As the third-quarter earnings reports approach, market expectations for various AI companies are at an all-time high, with Kunlun Tech Co., Ltd. (
Founded in 2008 with a focus on web games, Kunlun achieved its peak gaming revenue of 1.2 billion yuan in 2020, accounting for over 40% of its total income. However, the share of gaming in its revenue has now plummeted to 6.4%. Why did Kunlun fail to sustain this "cash cow," and what does its full transition to AI entail?
**01 From "Core" to "Edge" – What Happened to Kunlun Tech's Gaming Business?** As a company with a gaming origin, it is essential to revisit Kunlun Tech's historical journey in gaming. According to publicly available financial reports, upon its listing in 2015, Kunlun’s gaming division was its absolute core, generating 1.56 billion yuan in revenue, capturing a staggering 85% share. Although the company initially developed web games like "Three Kingdoms Wind and Cloud" and "Martial Arts Wind and Cloud," it mainly relied on agency distribution for mobile games such as "Martial Arts Q Chronicle," "Battle Spirit," "Forgetful Immortal," "Time Hunter," "Sword Soul Blade," and "Island Battle." In 2015, Kunlun began transitioning towards self-developed products, launching titles such as "Divine Demon Holy Realm" and "The Realm - Awakening of Souls," but these efforts were unsuccessful.
In 2016, Kunlun acquired Xianlei Entertainment (a leisure card game platform) to expand its user base through localized gameplay options (like room card models). Xianlei once became a stable cash flow source for Kunlun, peaking with a net profit exceeding 1.1 billion yuan in 2018. However, by 2020, regulatory changes (strict government scrutiny over gambling games) led to performance declines, putting strain on the gaming sector. In 2022, the contracts for distributing popular games like "Clash of Clans" and "Clash Royale" expired, pushing multiple offerings into the later stages of their business lifecycle. In 2020, gaming revenue still accounted for 43.79% of total income, a significant segment. That same year, Kunlun started experimenting with integrating gaming and AI by launching "Club Koala," a cross-platform game employing AI-generated and AINPC technologies. However, progress stalled due to artistic adjustments, failing to become a new growth engine.
By 2023, with Kunlun declaring its "All in AGI and AIGC" strategy, resources for gaming were further diverted. The 2024 financial report indicated that Kunlun's total revenue reached 5.662 billion yuan, with gaming revenue dropping to just 400 million yuan, a further decline to 7.85%; in the first half of 2025, Kunlun reported revenue of 3.733 billion yuan, with gaming revenues at only 239 million yuan, marking a historic low of 6.4%. The situation indicates that the once-sturdy pillar of gaming has crumbled, urging the company to seek new business growth avenues.
**02 The Illusion of an All-Inclusive AI Industry Chain: Diverse Cash Cows Supporting the AI Bet** Despite the collapse of its gaming business, Kunlun remains optimistic about its AI ambitions, bolstered by diversified revenue streams. For many years, Kunlun has pursued global expansion and investigations into AI technologies. Mid-2025 reports demonstrate that Kunlun's largest income source is its online advertising business, generating 1.433 billion yuan, accounting for nearly 40% of total revenue with a gross margin of 44.58%. Additional contributors of over 10% to revenue include Opera search services, short video platforms, and overseas social network businesses, boasting an average gross margin of 80%. These, alongside Kunlun’s previously high-margin gaming operations, support AI R&D financing.
Kunlun started eyeing the overseas market over a decade ago, being among the earliest Chinese firms to do so. With titles like "King's Blade," "Monarch 2," "Hero Battle Soul," "Forgetful Immortal," and "Time Hunter" driving overseas distribution, Kunlun successfully listed on the Shenzhen Stock Exchange in 2015, capturing 73.98% of overseas revenue. In 2023, Kunlun began significantly investing in AI. By 2024, R&D expenses soared to 1.54 billion yuan, a 59.5% increase, while in the first half of 2025, R&D expenditure reached 832 million yuan, accounting for around 22% of total revenue, over 50% dedicated to AI development. These investments facilitated technical advancements; Kunlun's "Tiangong" model has progressed to version 4.0, adopting an MoE (Mixture of Experts) architecture with a parameter scale reaching 400 billion, ranking as one of the world's largest open-source MoE models. Leveraging "Tiangong," Kunlun has built a diverse AI business matrix encompassing AI music, short video content, social networking, and gaming.
For instance, the AI music platform, Mureka, utilizes advanced Large-scale Transformer and Diffusion Transformer technologies to streamline the music creation process. Users can create music through Mureka and list their creations on the platform's music store, which charges a commission. By March 2025, Mureka was already generating annual revenue of approximately 12 million USD (about 1 million USD per month). The AI short video platform, DramaWave, employs AI technology for rapid content generation and localized adaptation, achieving annual revenue of around 120 million USD (about 1 million USD per month) by March 2025, rapidly becoming one of the leading platforms overseas. This growth also accounts for Kunlun's 37.33 billion yuan revenue in the first half of 2025, representing a year-on-year increase of 49.23%.
Yet, despite the infusion from diverse "cash cows," Kunlun continues to face substantial losses.
**03 The Cost of Transformation: Increases in R&D, Marketing, and Management Expenses** Despite some progress in its AI business, Kunlun's losses have deepened. In 2024, the company reported a net loss of 1.595 billion yuan; during the first half of 2025, the net loss further increased to 856 million yuan. The primary reasons for the losses are the increasing "three expenses": R&D investment, marketing expenditures, and management costs.
To remain competitive in the AI era, Kunlun must continually invest. Financial reports show that Kunlun's R&D spending primarily focuses on the "Tiangong" model and AI computing chips. In 2024, R&D expenses reached 1.54 billion yuan, a 59.5% increase used for upgrading "Tiangong" and developing AI computing chips. Recently, Kunlun announced its intent to apply for a comprehensive credit line of up to 50 million yuan from Hangzhou Bank Co., Ltd. Beijing Zhongguancun Branch for two of its subsidiaries. This reflects the significant funding needs associated with large model development.
Marketing expenditures have also surged; with a focus on acquiring overseas market share, significant funds are allocated for advertising. In 2024, sales expenses reached 2.304 billion yuan, a 42.23% increase, while Q1 2025 further escalated by 92.11% to 868 million yuan. These costs primarily concern market promotion and recharge channel fees for AI software and short video services, with DramaWave investing heavily in marketing to attract users, incurring substantial sales costs.
Lastly, management expenses have surged due to equity incentives and talent competition. To attract and retain talent, Kunlun has committed significant resources to management costs. In 2024, equity incentive costs reached 490 million yuan, a 55.4% increase, and in Q1 2025, management expenses doubled to 310 million yuan. "The AI industry is talent-intensive; we must provide competitive compensation to attract top talent," stated Fang Han. "These expenses are crucial for our long-term development."
**04 Future Direction: When Will Losses Cease? Institutions Hope for AI Business to Prop Up Sustained High Growth** Despite rising losses, Kunlun is confident about the future of AI. The company anticipates profitability in its AI model business by 2027. "Our AI business is already transitioning into the commercialization phase," Fang Han asserted. "AI music is generating an annual revenue of 12 million USD, and AI short videos are at 120 million USD; these represent tangible revenue."
Market analysts remain hopeful for Kunlun's revenue growth. A report from Guotai Junan Securities suggested that Kunlun has established a complete industry chain from computing power to models to niche applications, expecting its commercialization capabilities to continue strengthening, warranting an increased holding rating. Optimistic forecasts predict Kunlun’s total income in 2025 to reach 8.2 billion yuan, with losses narrowing to 480 million yuan. This suggests Kunlun would need to maintain at least a 45% revenue growth rate and a 70% profit growth rate to meet analyst expectations, presenting a daunting challenge.
However, skepticism exists in the market. Some analysts argue that the competitive landscape of Kunlun's AI business is overly intense, likely hindering profitability in the short term, especially with major players like Baidu, Alibaba, and Tencent ramping up investments. Whether Kunlun can navigate this environment remains uncertain. "Kunlun's transformation is a high-stakes gamble," remarked a seasoned investor. "It bets on the future of AI, its technological capabilities, and the potential of overseas markets. If it wins, it could emerge as a giant in the AI era; if it loses, it risks sinking deeper into difficulties."
In summary, Kunlun Tech’s ability to carve a niche in the AI landscape will depend on its capacity to first resolve its losses and ensure its AI business can emerge as a dominant force. This endeavor not only affects Kunlun's survival but also serves as a case study for the broader AI sector—whether a gaming-listed company can successfully reinvent itself as an AI enterprise and achieve revival through this transition. Ongoing observation and reporting on Kunlun's recent developments will continue.
Comments