Alibaba's fledgling games business is currently part of its broader Interactive Entertainment Group. However, thanks to the huge success of mobile title Three Kingdoms: Strategy (三国志战略版), the games division will now be upgraded to an independent body which will sit in parallel to Alibaba’s Interactive Entertainment Group. This structure change demonstrates the company’s new strategy in approaching the mobile games market. In 2014, Alibaba launched its first mobile gaming platform via its acquisition of UC Mobile, and the company’s gaming strategy subsequently focused on games distribution, leveraging resources from its e-commerce platform. Additionally, Alibaba has proposed a revenue share of 70% for developers in order to attract small and mid-tier studios. However, traffic on Alibaba’s e-commerce platforms has shown minimal transition to solid game downloads, and its high user acquisition costs are becoming a financial burden to Alibaba.
In 2017, Alibaba planned to shift its games strategy into in-house development via the acquisition of Ejoy; a start-up founded by former the former COO of NetEase. However, it was not good timing for Alibaba to enter mobile games development. Most traditional PC games publishers, namely NetEase, Changyou and Perfect World, have been devoted into PC-IP adaptation and launched various hardcore games from 2017. Although Alibaba has various financial resources for games development and its own distribution platform, it is unlikely to compete directly with pure games publishers due to its relative a lack of operation experience and games business sense. Not to mention that most traditional PC games publishers choose Tencent to publish their in-house IP-adapted mobile games. As a result, Alibaba has to remain focused on games distribution, whilst quietly exploring games development.
Three Kingdoms: Strategy generated grossing of $576 million in H1 2020 in China, becoming a major revenue contributor to Alibaba’s entertainment business. This gave the company’s top management confidence to finally decide to enter the whole value chain of the mobile games industry. However, we cannot expect the game’s success to be replicated. Three Kingdoms: Strategy’s success is mainly due to a large-scale user acquisition campaign rather than the organic appeal of its gameplay or story. Alibaba conducted advertising across every major channel to improve the game’s exposure greatly. Also, it routinely invites celebrities to promote the game via social media websites. Considering the recent huge cost of user acquisition, we expect a relatively low profit from the game compared to other, similar titles.
In addition to heavy advertising, the game’s marketing timing during the lockdown period also allowed it to gain strong initial traction, and its above-average game quality succeeded to maintain user retention, resulting in high spending. The game’s success allows Alibaba to direct more resources to in-house games development and thus to enter into direct competition with Tencent and NetEase. However, Alibaba’s future success in games relies heavily on the performance of its upcoming titles.
Alibaba’s approach could not overturn Tencent’s dominant position in the short term, but indicates the potential for great competition within the online gaming market across the whole value chain. The major threats Tencent and NetEase are facing are not newly-launched games from game companies, but new entrants such as Alibaba and Bytedance with large, established userbases and broad distribution channels.