The curious case of Genshin Impact

Dissecting a generational title that will change the gaming industry forever

Genshin Impact is currently one of the most profitable games in the world, netting $4bn+ in revenue since its launch 2 years ago (which is a very conservative estimate due to its cross-platform nature). It has shattered almost every record in gaming, and was the fastest title to hit the $1 billion milestone on the App Store and Google Play, achieving the feat in only ~6 months. Yet despite its global success, it rarely comes up in my conversations with people in the western gaming community. I didn’t understand — why aren’t more people talking about this?

Thoroughly perplexed, I decided to do a deeper investigation to make sense of how a game as transformative as Genshin isn’t more widely discussed. Below are a few key takeaways from my interviews with game investors, developers, and content creators.

• Genshin defies much of the conventional VC wisdom when it comes to building sustainable IP with lasting power. A core thesis of many gaming investors is that the longest lasting games are interactive social networks leveraging cooperative player-to-player experiences as a source of content. Think of games like League of Legends, where you can invite 4 of your best friends to take part in high octane, real-time strategic battles; or Guild Wars 2, where you can defeat powerful raid bosses and tackle complex dungeon mechanics alongside your trusted guildmates. Genshin represents the antithesis of this theme, offering what is effectively a single player experience with a limited co-op feature that arguably dilutes the gameplay (in co-op, you have access to 1-3 characters instead of the usual 4, limiting the combos that you can perform).

• Historically, the track record of eastern developers porting games to the west has been mixed. Success in the west for a game with deep eastern roots was largely unprecedented. As a voracious consumer of eastern games, it’s hard to argue with this point. In fact, having played almost every single eastern MMO that has come to the west over the past decade (yes, it cost a fortune) — Revelation Online, Blade and Soul, Lost Ark, Riders of Icarus, Vindictus, Tera (RIP), FF14, ArcheAge, Elyon (RIP), Astellia (RIP), BDO, Bless (RIP), Closers, C9, Dragon Nest, Kritika (RIP), Kurtzpel — FF14 stands out as the only title that has cemented itself in the western gaming zeitgeist (though important to note that Square Enix invested heavily in the localization of the game for the western audience). This can be attributed to many factors, but eastern games are commonly regarded by the western audience as overly grindy and “pay-to-win.”

• Western game developers still haven’t fully figured out how to implement balanced gacha-based monetization models. Western developers have traditionally steered clear from these models, while eastern developers have largely embraced it (and continue to innovate on it). Part of the reason is certainly a broader cultural acceptance of gacha in the east (and spending on games in general), but I’d argue that the stark contrast in the way western and eastern games approach character development also plays a significant role.

In summary, at first glance Genshin checks all the boxes for a standard eastern RPG that will fall into the “niche” category in the west.

• Single player experience that doesn’t benefit from traditional network effects.

• Grindy progression system

• Gacha monetization that appears to be “pay to win”

• No innovative differentiator vs. similar games (initially labeled by some as a Breath of the Wild clone)

As a result, unless you’ve been immersed in eastern games your entire life, the success of Genshin Impact likely came as a massive surprise. In the next section, we’ll peel back the onion and look at the more subtle elements that catapulted Genshin to the top.

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The hidden network effect

It’s no secret that investors love network effects. Many iconic businesses today like Uber, Ebay, and Twilio were built through powerful network effects. On the contrary, single player games generally do not benefit from direct network effects. When I buy a copy of Horizon Zero Dawn, my experience will be the same regardless of whether 100 million people are playing the game or 10 people are playing the game. While there is certainly value in a game being popular (e.g. for generating hype and building a community), the actual game experience is unchanged when new users join the game.

While Genshin is no exception, its intricate elemental reaction system and unique character designs enable it to take advantage of a different, yet immensely potent type of network effect — the content network effect. I described this concept in more detail in an earlier post, but the fundamental idea is that every new character added to the game exponentially enhances the gameplay experience through a compounding effect.

To further unpack this concept, we need to first understand how Genshin’s elemental reaction system works. In the world of Teyvat, there are 7 total elements — pyro, hydro, cryo, electro, anemo, geo, and dendro. Each playable character possesses 1 element, but 4 total characters can be added to a single party. While the player can only control 1 character at any given time, he or she can swap between all the characters in the party at will on a short cooldown.

The combat in Genshin revolves around this swapping mechanic and the various elemental reactions that can occur when 1 element meets another (see figure below). For example, casting a pyro skill on an enemy followed by an electro skill causes the “overload” reaction, which creates an explosion that knocks back enemies and deals AoE damage. In a similar vein, casting a cryo skill on an enemy that’s wet (due to the effect of a hydro skill) freezes the enemy, preventing them from moving or attacking for a few seconds.

Coupled with some of the most thoughtful character designs I’ve seen in a gacha title (every character adds something unique to the game), this elemental reaction system opens up a remarkably diverse range of team comps and play styles. Want to engulf your enemies in searing flames and watch them burn to a crisp? A burgeon or vaporize team is perfect for you. Have a penchant for crowd control-type playstyles? Run a freeze team and watch your enemies stand helplessly as you overwhelm them with chilling blizzard storms. The possibilities are endless.

As more characters (and reactions) get added to the game, players can constantly discover and test out exciting new team comps, effectively unlocking a never-ending supply of content / thrilling ways to fashionably defeat your enemies. Perhaps the best example of this non-linear scaling is the release of new dendro reactions that came with the Sumeru patch. The new dendro reactions (bloom, burgeon, catalyze) opened up a myriad of new team compositions that made many previously released characters even more gratifying and fun to use (shoutout to all the electro fans out there). In fact, after 2 years of casual gameplay I’m still craving to invest in new characters to expand my repertoire of teams!

In summary, I believe the elemental reaction system and emphasis on unique character design truly embody HoYoverse’s vision for the open-world game — maximizing the degrees of freedom through a highly synergistic and infinitely compounding live-ops content strategy.

But these factors alone don’t explain why consumers are paying premium prices (in some cases over thousands of dollars) for each new character. As alluded to earlier, another key pillar of Genshin’s success is how they approach character development.

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Character development on steroids

When I buy an Overwatch or League of Legends skin, it’s either because I really like playing the character or the skin looks really dang cool (i.e. as a means of self expression). There’s usually some lore associated with the character, and they sometimes even get flashy animated shorts or an entire animated series based on the IP. There may even be catchy music videos featuring the champions you can pilot in the rift.

In many ways, Genshin employs the same strategy when it comes to its characters… just on steroids.

At a baseline, with each Genshin character you can expect:

• Basic profile information (name of the voice actor/actress, birthday, brief description, basic story/lore, splash art)

• Full set of replayable voice lines

• Unique idle animations, attack patterns, skills, and personalities that make each character easily identifiable

• Multiple dedicated character quests or hangout events

• Event quests that explore the character’s backstory (e.g. Wine Festival event for Razor, Shadows Amidst Snowstorms event for Albedo)

• Main story quests that feature the character

• Multiple teaser trailers and a release video showcasing the character’s skills / story

When I pull for a Genshin character through the gacha system, it feels like I’ve already known the character for years. There is a certain level of emotional attachment and familiarity that the game has slowly and subtly built up prior to the character’s release. The game also deliberately times character banners based on current ongoing events and the latest main storyline, further deepening the connection between the player and the character.

The excerpt below from Nextrift is a great example of the painstaking detail that Genshin puts into its character development, and the resulting psychological impact that induces spending on a character.

“Not only do we learn much more about Albedo’s history in the latest story event, Eula also gets quite a bit of character development. Her friendship with Amber is explored too, and even Bennett gets some of the limelight as we learn more about his…well, not so great luck in adventuring.”

“I have a confession to make: I was actually saving up Primogems for Arataki Itto and Gorou – both of them will be featured in the same event wish come 14 December – but after the second act of the story, I couldn’t help but to roll for Albedo. This is despite the fact that I already have full constellations for the 4-star characters in the banner.”

On the other hand, buying a skin or unlocking a character in most western games feels like I’m swiping right on Tinder — it’s a more casual, first-impression purchase and I’m going in not really knowing what to expect!

However, I want to note that this is not a slight towards western games. I’m not implying that western developers aren’t assiduous when it comes to character development — I’m merely pointing out that the top eastern games go an extra 10 miles on this front, which aligns felicitously with the gacha monetization models that they commonly use.

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What makes the gacha monetization in Genshin work?

Some of the most frequent complaints against gacha-based monetization are:

• It’s “pay to win” — spending real money leads to an unfair advantage against others who don’t.

• It’s too expensive / the rates are too low — if you encounter a stroke of bad luck, the costs can add up quickly.

• It fuels an inherent gambling addiction

To address the above critiques, I believe HoYoverse has intentionally designed Genshin to be very casual leaning. While technically a mid-core game, Genshin shies away from any sort of feature that could be construed as competitive, while still offering an incredibly immersive open-world experience.

For example, the only permanent end game content at the time of writing is the Spiral Abyss, where the player has to clear waves of enemies within a set amount of time. Furthermore, there is no leaderboard (so you can’t compare clear times against other players), and all content in the game can theoretically be cleared / enjoyed without any spending. While spending does accelerate your progress, it’s not strictly required, nor heavily encouraged due to excessively difficult content (i.e. no indirect paywalls). There are certainly both pros and cons of this strategy, but it does shift the narrative away from “pay to win” quite effectively.

Additionally, Genshin’s content network effect and turbo-charged character development further mitigate the risks of the standard gacha model. Candidly, it’s refreshing to see a gacha game pull this off so flawlessly — I’ve had my own fair share of getting burned by toxic and predatory gacha models!

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How will Genshin impact (pun intended) the gaming industry going forward?

The breakout success of Genshin will undoubtedly have very wide-reaching implications for the gaming industry. To summarize, Genshin has demonstrated that:

• Cross-platform can work seamlessly

• Mobile can support ultra high quality games that were historically only available to PCs and consoles

• Thoughtfully designed eastern games can still succeed in the west

• Gacha doesn’t have to be toxic to be ridiculously lucrative

• Single player live service can be an incredibly powerful and long term sustainable model

I truly believe we are entering a new era of gaming in 2023 and beyond — an era where eastern games will see more broad-based adoption in the west, ultra immersive games will come to mobile, and gacha will reign supreme.

Oh, and Genshin may just hit $6bn in lifetime revenue this year.

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P.S. Anyone else excited for Blue Protocol in 2023?

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Thanks again for reading, and happy holidays to everyone! I’m incredibly thankful for all the support I’ve gotten since launching the newsletter earlier this year, and I look forward to tackling 2023 with all my gaming brethren out there.

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Much love and see everyone in the new year. Cheers!