Author | Sun Pengyue

Editor | Da Feng

NetEase has been navigating a rocky patch over the past month. According to Jinghe News, Shao Yun (nickname: Shao Yun), Senior Vice President of NetEase Games and President of the Tianxia Business Unit, will hand over his responsibilities and resign around the Spring Festival this year. Prior to this development, NetEase underwent its largest-ever internal anti-corruption crackdown. The company announced that it had thoroughly investigated and dealt with two cases of fraud, corruption, and illegal activities, with nine individuals facing criminal charges. Additionally, 27 companies involved in these fraudulent and corrupt activities were blacklisted, ensuring NetEase would never collaborate with them again. This turmoil not only shook NetEase internally but also sparked rumors that Ding Lei might soon return to the forefront to personally oversee management decisions.

External pressures combined with internal strife

Shao Yun, the departing Vice President, ranks second only to the co-presidents in NetEase Interactive Entertainment. He oversees multiple studios in Shanghai and Hangzhou, including the Tianxia Business Unit and ACE Business Unit. Beyond his high-ranking position and seniority, Shao Yun has spearheaded the development of numerous renowned games such as "Egg Party," "Diablo Immortal," "Knives Out," "LifeAfter," and others, solidifying his status as a pillar within NetEase Games. According to Jinghe News, Shao Yun's departure is primarily attributed to Ding Lei's intention to seize control of the "Egg Party" business from Shao Yun and redistribute the management authority of the Tianxia Business Unit, effectively demoting Shao Yun by two to three levels and significantly reducing his salary. Furthermore, Lin Yunfeng, Vice President of NetEase Games and President of the Fantasy Business Unit, as well as Yin Wei, Head of HR at NetEase Games, have also been impacted, with either their management scope reduced or the prospect of leaving the company looming.

In essence, beyond the overt corruption and illegal activities, NetEase is also grappling with intense internal power struggles. Amidst these internal and external pressures, NetEase's performance has taken a significant hit. The recently released NetEase third-quarter financial report for 2024 reveals that game-related value-added services account for 80% of overall revenue, with third-quarter revenue amounting to 20.9 billion yuan, a 4.2% year-on-year decrease. In comparison, Tencent Games reported third-quarter business income of 51.8 billion yuan, an increase of 12.6% year-on-year, highlighting a gap equivalent to an entire Mihoyo. This disappointing third-quarter financial report directly underscores NetEase Games' failure to capitalize on the crucial summer vacation period this year.

Ding Lei

Despite the decline in game revenue, user acquisition costs have remained steadfast. In fact, NetEase emerged as the "game company most willing to invest in user acquisition" this year.

According to Growing data, as of the end of October this year, the investment in user acquisition for "Fantasy Westward Journey" and "Knives Out" reached 1.53 billion yuan and 1.36 billion yuan, respectively, ranking first and second on the internal user acquisition list, with an average monthly investment exceeding 100 million yuan. User acquisition is pivotal for game promotion as "only with users can there be daily active users, and subsequently generate revenue," but it also presents opportunities for corruption. According to Huxiu ESG, "fake user acquisition," "rebates," and "kickbacks" are prevalent in the gaming industry, all providing ample scope for "interest transfer." Whether the user acquisition environment is directly linked to the nine senior executives implicated in the previous NetEase corruption case remains an internal matter for NetEase. According to China Entrepreneur, following the NetEase corruption case, Ding Lei embarked on reshaping the bidding process. Instead of business departments directly engaging with suppliers, the company's commerce department now handles all bidding negotiations, with the evaluation process completely anonymous to the business departments; even processes involving amounts less than 10,000 yuan require his personal approval.

A precarious situation lacking successors

Earning less while spending more is a clear indicator of severe business issues. NetEase's user acquisition costs are escalating daily, yet the market feedback doesn't justify this expenditure. According to DianDian data, the revenue of "Egg Party," NetEase's primary income source, has dwindled significantly. In February this year, its average daily revenue on the iOS platform was approximately 13 million yuan. Post the second quarter, the highest daily revenue didn't exceed 5.29 million yuan. According to Qimai data, "Egg Party" is also grappling with user churn. In the second quarter of this year, the total gameplay duration of "Egg Party" decreased by 56%, with daily active users plummeting from 17.46 million in July last year to 9.39 million in the same period this year. This notable decline in its flagship game has led to speculation about the impending departure of Shao Yun, the head of "Egg Party." During the third-quarter earnings call, Ding Lei underscored the importance of "Egg Party": "'Egg Party' remains our product with the highest daily active users. Despite encountering commercialization challenges, it's a process of accumulating experience." Beyond "Egg Party," other NetEase games have also performed moderately. "Knives Out's" revenue in November was 317 million yuan, a 5.76% decrease from October. In the same period last year, its revenue was 1.113 billion yuan; "Fantasy Westward Journey's" revenue has stagnated, with November's revenue at 556 million yuan, not significantly different from the 529 million yuan in the same period last year.

The pressure on "Egg Party's" performance underscores the need for a significant reduction in unprofitable businesses. Recently, NetEase has consecutively shut down multiple underperforming games. According to incomplete statistics, NetEase has announced the cessation of service for six games, including "War Roar," "Tale of Elysium," "Ace Combat Alpha," "Pokémon Quest," "Marvel Super War," and "Apocalypse Now." Notably, "Apocalypse Now," a shooter mobile game highly valued internally at NetEase, ceased operations only 46 days after its launch, leading to the optimization or redeployment of the entire production team at NetEase Shenzhen. Another martial arts open-world game, "The Legend of the Condor Heroes," which reportedly took six years to develop and cost nearly 1 billion yuan, also faced a troubled fate, announcing a rework only two months after its launch. During the earnings call, Ding Lei voiced his dissatisfaction directly and announced a change in team leaders and core members for "The Legend of the Condor Heroes." With the waning popularity of previous works and no successors to carry the torch, NetEase is navigating a painful transitional phase.

Who will be the next 'Egg Party'?

Apart from games, NetEase is also undergoing significant organizational restructuring internally. With Shao Yun, Senior Vice President of NetEase Games, set to depart, the Tianxia Business Unit he managed has been divided into three parts. The Eggy Studio (representing "Egg Party") and the Wilderness Studio (representing "Knives Out") under the original business unit have been upgraded to business units. Additionally, the female-oriented game "The Path of Stars," which has generated over 200 million yuan in global revenue for NetEase, has officially announced the establishment of an independent "Star Studio." This suggests that NetEase is poised to expand its investment in the female-oriented gaming segment. According to a Frost & Sullivan report, the female-oriented gaming market reached 95.8 billion yuan in 2023, a year-on-year increase of 11%, with its share in the overall gaming market rising from 19% in 2018 to 32% in 2023. This represents a new source of traffic that no gaming company can overlook.

Whether it's the division of the Tianxia Business Unit into three parts or the establishment of the Star Studio, NetEase's ultimate goal is to uncover the next "Egg Party." Currently, NetEase still holds a few aces up its sleeve, including the multiplayer shooter game "Boundless Frenzy," which competes with Tencent's "Valorant," the "Overwatch"-like multiplayer shooter game "Marvel Clash" based on a major IP, and the highly anticipated "Echoes of the Silk Road," all set for imminent launch. However, "recreating another 'Egg Party'" is undoubtedly a formidable challenge. The last company with a similar ambition was Mihoyo. Since 2022, rumors have abounded that Mihoyo is striving to create another "Genshin Impact," but neither "Honkai: Star Rail" nor "Zhongli: After the Fall" has matched the scale of "Genshin Impact." Now, Ding Lei faces the same arduous task as he returns to the forefront.