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Every gamer on the planet knows Activision Blizzard (NASDAQ:ATVI), but not very many have heard of Tencent (OTCPK:TCEHY) or Netease (NASDAQ:NTES). However, one can't ignore the fact that they are both extremely successful in the gaming industry. For Tencent, its growth of revenue was 58% on average for the last four years, and its net profit grew 48% on average in the same period. Its stock price grew as much as 525.42% in the last four years. Netease, another successful game developer, had 33% growth of revenue and 26.5% growth of net profit on average for the last four years. Stock performance-wise, Netease was up by 242%. By contrast, Activsion only had 16.5% revenue growth for the last four years. Activision's growth of net profit looks better only because it was losing money in 2008. The industry leader's stock price was down 36% since Sep. 12th, 2008. From a market capitalization standpoint, Tencent is five times as big as ATVI. It is interesting to see how the world industry leader is down 36%, while Tencent, a company whose business is only in China, is worth 5 times as much as Activision Blizzard.

4 Years Average Rev Growth

4 Year Average Net Profit Growth

4 Year Stock Price Performance

Market

Cap(in US dollars)

P/E

Gaming revenue percentage

ATVI

16.5%

-5.22%

12.31B

15.78

100%

Netease

33%

26.5%

282.71%

7.09B

12.54

87%

Tencent

58%

48%

525.42%

64.3B

36.72

53%

So, investors may wonder how Tencent and Netease achieved these results. Well, let me break it down into several parts.

First, both Netease and Tencent are not JUST gaming companies. In fact, Netease is one of the largest portal sites and the largest email service provider in China. With more than one hundred million active email users, Netease has fairly easy access to massive numbers of internet users, who are also potential online gamers. On the other hand, Tencent, the owner of QQ, which is the most popular instant message software in China, has more than seven hundred million active users. These factors contributed significantly to their success in the gaming industry. In fact, they don't even need to aggressively advertise their new games like some other gaming companies. Let's look back at Activision Blizzard; it is a pure gaming company with no mainstream internet users' outreach. That makes it extremely difficult for Activision to promote its games outside the hardcore gamers' community.

Second, both Tencent's and Netease's games have a wider target group than Activision Blizzard's. If you think of some first person shooter (FPS) games, the typical image would probably be some emotionless male soldiers wearing uniforms and some sort of night vision goggles or even gas masks. However, that image does not apply to Tencent's most popular game Crossfire. Instead, if you search "穿越火线" (Crossfire in Chinese) on Google, you can often find some attractive girls carrying guns. Targeting to female players is one of their most important factors to success. It would be ridiculous to say that female gamers would not choose FPS games with hot girls rather than traditional FPS games with only male soldiers with cool uniforms. Netease's flagship game, Fantasy Westward Journey or "梦幻西游" in Chinese, is another archetype of aiming at female players. This game's style of graphics is very childish comparing to most games on the market. In fact, that style actually makes the game extremely attractive to female gamers. Rovio's famous game Angry Birds is another successful example of being kiddish. Then let's look at ATVI again; most of the games they produce are not appealing to any females. When Diablo 3 was released, some girls were even complaining about how "Diablo" temporarily "stole" their boyfriends. The failure to attract female gamers makes it extremely hard for ATVI to expand their market share. In addition, Netease and Tencent made their games' difficulty level acceptable to most players. On the contrary, gamers are often frustrated by ATVI's games. You can often find players complain about how hard Diablo 3 is or how much "practice" Starcraft requires. For most gamers, they play games for fun and entertainment. I don't see why a 16 year boy should do hours of "research" on something like "Immortal push" or "Four gates rush" unless he is some South Korean who makes a living on this.

Third, monetizing is extremely weak for Activision Blizzard. The majority of ATVI's games cost around $59 and nothing thereafter. This is not a very compelling model since it sets a barrier for undecided players who are not familiar with some of the titles. Plus, gamers have a different willingness to pay for the same game. Setting a fixed price on the game is not the way to maximize profit. Unlike ATVI's fixing price on games, both Netease and Tencent are very successful on monetizing, and some even say too successful. Taking Crossfire as an example, it is a free to play game to begin with, which eliminates the entering costs. In order to make a profit, Tencent sells tons of online items in order to make your character more powerful. Here's the link of the digital items mall. By eliminating entering cost and maximizing revenue on each gamer, Crossfire is extremely successful, which generated $873 million US dollars in 2011 at the exchange rate of 6.253 USDCNY. ATVI's legendary MMORPG World of Warcraft generated about $1.2 billion dollars in 2011, but that was the revenue from the entire world compared to Crossfire, which is only in China. Netease's monetizing success is mainly on its real money auction house. Almost every valuable item in the game can be sold or purchased through the site for Fantasy Westward Journey or this link for Tianxia III (天下三in Chinese).

Through these offline auction houses, players can easily buy and sell items or even game accounts. Since valuable items and accounts can sometimes be sold for as much as thousands of dollars, players are more willing to spend more time and money to improve their characters, which leads to more gain for Netease. Of each item sold, Netease would charge 5% of the sold price. In addition, Netease prefers its own method of payment: epay.163.com rather than using a third party payment such as PayPal. As a result, money is transferred into epay.163.com. If the players don't transfer these credits to their bank accounts immediately, Netease can use the leftover money and massive cash in hand to do some financial business such as lottery, insurance or even venture capital. These are some successes that Activision Blizzard never achieved so far.

We do see some progress of Activision Blizzard recently as they launched a real money auction house for Diablo 3, incoming free to play Call of Duty Online in China, as well as the simplification of gameplay for the World of Warcraft's latest expansion pack: Mists of Pandaria. But that is just the beginning. Most importantly, Activision Blizzard must embrace the shift of platform from PC/console to mobile devices and bring much broader players to their business.

Source: What Activision Blizzard Should Learn From These 2 Chinese Companies