In what was the biggest gaming news last week, HoYoverse dropped the first trailer for a new upcoming game — Zenless Zone Zero (ZZZ) — seemingly out of nowhere. It’s currently making waves in the gaming community; as of this moment, the trailer has over 3.1M views on YouTube, and the official Discord channel has 10k+ concurrent online members… in only 4 days.
As a reference point, Elden Ring, a critically acclaimed action RPG that sold more than 13M copies worldwide since release in early 2022, has ~1.6M views on its official launch trailer (including Elon Musk’s endorsement). Diablo Immortal, the long-awaited cross-platform title from the celebrated Diablo franchise, has 4.1M views for its gameplay trailer after 3.5 years. Apex Legends Mobile, a highly anticipated shooter title launching this week, has ~300k views on its pre-registration trailer. Even Genshin Impact, HoYoverse’s previous hit title and top 3 grossing mobile game last year, has “only” ~1.4M views on its announcement trailer. Wow — things certainly escalated quickly for Zenless Zone Zero.
To be fair, I knew a new title was in the works, but was admittedly caught off guard because HoYoverse already announced another brand new game last month — a tactical turn-based RPG called Honkai Star Rail (HSR). Signups for Star Rail’s closed beta began on April 28, so it’s only been a few weeks since then. I don’t think anyone expected HoYoverse would announce another ambitious title within such a short timespan.
While it’s not entirely uncommon to see established studios work on multiple big projects at once, ZZZ stands out because the initial traction already rivals some of the biggest games coming out this year. There’s very limited information that’s been confirmed, but many are speculating ZZZ will be a rogue-lite action game featuring procedurally generated ‘labyrinths’ in a post-apocalyptic, urban fantasy setting (reminiscent of games like The World Ends with You). Judging from the website and trailer, there are many similarities compared to previous HoYoverse titles, most notably the ACG-themed1 art style and fluid action combat with cinematic cutscenes.
It’s important to note that hype for a game does not always correlate with success; regardless, I thought the announcement was worth highlighting because I’ve never seen a developer corner a market (mid-core ACG-style RPGs) with such an aggressive expansion strategy. HoYoverse seems to have found a repeatable formula for success using their technical and production expertise in this market, and it will be interesting to see how this strategy plays out in the short and long term.
This brings us to the main topic for this post — the key growth levers for a gaming company. More specifically, I thought it’d be interesting to analyze the expansion strategies successful companies like HoYoverse have leveraged in the past, and see if there are any modern trends we can uncover. This is a pertinent subject especially given the current market backdrop — the gaming industry is experiencing a mild post-pandemic whiplash following a blistering 2020 and 2021. Per Sensor Tower, mobile game revenue declined 6% y/y in Q1’22 to $21bn after growing 27% and 18% in Q1’21 and Q1’20, respectively. NewZoo forecasts that the global games market will only grow ~5% in 2022 to $203bn. Publicly traded game developers mostly announced soft Q1 results this year.
In a decelerating (or should I say, normalizing) market, gaming businesses will have to search for new avenues of growth, and expansion vectors are certainly top of mind for many studios I speak with today. Without further ado, let’s dive right into it. In this post, I will focus on the first 3 of the following 6 major strategies (which are not mutually exclusive):
Build or update content for an existing game
Make new games
Monetization strategy
Geographic expansion
Platform expansion
M&A / non-gaming / ancillaries
1.) Build or update content for an existing game
One of the most monumental shifts in gaming over the past decade is the transition from “games-as-a-product” to “games-as-a-service.” In other words, developers started to design their games as a platform that would be updated with new content on an ongoing basis, in contrast to the traditional model in which games were designed to be purchased and played through only once.
While there will always be demand for one-and-done games (increasingly as part of a bundled subscription plan like Apple Arcade), the most successful games today are undoubtedly platforms with many years of live-ops runway. The games-as-a-service model didn’t just extend a game’s lifespan; through continuous iteration (i.e live-ops), it also enabled developers to drive deeper personalization (e.g. targeted offers and special events), more engaging gameplay feedback loops, and greater brand loyalty. It also spawned new business models like free-to-play, which has seen success across both PC and mobile titles.
A quick look at some of the large game developers and publishers reveals that many are still generating significant revenue from fairly dated IP:
Nexon still derives ~50% of total revenue from Maplestory (released in 2003) and Dungeon Fighter (released in 2005). Maplestory and Dungeon Fighter generate ~$400M and ~$600M in annual revenue, respectively, per analyst estimates.
NetEase’s hit mobile MMORPG title in 2015, Fantasy Westward Journey (梦幻西游), was still a top 10 grossing title in 2019.
Riot’s renowned MOBA title, League of Legends (released in 2009), generates ~$2Bn of annual revenue today.
Activision Blizzard’s MMORPG titan, World of Warcraft (released in 2004), still generates ~$900M of annual bookings per analyst estimates.
All of these games still have a regular cadence for content patches. For example, Maplestory receives large updates on a monthly basis, despite being an 18 year-old game!
But how do developers figure out what content to update or add? While it depends on the genre, business model, and maturity of the game, a recurring theme based on what I’ve observed is to focus on the data first. Where are players spending the most time in the game? What cash items are players purchasing most of? Why does 30-day retention look so low for a specific cohort?
Content patches generally fall into 4 categories:
New features: Plethora of options including new classes to play, new regions to explore, new bosses to fight, new gear to acquire, and new game modes. An effective approach here is to listen to player feedback and build on core competencies (similar to what was outlined in my previous post). Example: Open world exploration is one of the hallmarks of Guild Wars 2, so the developers focused on content that would make traversing the vast world of Tyria more exciting — this led to the addition of gliders and then eventually the innovative mount system that many new players hopped into the game to try out. Most top games will aim to deploy a healthy mix of new features that extend both horizontal and vertical progression.
New monetizable assets: Cosmetics, card packs, loot boxes, gacha characters, and other cash items. One important consideration to note here is balance. Cosmetics can scale indefinitely because they have no impact on game balance (assuming they don’t provide additional stats), but new cash items should be carefully selected to ensure they don’t break the progression or balance of a game. Example: Dragon Saga Online, a unique 3D arcade side-scroller released in 2009, eventually faded into oblivion because the developers haphazardly added cash items that increased the avoid stat — if you stacked enough of it, nobody could hit you in PVP. Talk about fun…
A great example of a successful strategy is the tiering structure that League of Legends implemented for its champion skins. The Ultimate skins (highest priced) come with new character models, new textures, new skill animations, new visuals, new voice overs, and more. On the other hand, Budget tier skins (lower priced) come with only minor model / visual changes. This strategy allowed Riot to capture as much area under the demand curve as possible — we’ll discuss this more in the monetization section below.
Events and collaborations: Holiday sales, gifts, crossovers, game master events, and time-limited quests / game modes. This can be a great low-cost way to keep the experience fresh for players. Perhaps the best example here is Fortnite, which has found much success from frequent collaborations / crossovers with other IPs (Marvel, Tomb Raider, and even the NBA). Maplestory also now has regular collaborations with other brands (including a recent one with famous pop band BTS that featured items designed by all the members). HoYoverse also saw much success adding Asuka from the popular Evangelion series as a playable character in Honkai Impact. The network effects from combining multiple IPs can be tremendously powerful.
Optimization. Improving the UI, simplifying complex systems to improve the early game experience, removing old content, and others. A common area of focus here is reducing the friction in new user onboarding (i.e. making sure there are no bottlenecks impeding top-of-funnel growth).
As we can see, there are a diverse number of ways to drive growth just through updating or adding content for an existing game. When executed well, it can be an effective way to elongate the typical retention curve and attract new users to the platform.
2.) Make new games
Gaming companies produce new IP to diversify and broaden their portfolio. A new successful title has the potential to significantly expand the TAM and de-risk the business from shifts in broader consumer trends.
The challenge, however, is that making a brand new high quality game is no easy feat. In some ways, it’s like building a new country — settling on a theme, designing the gameplay, incorporating community elements, building the core progression loops, creating a healthy economy — there are many moving parts interwoven in ways that are deeper than what meets the eye. As a result, many companies choose not to go down this route until much later in their life, given the level of investment required and risks involved. It took Riot Games a whole decade before releasing their second game, Teamfight Tactics (TFT).
The good news is that the second game is easier to produce than the first, and the third will be easier than the second, generally speaking. Once a developer has established the underlying design and technological foundation, the development pipeline becomes much smoother. For example, NetEase now uses its internally developed engine Messiah to accelerate new game development. Messiah was designed to support graphics-intensive 3D mobile titles, a core focus for the company.
Given the risks involved, some developers opt to start with games that are less resource intensive (e.g. casuals / mid-cores), then move on to more ambitious projects (e.g. MMORPGs) over time. In fact, we can see that HoYoverse has historically followed a very similar strategy when it comes to new releases:
HoYoverse’s first game FlyMe2TheMoon was a very simple 60-level side-scroller adventure with puzzle elements (think old school Mario with some flying mechanics). It was followed by Zombiegirl Kawaii in 2012 and Guns GirlZ in 2014, which both inherited the ACG theme and side scrolling aspects from their first title, with added gameplay complexity and deeper RPG-style progression. Then came Honkai Impact in 2016, a hub-based action RPG boasting one of the highest production qualities at the time, built on the same graphical and technical foundation of its predecessors. The main character for Honkai Impact — Kiana Kaslana — is the same character that you play as in FlyMe2theMoon!
If we look at Riot’s portfolio, there are some very interesting trends & similarities:
Riot also extensively re-uses its art / graphic assets from its first title (League of Legends) in subsequent titles. The only title that doesn’t so far is Valorant.
Projects become more ambitious over time — Riot only announced its foray into RPGs recently with Project F and the unnamed MMORPG title.
Diversifying into more genres over time. Riot now has titles across MOBA, collectible card game, auto-battler, and FPS.
No overlap in genre for games that are still live, presumably to avoid internal competition (though worth flagging that Tencent — Riot’s parent company — did publish Honor of Kings, a MOBA title that competes with League of Legends in Asia). TBD if Zenless Zone Zero will overlap with Honkai Impact for HoYoverse — something interesting to monitor.
No direct sequels yet. All titles are “new.”
Monetization model hasn’t changed (much) — mainly still cosmetics driven for Riot given their competitive focus, and gacha-driven for HoYoverse.
Riot and HoYoverse are obviously very different companies focused on very different types of games, so it’s interesting to see how their expansion strategies have converged. My main takeaway is that new hit titles are rarely developed overnight — in some ways Genshin was the culmination of the previous HoYoverse titles, and the success of TFT / Valorant was the culmination of the foundations set by League of Legends.
3.) Monetization strategy
In the early 2000s, gaming companies discovered that they could make way more money by giving away their products… for free. It was a radical shift in the entire industry because of the way games had always been monetized — a fixed price for a perpetual license to the software and content.
Some of the earliest adopters of this model include Runescape and Maplestory (both still exist to this day), which gave away their base games for free and monetized through in-game purchases of premium content or virtual goods (i.e. microtransactions). Given their initial success, many games followed suit, which led to the birth of what we call “free-to-play (F2P)” games today.
So what makes F2P such a powerful model?
There are two main benefits of F2P:
It lowers the barrier to entry for new (and especially casual) gamers. The more players that can access a game, the more that game can benefit from viral marketing (i.e. lowering customer acquisition costs).
Microtransactions effectively enable granular price discrimination based on player enthusiasm. Think about that for a second — that’s absolutely crazy. Love the game so much that you want to max out every single 5-star character in Genshin Impact on release? That’ll cost you upwards of $100k (which some players have spent). Want to play casually for 30 minutes a day and slowly build up your roster with free resources earned in game? That’ll cost you nothing. The better your content is, the more people are willing to pay (and now have a means to do so). In the old model (and in every other form of media), everyone paid the same price irrespective of how much they loved a game’s content, which inevitably results in lost revenue.
Interesting to note that enterprise software businesses attempt to "price discriminate” with a ‘call us for custom pricing’ tier, mostly to limited effectiveness.
Put differently, F2P + microtransactions allows games to capture as much area under the demand curve as possible. Consider a hypothetical linear demand curve below:
With the fixed pricing model (assuming no tiers), the area under the curve is 250. With F2P and microtransactions, the area under the curve doubles (!) to 500. This is an oversimplification of actual game economics, but still illustrates the potential that F2P + microtransactions has over traditional models.
With such a marked improvement, it should come across as no surprise that most games eventually transitioned to F2P (e.g. Tera in 2013, WildStar in 2015, Rocket League in 2020, PUBG more recently, just to name a few examples), and most new games are designed with a F2P model in mind. Of the top 10 mobile games by worldwide revenue in 2021, all 10 are F2P.
That is not to say F2P doesn’t come with its own challenges. Gacha models / loot boxes have long been criticized as predatory, and several countries have stepped in to increase disclosure requirements. However, it’s hard for me to see stricter regulations be enacted in most markets (rarely do governments impose explicit consumer spending restrictions for non-minors unless proven to be really egregious).
F2P models have also evolved from just gacha — many successful F2P games now employ hybrid monetization strategies, combining different models (season pass, premium subscription, ad removal, etc.). For example, Roblox’s subscription provides users a regular set amount of in-game currency (Robux) as well as other premium benefits (e.g. Avatar shop, trading access, discounts).
Many games have also seen success driving growth by introducing new monetization elements — Lords Mobile doubled week-over-week player spending in January 2021 following the introduction of the game’s new Season Pass, per Sensor Tower data. Introduction of the Farm Pass in December 2020 for Hay Day helped increase revenue by 46% week-over-week. Supercell has implemented similar systems across other titles in its portfolio as well (e.g. Clash of Clans, Clash Royale, Brawl Stars) to some success.
I believe games will continue to experiment with different (and new) monetization features as a way to drive growth in the future. The early success from new methods such as season passes (which turned out to be a great way to monetize genres lacking a full-fledged progression system such as shooters) will likely also encourage more developers to think outside the box in terms of alternative monetization models (wink: crypto).
Final thoughts
The gaming industry, like many others, is heading into a challenging year as pandemic tailwinds fade and macro conditions worsen. Growth will slow. The markets are going to continue to be volatile. Valuations will come down.
However, it’s important to remember that gaming businesses still have many levers to pull to drive growth, and those that persevere will no doubt come out stronger than ever. Some of the best games were forged during downturns, and if the rapid pace of new game announcements in 2022 so far is any indication, we may see some really good games come out soon!
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ACG refers to animation, comic, and games.