3 Digital Strategy Lessons from Epic Games and NetEase (Tech Strategy – Podcast 168)


This week’s podcast is about NetEase and how gaming ecosystems (like Epic Games) have lots of important digital strategy lessons.

You can listen to this podcast here, which has the slides and graphics mentioned. Also available at iTunes and Google Podcasts.

If you are interesting in discussing your digital strategy, please contact us at TechMoat Consulting.

Related podcasts and articles are:

From the Concept Library, concepts for this article are:

  • Platforms vs. ecosystems
  • Online Gaming

From the Company Library, companies for this article are:

  • NetEase
  • Epic Games

Photo by Florian Olivo on Unsplash

———Transcription Below

Welcome, welcome everybody. My name is Jeff Towson and this is the Tech Strategy Podcast where we analyze the best digital businesses of the US, China and Asia. And the topic for today, three digital lessons from gaming giant NetEase. And NetEase is like it’s a really important company. It’s been around for over two decades. It’s one of sort of the longest lasting tech companies right up there with like Adobe and these other sort of founded in the 90s companies, but it’s not really well known outside of China and Asia. It’s kind of important and you know, it’s still run by the founder. A lot of expertise. So it’s really a cool company and I mean it is one of the interesting players in gaming and I think there’s a lot of good strategy lessons that come out of that for non gaming companies, especially entertainment in general media. video, entertainment, Netflix, that kind of stuff. So anyways, I’m going to sort of boil down what I think are the sort of the three lessons out of NetEase and also give a little bit of history because it’s a pretty cool company to think about. And that will be the topic. My voice is a little bit shot. It’s a… It’s Saturday morning at the end of the China tech tour. I’m sort of hanging out in Shanghai and yeah, I’m a little tired. My voice is a little shot. We’ve been running all over China for the past five to six days. Company, company, lots of it’s been awesome. My brain’s kind of a little tired. I’m not tired. It’s full. Like I think I maxed out my bandwidth. So we were kind of, I mean it’s really awesome. I’ll be writing and summarizing a lot of lessons along the way over the next couple weeks. But yeah, it’s like TikTok headquarters, bike dance, Ali, you know, Alibaba out in Hangzhou, Baidu, Aichi, Shanghai. I mean, it’s just been a good old time. And for those of you who were here, thanks, it was really a lot of fun. We were out on the river in Shanghai last, well not. on the river but next to the river sort of in the bund of Shanghai last night. Really fun, beautiful. I mean it’s just fantastic. I used to live there for quite a long time so it’s one of my favorite places. I’ve been in a good mood ever since but net my voice is shot so this probably won’t be too long today. Maybe that’s a good thing. Anyways let’s see any other no housekeeping today really. Disclaimer, as always, nothing in this podcast or in my writing or website is investment advice. The numbers and information from any of the guests may be incorrect. The views and opinions expressed may no longer be relevant or accurate. Overall, investing is risky. This is not investment legal or tax advice. Do your own research. And with that, let’s get into the topic. Now as always, we start with sort of key lessons, concepts, which are always found in the concept library on the web page. And there’s really, I think, one. The one I want or the one I want to talk about is this idea of platforms versus ecosystems. You know, ecosystems, it’s kind of a vague term. People use it all the time. Nobody really defines it. I view it as when we’re connecting various companies. to accomplish something far beyond what any one company could do. So it’s about connectivity and collaboration and coordinating on things like ecosystems. So when people talk about ecosystems, often they’re talking about an industry like semiconductors is an ecosystem. You can’t just design any random chip and hope it’s gonna work because the chips you design the way they work has to be closely coordinated with software and operating systems and how machines run software because they have to sort of tightly integrate how the software functions with the coding language, with the design of the chips, it’s all kind of one. And then you really have to, once you do the design, well then it has to coordinate with the fabrication. and the foundries and how they’re manufactured. And then you put them in PCs or servers or whatever, so it has to coordinate with the hardware developers and makers. So it’s so tightly integrated, it all has to sort of work together. Hence, it’s kind of an ecosystem of a lot of very large companies that all have to keep close eyes on what each other are doing so that their product works. And especially not just for current collaboration and working. But the next wave of innovation, if you’re gonna, you know, release the next generation of iPhone or smartphone, you kind of have to wait until the chip makers tell you what they’re gonna do next. And then when they announce what the, so there’s usually kind of leader when it comes to innovation, like what Nvidia is doing. Everyone waits for them to announce what their next chip is gonna be able to do, and then they can start to do all their components that work against that. So innovation and ecosystems sort of go hand in hand. And there’s some good books written about this, a guy named Michael Jacoby this, I’m probably saying his name wrong, who talks a lot about ecosystem orchestration. There’s another book called Ecosystem Edge. And the net net, if you want a simple explanation of an ecosystem, ecosystems tend to be much better at major innovation. where we don’t know what an electric car is or an autonomous vehicle, and no one company usually could ever create one on their own, so they all have to kind of work together to overcome these major step changes in tech. So ecosystems tend to be better at overall innovation because they all work together. There’s a lot of trial and error. You don’t have to make one big bet, and they all pool the resources to launch the next generation of something. Whenever we see these major step changes like the emergence of the smartphone, we kind of see iPhone did it internally, but we also saw Android put together an ecosystem where all the carriers and smartphone makers and chip makers worked together to launch Android. So you tend to be more powerful in innovation. The price you pay is you’re much less efficient. When you have a nice, clean business model where you’re focusing your innovation, you’re more efficient, ecosystems tend to be very inefficient with a lot of wastage. And there’s a bit of a trade-off. So what we usually see is we see with a big major step change in technology, we see an innovation emerge. And then once the new design gets established, okay, we know what a smartphone is, then all the players tend to work more independently and get much more specialized and efficient in their one aspect of what people call the dominant design. So that’s kind of a pattern you see overall. Okay. Within that, let’s call that the broadest version of ecosystem. We can kind of go one step down and say, okay, but sometimes companies themselves sort of become ecosystems. Apple is sort of its own ecosystem. It makes the smartphone, it controls the operating system, it tells all the developers the way they have to behave, it tells the hardware makers that work the peripherals and whatever. I mean, Apple is much more than just a company and it’s more than a platform business model. It’s kind of an ecosystem company. And there’s a couple of companies like that. Google, I would say, is the same because everybody has to sort of adjust their behavior, search engine, SEO to match Google. Apple, Google, I kind of consider them ecosystem players. Anyways, one of the companies that I think is an ecosystem player that people don’t talk about is in gaming. Tencent is an ecosystem. Epic Games is an ecosystem. They are coordinating something much larger than themselves and they kind of run the show. So I put a very small number of companies in that category and then I take it one step further and say, okay, what if you’re in the connectivity and coordination business but it’s pretty small and focused? that would be a platform business model. You’re connecting buyers and sellers, so you’re sort of orchestrating an ecosystem, but it’s very sort of small and controlled. So I’ve always considered platform business models to be a simple form of an ecosystem. Payment platform, we’re coordinating the behavior of lots of merchants and players and consumers and banks, but in a very simple one to two core interactions way. So in my brain, that’s kind of how I think about it. These major ecosystem industries, and then the next step down is maybe one major player, couple of those, and then platform would be a simple version. That’s kind of how I’ve always thought about it. I find that pretty helpful. Anyways, within that, there are a couple companies, these ecosystem players like Apple, Google, Tencent within gaming, and definitely Epic Games. And then right below that, you can start to think about a company like NetEase. They’re not at that level, but they’re kind of close. They have their own gaming engine. They have distribution. They have marketing. They have promotion. They have content creation. Kind of like Epic Games. Anyway, so I’m going to talk about, that’s kind of how I view it, and that’s a good way I find to think about it. So that’s sort of the concept for today. Okay, so let’s talk about NetEase. Founded in 1997. Like People think Alibaba, Baidu, and Tencent were sort of the first wave of tech companies out of China. They were really the second wave. The first wave kind of emerged in 1995, 1997. And, you know, obviously there were no smartphones and there weren’t really even PCs. There kind of were, but very few. I mean, more what you really saw was internet cafes, you know, with desktops and people would go in. And that was a lot of Asia was that way back that way, not counting Japan. So the first wave, you know, when in the US we saw companies like Yahoo emerge where they were doing these sort of homepages, which were really kind of like newspapers online. In China in the same period, we saw companies like Sina, Sohu, which people don’t really talk about anymore. They’ve kind of faded away. But within that first wave, we also had NetEase. And then that was 1997. Then we get to 1999 ish. That’s when Baidu, Alibaba, and Tencent emerged. And they all basically got founded within six weeks of each other. Alibaba got founded in Hangzhou, Baidu got founded in Beijing, Tencent got founded in Shenzhen. But it’s just like six weeks apart. It was really kind of interesting. And Jack Ma used to talk about, because he had… done something called China Pages, which was kind of like a phone book for China. In that first wave, sold it, joined a company. And then he talked later about lamenting the fact that he kind of sat out the first wave of the internet. And then when he launched Alibaba, that was him trying to catch up. So anyways, that was what was going on. And they started, I mean, it was kind of not totally clear what they were doing back in 1997. I’m talking about netties. But a bit of a search engine. They were doing email services like Gmail. In 1998, they started to put up websites, sort of like Yahoo portal business model that gets you sort of ad sales, but there wasn’t really any advertising in China, digital at that point. So kind of, I’m not totally sure what they were doing in that period, but 2001, we start to see them really get traction when they basically went into entertainment and content. right? And the one that made the big difference was gaming on PCs and really at that point gaming in internet cafes. And you know Tencent sort of hit on the same model around the same time. They started out doing Messenger QQ, which was kind of a copy of Yahoo Messenger. And then they eventually went into as well gaming on PCs and gaming in internet cafes. And this turned, I mean certain business models are just awesome. If you get one of these, like Search is an awesome business model. Marketplaces for products, that’s how you get Amazon, that’s how you get Alibaba, right? Great business model. MMORPG gaming on PCs was one of these, like dear God, this business model’s awesome. What does that mean? You… You basically, I mean, there’s certain types of user behavior are more powerful. Messenger is very powerful. We all use it every day. We just do. Intensive interactive gaming is really powerful. And so MMORPG, multiplayer, highly interactive, all your friends are playing together. You’re chatting at the same time that you’re playing. It’s World of Warcraft. We’re all in this open world. That type of gaming was incredibly powerful, much more than single player, I’m just driving by myself in some car game or I’m just doing single player shooter. You know, this model of we’re going to get everyone together in this very immersive, highly interactive type of gaming. I mean, you get people in that and it was just like really powerful as an experience. People will play these games for 20 years. You know, people who are, and then you sort of build your character, you level up, you get points, all your friends are playing. You know, it’s like watching someone invent cigarettes, right? It just was really powerful. And the people who play these, if you had one of those games under your belt, World of Warcraft, Grand Theft Auto, people would, it’s like a cash machine for like decades, like it’s crazy. Anyways, so they get into MMORPG, but for Chinese language. So this is people in China, everything’s in Chinese. Regulation is actually a big deal. Most of these games are coming from abroad at that point. So this is like Hollywood putting their games into China. They have to get approval, they have to go through a certain partner. that’s licensed. Same thing for these games. World of Warcraft, Blizzard, all of that stuff. They come to China. They’ve got to get a regulatory approval. They work with a company, Netis is one of them, Tencent’s another. You have to change the language, obviously. There’s, you know, differences you can only do in China, like, you know, you don’t show blood in video games, or you have to make it green or something. No time travel is allowed. I don’t quite understand what that’s about. But you know, so a company like NetEase and Tencent, what they initially provide to these gaming companies, which are originally outside of China, but now much more coming from China, is distribution and publishing and localization. Okay. that would let’s call that the first benefit to these companies that want to work with this. And then you start to gather a lot of demand. So you’re aggregating demand on one side and you’re helping these companies on the other side. Then you start to provide other things like, well, how do we make money? Digital advertising was not a big deal then you couldn’t make money. So what China did, which the rest of the world followed later was, you know, we’ll do micro payments and micro purchases. You can buy weapons for your character. You can pay for special skims and you can, you know, you can all these little tiny payments. That’s how kind of gaming in China emerged and got funded. And then it turns out that’s a really good business model because someone’s playing with their character for 10 years in a game and they’re buying little goods all the time and they become little marketplaces. You can sell your goods often off the platform. that people would buy and sell various like, hey, I have a great character, you wanna buy it? I have this special weapon, you wanna buy it? Then more and more moved on the platform. So a lot of interesting stuff there. And within that business, there’s this phenomenon of the whales, where certain people are spending hundreds of thousands of dollars on little in-game purchases every year. And some people spent more than that. So… There was sort of a whale phenomenon like you see in casinos. Okay, so you’re starting to make a lot of money. You’ve got this powerful experience where people are playing for a long, long time and you’re adding more and more services for the game developers. You started by offering them distribution and publishing, then you offer them ways to make money. Hey, if you put these virtual items within your game, you’ll get a split of that. So you can make money. Increasingly, you’re offering marketing services and promotion services. If you want to launch a game in China and you’re Marvel, you know, these companies would make IP that they own, Iron Man, hey, we’ve got a new Harry Potter movie, let’s release a game for this. You could then go to a company like them, they’d give you distribution, publishing, but they’d give you promotion. as the movie’s coming. Like you can see this sort of be fairly powerful on two sides. One, the consumer experience is very powerful, no question. Second, these companies like NetEase Tencent, they’re creating more and more services for game developers over time. And increasingly for not necessarily game developers, but people who just own IP and wanna franchise that into gaming more and more, whether it can be movies, TVs, or whatever. So. really cool on both sides. And, you know, company like NetEase had a close relationship. I think they still do with Blizzard. So World of Warcraft, StarCraft, you know, providing all these services. The flip side to that scenario, unfortunately, is you have to pay these game developers, IP owners, pretty significant royalties. So it’s sort of, you know, a giant’s doing business with other giants. Let’s say the weakness of this model is you are very dependent on having blockbuster hits. It turns out it’s not like there’s thousands and thousands of games you can bring in to the system and let people play. It turns out most people want to play 10 to 20 games, which are very expensive to make. If it’s not a blockbuster, you can lose a lot of money. So game development in this world is sort of high stakes. But if you get a hit, you can keep it in your pocket for a long time. And these companies like NetEase and Tenza, they had the hits. And so they printed cash for a long, long time. You know, that’s kind of the history of the gaming side on PCs. And more and more… You know, these platforms like Tencent and NetEase, they start to get into development themselves. Like they start to work with game developers. They start to invest in them. You know, Epic Games is super important. Obviously, Fortnite, well, Tencent is a major owner of them. And NetEase is closely tied with Blizzard. So you see sort of this vertical integration, not unlike what we see with Hollywood, with Hollywood Studios will invest in their own monies, but they will buy others. Netflix may do some of their own content in-house, but they will also franchise or license other people’s content, or maybe they’ll do co-development. So there’s lots of deals sort of on the content creation side. So NetEase over time starts to look more and more like a content creation company with unique distribution and some other skills. Okay, so let’s call that like 2000 to 2010. NetEase has some pretty serious competitive strengths like China is not open to anyone. You have to sort of have government approval so that limits who can do this, especially if you’re a foreign game company, you have to go through one of these companies. They start to get scale in content, creation, production, distribution, marketing. They get better and better deals. They’re the ones who get the best games. And to some degree, you get a network effect with the more games on your platform, the better. For the consumers, the more consumers on your platform, the more gamers want to do work with you, the developers. But we’re not talking about hundreds of thousands of merchants like we see on e-commerce platforms. No, we’re talking about a handful of games. So it’s a fairly weak network effect in that regard. I don’t really know if I consider them a platform at this point. Okay, so that’s kind of going along in-house development, licensing content, increasing services on both sides. They make a lot of money. Their money’s basically coming from ads, which grow more and more. Games are great to put promotions in. You can have Nike shoes in your characters and banner ads and all of that, but really those micro payments that are happening within the games are throwing off a lot of cash. And then increasingly we see them move into e-commerce. Because if you’ve got Nike shoes within your game and people are buying them and it’s got a banner ad and it’s a digital good, well, why not link to buying real shoes? Right, so there’s sort of a natural link between gaming experiences and e-commerce in the real world and the most direct form would be just selling merch. If you’re doing the Iron Man game, why don’t you sell Iron Man merch? And you know. So you see all that kind of mixed together. Okay. Let’s call that phase one of NetEase, 2010-ish, 2015. The technology changes, which is one of the challenges of gaming. The technology’s always changing, and mobile games more and more become a thing. And NetEase in particular does very well in this. They start to go after mobile games. They develop their own gaming engine. that developers can build games upon that is very good for mobile games. And you know, if you look at sort of the top hundred games you see on Netis, a lot of them are developed in-house, which is very different than this blockbuster model that we saw on MMORPG on PCs. So that’s kind of good and it’s bad. It’s not as powerful as these, you know, But it starts to look a lot more like a platform business model where you’re not talking about a handful of super successful games. You’re talking about hundreds and hundreds of games that people might use like Fruit Ninja and Tetris. You know, these simple games that are on your phone. But it’s a different platform, so it’s a different thing. So we sort of see that start to move. That’s a blessing and a curse, I would say. So that’s kind of like a major change that they’re still sort of dealing with and adjusting. Another major change is they start to move into other types of content. Not surprising. They start doing cloud-based music. That was about 2013 and they’re arguably number one or number two in China for sort of streaming music. But again, it’s not just like Spotify where you just listen to your playlist. It’s very interactive. which is kind of their thing. We pair content with interaction and community, which is normal in gaming. Well, you start to apply that to things like music, and so their cloud music is quite good. They start to go into education a bit, which is a company called Yoda, which they invested in. But it’s not, it’s also, they would call it learning services, where you’re… basically engaging with content like a dictionary, like a class, but again it’s content plus interaction. You know that is learning. Well that’s kind of similar to gaming. They do into that. Very interesting. That ends up being a problem later because you know one of the tech crackdown stories of the last couple years in China, arguably the biggest one, was when the government basically outlawed for-profit education. So companies that had significant education businesses, and this was generating quite a bit of revenue, that got directly hit by that. So that’s sort of gone international. A lot of companies have sort of had to respond to that. So you have sort of the music business, other types of content, you have the education business, and then you have the e-commerce business, where You know, they’ve been pretty clever in e-commerce. They’ve been sort of doing these specialty surgical plays that avoid Alibaba and JD. So one of them, the ones they did was Cross-Border E-commerce, which was Yanshuen. But this was, you know, years ago. And they were one of the first companies to do like, hey, instead of domestic e-commerce, let’s do Cross-Border. Very clever. They were kind of an early mover. And then that ended up going to Alibaba. And now, you know, most of these major players now do domestic and cross border e-commerce, but they were one of the early movers there, very clever. They also did what we call sort of C to M, where, or also called private label OEM, where you’re doing e-commerce, but you’re buying directly from factories. So the OEMs, the original equipment manufacturers, you know, that might be providing all the shoes for Netflix, I’m sorry, not for Nike. They can turn around and sell their own shoes, private label. And they went into NetEase. They were one of the first movers in that space, which is really a cool business model. That’s kind of what I’m paying attention to. So anyways, NetNet, you get to 2015 and you’ve got this legacy PC business, which is still quite powerful because they’ve got a couple of these really powerful games. these blockbusters in their back pocket. You’ve got the mobile gaming business, which is evolving, but they’re a major player there. You’ve got education, which was pretty profitable, but politically has been undergoing changes. And then you have e-commerce. They’ve got these sort of specialty plays. That’s where most of the revenue is coming from recently. And you can pull their numbers. They’re all, they’re public, a pretty cool company. And yeah, it’s a really interesting company. Okay, that’s kind of like, let’s say, basic introduction to NetEase. And then let me sort of get to the so what, which is, okay, what are the big strategy lessons here that are important for where we are today in digital? And I’ll talk about generative AI impacting this and things like that. Now, lesson number one, digital strategy lesson number one, is mobile gaming is both better and worse. than PC-based, highly interactive gaming. That was really a tremendous business model. But okay, so it’s shifted to mobile and it’s shifting over time. And this is really, like gaming is such an interesting, when you look at gaming companies, like the two capabilities that always jump out at me are to do this business, you really have to be a creative company. You have to be like a Hollywood studio. There’s just a tremendous creative aspect to it. I mean, this is not engineering like building e-commerce. No, it’s like we have to think about characters and story and what people like right now. And why does this one, why do people love this? It’s almost like an artist colony more than it’s like a business, right? So that’s a whole major capability. And the founder and CEO of Nettie’s is very much a creative personality. And you see that in companies in Hollywood and other places, and then you see it other places, and you don’t see it at all. So that’s an interesting capability. But at the same time, you also have to have a deep capability in tech, which you don’t really see in Hollywood. Hollywood, it’s all creative types, but the tech doesn’t change fundamentally every five years. But it really does in gaming, like PCs, different business models, virtual reality, gaming engines. I mean, you have to be a… a top tier tech company plus a top tier creative company. I don’t really know of any other businesses where you’ve gotta have such depth in both. It’s really kind of fun to watch. Disney will describe itself as, if you look at the Disney strategy, they will talk about themselves as a creative company, but we also have to be a tech company. But they’re not really a major tech company. They’re kind of, it’s like 80% of the first and 20 to 10% of the second. You know, NetEase and Tencent, they are 50-50. You’ve got to have as many artists and animators as you do AI people. So it’s a really interesting sort of structure. Okay, so as you move into one of these major technology shifts from PCs to mobile, and then maybe from mobile to VR, the shift from there for gaming was a blessing and a curse. The… good parts were, well let’s say the bad parts. The bad parts are mobile gaming doesn’t have the power of these highly interactive World of Warcraft PCs, Ultimate, you know, I kind of joke sometimes, like I can sit and watch a movie for two hours, and at the two hours I’m ready to stand up. You know, okay, I’m done. I don’t want to sit down and watch another one. But I can sit and play a video game and look up, and it’s five hours later. And it’s like, what happened? Is it really 2 AM? It’s such a powerful consumer experience. So mobile gaming doesn’t have that really surprising level of power as an experience that immersive gaming does on a PC or on a big screen, a console. So it’s not as powerful. It doesn’t necessarily get you this nice cash flow model where people are buying skins and they’re playing the same game for 10 years. And we can, you know, you can make money off one of your customers for 10 years. They keep buying stuff, they keep leveling up. We don’t have that. But at the flip side, it looks a lot more like a marketplace. Like instead of, you’re not so dependent on blockbusters. You know, if you get one, if you have a blockbuster, maybe you have World of Warcraft, great. What’s your next blockbuster? Well, it’s very hard to predict, and it’s very unpredictable what is gonna take off. So this is more like if you’re making hundreds of mobile games and a lot of them are doing okay, it looks a lot more like a robust marketplace with a network effect. You’re not so dependent on these major blockbuster franchises. You know, you can keep rolling out these games, and a lot of them will fail, but more of them succeed, and you don’t have to bet the entire company. on building one of these things. So it’s a better marketplace. You get more of a network effect. You’re less dependent on the big hits. Now ideally what you want is both. You want a really nice marketplace for mobile games and then sitting on top you want the occasional blockbuster. Best of both worlds. So that’s kinda lesson number one, the tech change. Now we could see that shift back the other way. If virtual reality takes off, well then we’re back in the business of creating these ultimate immersive experiences. Well, that’s blockbuster. Is it? But if you look at Roblox, that’s sort of a virtual reality thing, but you know, it’s thousands and thousands of little worlds. where people hang out. Okay, so that’s more like market. So as the tech changes, which is happening right now, we could see that dynamic shift yet again. And I think almost for sure it will. So that’s sort of lesson number one, mobile versus this powerful model. It’s a blessing and a curse. Okay, lesson number two. What we see in gaming ecosystems. is probably what we’re gonna see in the future of entertainment as Generative Eye takes over. So that’s YouTube, that’s Netflix, that’s iQiyi. I expect them to shift to more of what we see in gaming ecosystems. Now what does that mean? Let’s say we look at NetEase, Epic Games, Tencent. Okay, to some degree they’re creating content. They’re developing games in-house. They’re co-developing games with developers. They’re licensing some games and franchising, but a big portion of what they are doing over time is they are creating tools and services for game developers. So instead of like, we’re gonna go mining for gold ourself and try and develop a game, they’re increasingly creating, they’re increasingly selling picks and shovels to everybody else. So. Yes, Epic Games had Fortnite, massive hit. Yes, they might do a co-development deal with Marvel to launch the new Marvel thing, and then they may work closely with a certain studio to do that, and most of these companies like NetEase, you know, they have gaming studios where they develop this stuff all over the place. Okay, that’s like Hollywood creating movies and then selling them. Okay, but what they also do is they increasingly… build on their gaming engine. If you’re going to build a massive, highly interactive game, you have to build a game engine. Very, very difficult. But over time, you can then offer that gaming company, that gaming engine, as a service to other developers who want to make games. So you go to smaller developers, you go to lots and lots of developers, and you say, you can use our gaming engine. We’ll charge you a fee for that. That’s how they make the Mandalorian TV show. They use the Unreal Engine. Yeah, the Unreal Engine from Epic Games. You can go to all these smaller companies and let them use all your tools. So you can offer them game development services and tech. You can offer them distribution services. You can offer them marketing and promotion services. When you release your game, you can buy marketing services. If you have created valuable IP, maybe famous characters, in your game, we will help you monetize your IP. We’ll put it on merch. We’ll put it on hats. We’ll make games because we have those relationship. So IP monetization services. And increasingly, what they offer are sort of social network services. Like if you’re on Epic Games, there’s a social aspect where people have social networks. They play the games with their friends. They have a unique ID within the Epic Games thing. And if a new game developer wants to release their game on their platform, you can ask them, would you like to have all these social networks automatically embed in your game? So you can sort of put social network chatting messenger as a service as well. So there’s sort of this balance between how much of it… you doing content creation yourself as NetEase or as Epic Games and how much of it is you providing a suite of services? So that everyone else can make and distribute games. Are you in the mining business or in the picks and shovels business and NetEase unsurprisingly is doing both which is really smart and I think that’s where Hollywood is gonna go and I think that’s where YouTube and IGE and these other companies are gonna go as generative AI makes it possible for anyone to make high quality, let’s say, animation. Anyone can do an animated TV show right now with Generative AI. So as that business gets disrupted and democratized, where you used to make money making animated films and now it’s impossible to make money as an animated film studio because everybody can make these with Generative AI now, those companies will shift from, hey, we make content to hey, we provide the picks and shovels. So yes, you can make an animated movie using generative AI, do runway, do mid-journey, and we will sell you the distribution, the marketing, the monetization, the IP, the embedding of interactive activity. Well, there’s not a lot of interactive in traditional entertainment, but I think they’re gonna shift to that way. Now maybe certain types of their content creation, if you’re a Hollywood studio, if you’re Netflix, maybe you’re still making money on the blockbuster movies because they require a lot of money. Maybe you’re still making money on certain types of content like live sports, but a lot of your suite of in-house content purchased or developed is going to get disrupted and anyone can do it. And you’re going to want to shift out of the content creation business more and more into the, we provide tech services, distribution, all of that, which we already see in gaming. But I think we’ll start to see that in things like YouTube, Hollywood Studios, Netflix, Disney. That would be sort of plan B because if plan A, your core business gets disrupted, that’s the next natural place to go. And I’ll talk about that with companies like iQiyi, which are already talking. in terms of this. So what we see in gaming, here’s the, so what? What we see in gaming ecosystems, I think is a natural strategy for a lot of entertainment that’s gonna get disrupted by generative AI. Okay, that’s point number two. Lesson number three, last one, and then I’ll finish up. I don’t think generative AI is gonna hit gaming. Like, You can sort of see this pathway of disruption and destruction as like generative AI. They started with something simple like text. Now you can write a script with generative AI and not with lots of writers who are currently on strike I think still in Hollywood. And then we get to something like generative images, mid-journey. a Dali, stable diffusion. Okay, now anyone can create pictures, anyone can create characters, very easy now. Then we get to music. Turns out generative AI is very good at writing songs. So we can see it’s sort of eating its way into various content types. And then the next one, the one we see first in video is really animation. Like you can do animation with generative AI right now. But you can create your own animated cartoon movie right now. So it’s already sort of into video, and the next thing it’s going to eat into would be more realistic video, like TV shows and movies. But there’s every reason to think that’s going to happen too. OK, is it going to keep going where generative AI can then create video games? If it’s a mobile game, maybe. But if it’s more complex and immersive, I don’t think, I think there’s a hard wall there where generative AI stops. Because if you’re going to create an immersive interactive game, World of Warcraft, Ghosts of Tsushima, Genshin Impact, you need to have a gaming engine. which is a completely different technology. You’re not creating content, you’re creating, you know, the digital assets, the vectors, all this unique tech that takes like literally 10 years to build. There’s nothing in generative AI that gets you that. So it’s like, as I watch it eat through this entertainment sector, it looks like there’s a hard wall there. Now you can feed generative AI as an input. if you’re creating characters, if you’re creating digital assets, like let’s put some cars in the game. Well, Generative AI can do that, but then you’re gonna feed those digital assets into the gaming engine. But I don’t see how Generative AI impacts gaming engines at all. Maybe certain steps in the workflow will become more efficient, but that’s kind of what I’m thinking about. So these companies that build these ecosystems, like NetEase, Epic Games, They are built on these unique gaming engines. They each have I think they’re pretty protected That’s kind of my working theory right now Anyways, that is it for the content. So much for this being a short podcast. Not at all. Anyways, lessons for today. Think about ecosystems versus platforms because once we get into gaming, it becomes much more of an ecosystem picture as opposed to like TikTok and YouTube, which are much more of a platform type business model. So that’s kind of the concept for today. Lessons, you know, mobile gaming is sort of better and worse than what we’ve seen in mobile, like platform-based PCs before. I’m sorry, PC-based PCs before. The gaming ecosystems are probably the future of a lot of generative AI meets media and video entertainment. It’s going to look like a gaming ecosystem. And number three, generative AI, I don’t think it’s going to disrupt the gaming engines and most of these very serious gaming ecosystem. But we’ll see. Those are my sort of three working ideas. Okay, that is it for me for today. It is early morning here. I’m kind of hanging out in the Swiss Hotel in Jing’an, which is, I used to live near here. This is like my favorite part of, not my favorite part, but I used to hang out and live in Jing’an in Shanghai, which is sort of really nice and pleasant and comfortable. People go down to the Bund because it’s spectacular, but this, I always found this to be the most comfortable place to live. So anyways, I love the Swiss hotel here. It’s really like Rooms are great. It’s kind of Turned into my favorite place. Anyways, I’m here for a little bit and then heading out to the airport Flying around and then back to Shanghai in eight days something like that. So yeah, I’m bouncing around It’s gonna be a great week. It’s gonna be a good month Anyway, I hope everyone is doing well. That is it for me from Shanghai and I will talk to you next week. Bye. Bye


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