let's say Marvel Snap or Second Dinner, they were sort of the first investors on day zero of that as a, hey, we just want to support you when we love this. They did the Series B in that game company after I did the Series A. Yeah, exactly. And so I think they have real taste and a lot of the strategy seemed to be a lot more around that. And also publishing rights in China. I mean, they have done those investments again, like Tencent strategically to create that sort of win-win environment around the Chinese publishing aspect of it. And they've been a great publisher for us at that game company in China. Yeah. And it's, it's interesting because you and I both both noticed that it seems like they're, they're starting to actually pull back on this international side. Not something that we've just noticed. It's like William Deng has literally, like, gone out and started to ask for redemption or secondary selling of his shares in a variety of game studios in the West. So it sort of begs the question, why? And I mean, you think about the fact that they've, they've made a number of these investments in these, these foreign game studios clearly we're going to talk in the next episode of this podcast about the environment for investment and liquidity in the game's business. And it's not going to be a great story. And it may be just a purely financial decision on their part that, you know, they've got a bunch of dead money sitting in games companies in the West that, you know, maybe they could use and put to better use in other ways and other, in other territories and maybe domestically. But I'm not sure. Yeah. Look, a part of me and, you know, this is putting my Tim Foyle hat on a little bit, which is losing, losing the Blizzard rights was clearly a pretty big blow to Netty's. And we didn't point this out, but in 2023, those rights went to Tencent. Yes. Yes. The, the license expired. Bigger negotiation, apparently, from all public disclosure. And it turned out that those rights flipped from Netty's to Tencent. And there was a lot of sort of petulant behavior on both sides around the losing and gaining of those, of those rights. And so there was bad blood in the water. Yeah. So like I, I have to imagine that's a massive, massive blow to Netty's to lose sort of the crown jewel of all games and globally. And not only to lose it, domestically, it's, it's lose it to your biggest competitor. And so again, Tim Foyle had a little bit is because of CCP's involvement or the Chinese Communist Party involvement in these things, it's very unlikely that a deal like that happens without CCP's involvement. You could certainly imagine a scenario where CCP is actually saying, no, Tencent gets the rights out to this. And if that's the case, you might argue that, that Netty's is, is thinking, how do we get back on the good graces of, of, of the CCP? It could be. I don't know. I, I wouldn't say so. That wouldn't be my first thought, but it's an interesting theory. Let's turn to some of the more up and coming games companies in China as we close out this episode. Because I think we've seen some really interesting grassroots movement in China, both in the mobile space, but particularly in the PC space and increasingly in the AAA space. And I think those trends are very significant. And I think they auger a very interesting period that we're about to enter with regard to Chinese companies exporting their product to the West as opposed to being reliant on their domestic markets. Yeah. And, and so look, it really, it really stems from, from mobile is, is where the, the early dominance in a lot of this, this comes from globally. So China is very quickly become, if not the most important player, they will be the most important player within a few years on mobile, where you have several, if not more than half of the top 10 games in the US are from Chinese studios. And that's, that's baked into the fact that they're, they are doing the global ambition on day one. They're not thinking about how do we, we just publish in the East. And the reality is they're just better at monetization and, and free to play in a way that, that the Western developers aren't. So as we've talked about in the mobile episode, you have Eastern Europe studios, you have even, you know, it's really, yeah, it's really, yeah, yeah. You even have Vietnamese studios starting to work right now. And China is just continuing to pave the way. And so a lot of that, you know, the, the big ones that, that we'll talk about here, but sort of the first one that we, we should really talk about is Miho Yo, or Ho Yo verse, which is founded all the way back in 2012, which is sort of, sort of amazing. But they started with, with quite a few games domestically, Han Kai was sort of the series that they started in, in pre 2020. But they're big, big hit, which, which really was sort of the landmark hit and, and the West was Genshin Impact, which launched in, in 2020. And Genshin is almost feels like breath of the wild or, or Zelda, and they're bringing this like triple A quality council and graphics to mobile. What are the maybe most notable parts of this game, though, is it brings in, like, pure gotcha mechanics and monetization in a way that we just never really ever would have thought would have worked in the West and it, it more than worked. Genshin is, is done several billion just in the West, and it wasn't until several months or years later that they started to launch the PC skew and go full cross platform. But they they sort of normalize got to into these core games into the West and one of the first real breakout games that you see people even the West play it today. So interesting and the things done billions and billions of dollars in revenue, it was really the first real breakout in its PC implementation of kind of a Chinese MMO working in the US in a way that nobody really thought possible. If you'd looked at Chinese MMOs going back historically, they are very culturally specific, extraordinarily busy user interfaces, odd gameplay, almost like the equivalent of the Japanese RPGs of an earlier generation where yeah, they were a real acquired taste for the Western audiences. But Miojo really nailed it with Genshin and it was a breakout in a lot of ways and they continued to innovate. It's like, well, talking our AI episode about a new game that's in beta from Miojo that is a AI first AI platform specific game that's really compelling. And look, I mean, it's Miojo is on pace to do over $10 billion in revenue globally by the end of 2025 and 5 billion of that is in China. So let's say about half of the revenue is outside of China, sort of unheard of for what is really a game made from Chinese developers and very Asian in terms of its in terms of its sort of look and feel. Yeah, it's the game. It feels like an anime game and has gotcha mechanics. It's not like it was a westernized game or sort of built to be a westernized game. It sort of was purely a Chinese cultural game. And so one of those just amazing stories, but maybe the canary and the coal mine of of, you know, this is where it's all going. The other game developer that I think we should really call out is a studio called Habby, which is actually founded by an excheat and mobile game executive. And China mobile was sort of known for like piano tiles back in the day if you ever played one of those games. And they launched this this game in 2019 called Art Hero, which actually is probably my favorite game of all time on mobile, even more than a clash royale or any of these others. But they they pioneered this genre called hybrid casual, which really what that means is their games look and feel like a hyper casual game, which really means simple gameplay, easy to pick up, sort of broad appeal and advertising, but they nailed the mid core monetization. So the game loop feels incredibly deep despite the actual core gameplay, which is something you and I talk about a bunch of like, what are you actually doing in the game? And in Art Hero game, you're just moving your finger around your screen. You're not actually taking any actions. You're just dragging your finger, but they made it feel incredibly deep. And look, they they are best in class and user acquisition. Like that's for sure, because it's sort of pioneers, the fake genre or fake game ads where you're getting tricked a little bit. But even more than that, the retention is incredible because it is closer to this mid core type game. Interesting. Yeah. It's funny that, you know, that pattern that we talked about in the mobile episode. And we associated mainly with just sort of Israeli casino gaming, right? In general, in terms of those sort of fake ads drawing you into a higher monetizing play pattern, we really should have talked about the Chinese companies as well, because they've been huge proponents of that particular strategy. And you look at something like last war. I think everybody who's listening to this is probably seeing those ads on either Instagram or Twitter or whatever, where the hordes of entities are coming down the road and these lone gunmen are battling them as those hordes approach. And you know, that is a classic, classic use of that kind of bait and switch to get you into into those games. And they've been incredibly successful. I think last war is massively, massively successful from a financial standpoint. Yeah, yeah. I mean, you know, last war, which is from a studio called Funfly. The other one is is Whiteout Survival from Century Games. These two, if you've ever seen the ad of it's like plus 10 minus 10 and they're like running through a little checkpoint, they pioneer that whole ad unit, which is basically become the gold standard of an ad unit in mobile games and really off of fake ads, right? Like you don't really ever see that gameplay when you're like, which actually it seems to probably be a pretty fun game, but you never see that when you're playing. And actually, those two in particular really sort of take their skills from the East, which is 4x games. Yeah. And those games, you play the first 10 minutes and you somehow end up in really deep 4x games, which monetize like crazy well, but almost feel reminiscent to our friend Gabe Layden and machine zone type games, but sort of arbitraging it through these fake ads. So interesting. There's a couple others that are notable, you know, in mobile that are worth talking about. I mean, Tencent's had incredible success basically taking PC games, PC hits and transitioning them into mobile hits has done it with PUBG, has done it with Call of Duty. Yeah. I mean, the Call of Duty mobile is, I mean, it's an amazing game, like truly, amazing game. And it was a tail wagging the dog in terms of commerce for a long time. Yeah. And that's purely built by a studio called Timmy Studios out of China, where that game looks and feels, it's sort of amazing because you and I talk a lot about how do you take Western games and turn them into free-to-play games. They turned what is Call of Duty, which we think of as a premium skew into a pure free-to-play game. And it might actually do better on a cost, or like on an actual revenue basis than Call of Duty as a franchise, which is pretty remarkable. I think that was what I was alluding to. I think it's really very possible that's the case. Let's turn and take a quick look at, I think, the big news out of 2024, which was China's really powerful entry into AAA with Black Myth Wukong. Yeah. So Black Myth Wukong, basically, is a game started by a studio called Game Science, interestingly enough, from X-10 cent devs. And they started working on a bunch of random games, similar to La Se Miguelio, but really, they made the switch towards building Black Myth Wukong, which was, let's build a AAA game, or AAA narrative style game, that really embraced Chinese culture. Like Black Myth Wukong is a cultural icon, it's an actual story that is rooted in China, in a way that I'm trying to think about, a fairytale would be like in, or lore would be like in the US, but basically that. It's something that they would learn about as a mythological creature. And they build this, it's a really small team. So, you know, 30 employees in the early days, and at the end, it's still only 140 employees credited at the time of release. But they release it as this $60 premium game, which again, it's not something that you would really ever see from China, let alone an actual AAA narrative game that's on par with Zelda, or Spider-Man, or Hogwarts, or whatever these games are, and hit absolutely crushes. Like, it worked. Yeah, like, you know, sells 25 million copies plus, and so I mean, you could do the math of that, just how crazy that is, but it also was nominated for games the year on every single major news outlet. The graphics looks sort of just out of this world, but really, really notable of, like, they successfully shaped a AAA game out of there. And I think that's really important, because again, like we've seen in the film business, if you go back and look at sort of the top films in China over the last 10 years, 10 years ago, it was, you know, more than 50% Western imports, and in 2024, it was zero Western imports. And I think there's a real danger or opportunity, depending upon your point of view, that that's going to happen in the games business in China. And I think the potential of the Trump trade war is going to maybe accelerate that in a way, because if it turns out that it's too expensive, or whether China decides to put retaliatory tariffs or restrictions on Western product entering the Chinese market, it's going to bolster the Chinese AAA market even more. And I think this is an incredibly significant milestone in the development of the Chinese gaming market. Yeah, and look, you know, Mitch is someone who loves, you know, Hollywood and thinking about films. And it makes a ton of sense that, you know, culturally domestic cultural experiences or stories will resonate better in those markets. I think for a whole bunch of reasons, games are sort of a unique beast to build and build that natively, but the fact that they're doing it, or they're showing sort of the first signs of them being able to do that, is actually a pretty big warning sign of, if Hogwarts isn't going to work as well in China, there's going to be a lot of ripple effects of what that means. Again, the Western game developments. And particularly on the prospects for the Western publishers, because I think a lot, as we've said in previous episodes, a lot of these Western publishers have made a big bet on growth happening outside of the US in some of these less traditional markets in China and Southeast Asia and the Middle East and North Africa and others. And I think, you know, if China is really replacing those Western products with domestic products at equivalent quality levels and with more local cultural resonance, it's going to be a real problem for those publishers. Yeah, and look, it's a little bit of sort of the craziest part about the story is maybe the price point of, you know, we talked so much about how China is known for free-to-play, and these AAA narrative games sort of historically have always maybe looked closer to your box-gooder or film business, which is closer to the $60 narrative game. And if that's what they're selling this for in China and it's working, it sort of opens up a whole other industry that, again, would have been closed off for decades. So, let's wrap this episode up by looking a little bit forward at where we think we're going to go and what we're going to see from the Chinese market and from Chinese publishing abroad over the next couple of years, and I think we're both probably in agreement that we're going to see more AAA, more Blacksmith, Wukong-like games make their way from Chinese studios to the West and be successful in the West as AAA product. Yeah. I think the other side of this is really around sort of the regulation and the globalization of this, which is now that there's not just one or two success stories of Chinese studios working in the West, it sort of is clear that any Chinese studio or any Eastern studio should be setting their sights on being a global studio rather than even just being successful domestically. Yeah, and I think, again, depending upon how the trade war that we're currently engaged in resolves, it may be that China has to look to markets like Southeast Asia, like India, like the Middle East, and even Europe, where they may not be engaged as dramatically in a locked horns trade war, like they may be with the United States, and this may really hurt the US game market because the access to capital and the access to the Chinese market that may be available through these Chinese publishers in those territories, those non-US territories outside China, it may really bolster those businesses and much to the detriment of the US publishing industry. I think it could be a really bad sign, and it's one of the reasons why I think the Trump trade war may be, and is likely to be, a strong net negative for the US game industry. Hmm. And look, there's another sort of subtle story within this, which is there are quite a few studios that we haven't talked about it within this that actually start to set up shop in Singapore or regions around it, sort of strategically as a, like, let's be global ambition on day one. Agreed. Well, you know, getting back to that sort of equity piece around for an investment, you could see a scenario in which the US forces China to divest itself of US gaming companies, of investments in US gaming companies, and that means a 40% sell off of their epic interest and potentially the spinning out and maybe, you know, would take, they could take a public or maybe they could just raise private equity money and try and continue to rent it as a independent entity or whatever of Riot games. Yeah. Yeah. It's all eyes are on Supercell and Riot and these other, these major studios that Tencent and other Chinese corporations have massive, massive holdings in. And what does that actually mean? You know, Riot, Riot's almost fully based in LA. Yeah. And what does that mean when you're, when you're owned by a Chinese company? I think the other interesting trend that we've seen and we've seen this with the deep seek announcement a couple of weeks ago where China basically locked out of the market for next generation GPUs, which are the foundation of a lot of the model development in AI went open source and with, you know, innovative uses of lower quality GPUs and built a really viable platform for artificial intelligence that rivals the open AIs and the other US giants. And as a result, has really catapulted China into the AI business in a, in a unique way. And I think that their gaming industry domestically could tremendously benefit from that. And as we've always seen the Chinese gaming companies are willing to innovate in a way that often the US gaming companies are not. And so I would not be surprised. And again, we've already seen from Mihoyo an initial early example of this. But I wouldn't be surprised long term to see more Chinese innovation around AI in games. Yeah. And look, I mean, you have actually Tencent and, and Alibaba and the major players publicly releasing their own models, you know, they're releasing their own image generation models. And so you would, that is night and day from, let's say, the west where you don't, you aren't seeing, well, you are seeing Microsoft maybe as one of the few pioneers here. But let's, let's say Sony or, or, or Activision specifically or, or those actually releasing their own models. True. So look, China's been an incredible story in the games business over the last 25 years and particularly in the last decade. And I think we're about to enter a period of great uncertainty in terms of the relationship between China and the West. And it's going to be really fascinating to watch how this plays out. As I said, my own opinion is that the current state of play between the US and China is not going to be very auspicious for the Western game companies, for particularly American game companies who are trying to get into the Chinese market. Or for those companies in America who have taken massive or even less massive investment from Chinese companies and those companies may be forced to divest themselves from those companies leading to a great deal of uncertainty. And so I think we're entering some really choppy waters in terms of the Chinese-American relationship. But overall, over the last 25 years, it's been an incredible story and an incredible journey for both the Chinese companies that have participated in this great period of growth. And also for the US companies that have had massive success getting access to the Chinese market through their local publishing partners. Yeah. China, we could assume it will largely be closed off for Western developers to go in. And for the time being, we're seeing Chinese developers come over to the West or successfully Shippen to the West and start to get into the market share here. And so what does that actually mean if it's closed off for Western developers? So the next couple of years are going to be really, really important for the overall industry. The next couple of months are going to be really sweet stays. But it is, China is clearly a dominant player and sort of in the pole position to be the number one player in this entire industry. Cool. Thank you, Blake. Thank you. [MUSIC]