Market Insight

Games: Alibaba establishes games development business to compete more comprehensively

October 05, 2017

Chenyu Cui Chenyu Cui Senior Research Analyst – Games, IHS Markit

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Alibaba has established a dedicated gaming business group to develop in-house titles following the acquisition of Ejoy Technology, a China-based online games developer. The founder of Ejoy is the former COO of NetEase and will take charge of Alibaba’s new gaming division, which will sit within Alibaba’s Digital Media and Entertainment Group. The acquisition of Ejoy brings with it key development staff that were responsible for NetEase’s flagship PC titles. This is not the first time Alibaba has stepped into the games industry, but reveals strong ambition in games development to complete its ecosystem and extend its role in the games sector value chain. 

Our Analysis:

Multiple acquisitions to build its game business

Prior to this establishment of a standalone games division, Alibaba had already rolled out its mobile games platform in early 2014 to test the market and then acquired UC Mobile and 9Games to enhance its position in the mobile games distribution market. Back then, in order to catch up with other Android-based distributors, Alibaba announced a more attractive revenue sharing model with 70% going to game developers, which although standard in Western markets is more generous than most third-party stores in China. However, this foray into mobile games was watered down as it was part of a broader strategy into the mobile sector and a lack of hit games failed to bring Alibaba much success in building its position in the market.

In 2016, Alibaba acquired WanDouJia, one of the leading China app stores, to further build its games distribution business and established AliGame. Alibaba then followed this by creating the Digital Media and Entertainment Group to combine AliGame, AliFilm, YoukuTudou, and AliLiterature, with the aim of offering a complete entertainment division, where IP from one sector could be leveraged into another. This umbrella strategy has worked to some effect for big media companies in the West. It’s also true that games IP as a whole is increasing in importance and that characters and settings created for games are influencing other content sectors more significantly. Having a framework to manage this content cross-over makes sense therefore.

Competing with the dominant player in China games - Tencent

With this latest acquisition, Alibaba’s move to develop in-house games increases investment risk, but also opens up the opportunity for bigger rewards. Tencent has pursued a similar strategy and has benefitted hugely from first-party content, although Tencent distribution network puts it in a considerably stronger position.

Alibaba has never hidden its intention to compete directly with Tencent in the social network market. Launching the mobile chat app LaiWang and adding social features to Alipay have, however, failed to shake the dominant position of WeChat and QQ. Mobile social games might offer another chance for Alibaba to compete more comprehensively in the social network market and Ejoy has well-established experience of connecting messaging platforms with mobile social games. Alibaba will have to decide if its strategy is to generate maximum revenue from its in-house mobile games and thus work with other leading distributors including Tencent, or whether it will use exclusive titles to drive more business to its own networks.

Another key question is what genres of games Alibaba will aim to develop. Although the development team have established experience in building core PC games, their released mobile games are mostly casual social games such as card, simulation and tower defense games. The recent trend in the Chinese mobile games market is core PC game IP adapted for the mobile audience such as Fantasy Westward Journey, TLBB and Dragon Nest. Tencent’s Honor of Kings a mobile version of the most popular PC multiplayer online battle arena title from Tencent-owned Riot Games, League of Legends is the most lucrative and popular mobile title in China. Although Alibaba has a deep IP portfolio from film and dramas, none of these properties have legacy game users. Additionally, Ejoy has limted experience in developing core mobile games so the new game development team is likely to take time to find its feet.

Geography
China
Organization
Alibaba NetEase Tencent
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