China's other gaming giant quietly snapping up global talent

NetEase's gaming empire now surpasses Activision Blizzard or Electronic Arts in revenue. PHOTO: NETEASE GAMES/FACEBOOK

HONG KONG (BLOOMBERG) - Jenova Chen needed money to put his latest game out in China. It was 2016, right after Tencent Holdings made a splash by taking over Clash of Clans studio Supercell Oy, and Mr Chen was counting on the newly acquisitive internet giant.

But when Tencent passed, calling his novel mix of stylized designs and free-play too risky, it was the smaller NetEase that swooped in. Founder William Ding flew all the way to San Francisco and spent hours with Mr Chen to seal the deal, unheard-of back then for the reclusive Chinese billionaire.

"He struck me as a product manager, not a banker," Mr Chen said last month. "NetEase looked at my game from a creator's perspective, and Tencent cared more about the business aspect of it."

That perception helped propel Netease's evolution from struggling web portal to Chinese gaming giant. After more than a decade of toiling in Tencent's shadow, NetEase's gaming empire now surpasses Activision Blizzard or Electronic Arts in revenue in large part because of its reputation as a champion of developers, willing to bet on creative talent.

It portrays itself today as the anti-Tencent: a constellation of studios laser-focused on games and unafraid to take risks, while its bigger rival juggles a vast social media and fintech enterprise. Despite being just over a 10th of Tencent's size, NetEase's draw for many Chinese developers is a singular focus on gaming and a track record of original hits like Fantasy Westward Journey.

The trick now is to sell that to global developers. One of Mr Ding's oft-espoused mantras is "embrace your inner geek," borrowed from Warcraft studio Blizzard. That could resonate with the game creator community, as NetEase and Tencent accelerate their international endeavors to escape a Chinese government crackdown.

Last Thursday (May 5), NetEase opened its first development studio in Austin, Texas - Jackalope, to be led by Jack Emmert, the comics and role-playing nut who helped forge enduring franchises such as DC Universe Online and Neverwinter.

NetEase's rise as a bona fide competitor offers global game builders a second window into the US$44 billion (S$61 billion) Chinese gaming arena - the world's largest - and could undermine Tencent's longstanding dominance on online entertainment.

It's a stark reversal from a decade ago, when Mr Ding's outfit was best known as the mere local distributor of blockbuster games like World of Warcraft. In five years, NetEase wants to put its name on a quarter of new triple-A releases in the global market, through everything from self-development to investment and publishing. And by the same time, it wants to generate half of its gaming sales from outside China, executives said in exclusive interviews with Bloomberg News, revealing previously unreported targets.

NetEase has a lot of ground to make up. It generates about 10 per cent of its gaming revenue from abroad, versus about a quarter for Tencent. The disparity shows up in their investment portfolios, with Tencent placing far bigger bets on the likes of Ubisoft Entertainment and Activision.

Because NetEase can't match Tencent's deep pockets, it's gambling on talent - people like Mr Emmert or Toshihiro Nagoshi, the industry icon behind the "Yakuza" series who left Sega Sammy Holdings to join NetEase in January. Mr Nagoshi and his team are now making a new console game for NetEase - an aggressive move given that neither Chinese company has a track record of developing titles for the Xbox, PlayStation or Switch, which are almost non-existent in their home country.

"The most important thing for games is creativity," NetEase founder Ding said in an e-mailed response to Bloomberg News. "Even after successes, we need to keep polishing games and operate them for the long term, in the spirit of craftsmanship."

Done right, it could finally help NetEase to gain recognition from the Western development community.

Getting it right abroad has become imperative in part because of Beijing. Revenue for the first quarter is expected to grow 11 per cent - the slowest pace in two years - after regulators froze game approvals in July. While that suspension lifted last month, regulators have made plain their willingness to punish an industry it accuses of encouraging addiction and even damaging children's eyesight.

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