In recent times, NetEase Games has been met with a series of unfortunate events as it navigates its overseas expansion pursuitsOnce regarded as a promising player in the North American market, the company has faced significant setbacks that have rendered its aspirations seemingly dimmed.

Reports have emerged indicating that the Jar of Sparks studio, which NetEase established in the United States three years ago, has paused the development of new game projects and is laying off employeesJust a few months prior, similar announcements came from two of NetEase's studios in Canada, Skybox Labs and Worlds Untold, which also resolved to halt operations and proceed with staff reductions.

This presents a grim picture for NetEase Games, a firm that aimed to establish a notable presence in North America—an area deemed crucial for its overseas ambitionsThe latest financial report from NetEase reveals that while the company's overall gaming revenue reached an impressive 21.8 billion yuan, marking a 16.5% year-on-year growth, its performance in international markets pales in comparison to its main rival, Tencent, which dominates with a commanding lead.

Sensor Tower's data highlights that in the global mobile gaming sector for 2024, while Tencent takes the pole position, NetEase sits at fifth place, largely relying on the domestic market for considerable revenue

In light of these trends, the stark differences between both companies become more evidentDuring a conference call in 2018, NetEase's CEO, Lei Ding, mentioned that overseas revenue contribution had crossed the 10% threshold for the first time, but subsequent reports failed to disclose significant growth in international earningsIn contrast, Tencent has recently reported that overseas income accounts for nearly 30% of its revenue, surpassing 14.5 billion yuan.

NetEase's diminishing market presence overseas, especially alongside rising domestic competitors such as Mihayou, is a concern reflected in various data pointsRankings for Chinese game publishers' international earnings often place NetEase behind rivals, consistently falling outside the top positionsIt becomes clear that achieving Lei Ding's aspiration of 40%-50% overseas revenue contribution is still a distant goal.

The company's journey in potential markets did not begin directly with North America; instead, NetEase appeared to carve a path more in Japan

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The initial overseas strategic focus can be traced back to 2014, when their North American office was establishedAt that time, North America was viewed as a jewel, showcasing a vast player base and a high percentage of paying users, with one in every two mobile gamers willing to spend money on their gaming experiencesThis lucrative potential far outstripped what was available in China, Southeast Asia, the Middle East, or Africa.

Yet, despite its early focus on North America, NetEase witnessed greater success in Japan soon afterThe game "Onmyoji," released in 2016, experienced unprecedented popularity in Japan where it topped the App Store download charts simultaneously after launch and garnered substantial reservationsJapan's unique gaming culture presented challenges, but NetEase's careful localization efforts paid off, making it a notable IPO success story.

Another major title, "Knives Out," launched in 2017, quickly ascended to success in Japan, contributing significantly to NetEase's overall overseas revenues

Much of the game's immediate success could be attributed to Japanese gamers being new to the 3D open-world genre at that time, which translated into robust revenue—80% of the game's earnings in 2018 originated from JapanFollowing this, NetEase focused primarily on Japanese studios, aligning resources toward further developments in that market alone.

However, Japan's market, though rewarding, holds limitationsWith only 125 million people, the revenue potential significantly lags behind Europe and North America, which boast populations six times greaterThe mounting competition from firms like Mihayou, which has captured attention with significant hits in Japan, places additional pressure on NetEase's strategic focus in this region.

In 2021, senior executives made clear intentions to shift some of the revenue focus toward a more market-diverse strategy, including bolstering efforts in North America and Europe

New studio investments followed, including several established in the U.S., such as Jack Emmert and Jar of Sparks, dedicated to creating AAA titles, and partnerships with renowned studios in Europe to craft games for multiple platformsAs early as 2024, these investments spotlight a critical transition, with NetEase making visible moves to prioritize U.Smarkets and expand its development footprints in various ways.

In stark contrast to Tencent's overt spending strategies, which involved vast acquisitions and bold investments, NetEase has often been described as adopting a more prudent and calculated approach in achieving overseas growthAs opposed to acquiring entire studios, NetEase primarily invests through partnerships and collaborations that allow creativity to flourish while maintaining a degree of operational independenceThis careful strategy refines creativity but can also limit the scaling process necessary for competing on the global stage.

Both companies have faced uniquely different challenges—while Tencent sprung into overseas ventures with record-breaking investments, NetEase has sought to innovate through strategic collaborations and tightly knit local partnerships aimed at sustaining growth and enabling product creation without the need for deep-pocket acquisition strategies