To The Moon

Thanks to @TigerTradingNotes for the invitation to share my views on the Black Myth of Wukong and the single-player games market.

Last week, Game Science Studio officially released Black Myth: Wukong. In just a few days, it has sold over 10 million copies across all platforms. The game is visually stunning, well-produced, and draws from the classic Chinese literary masterpiece, Journey to the West. It has resonated deeply, particularly within the Asian cultural sphere, which is well-versed in Journey to the West lore. Remarkably, this game marks China's first AAA title.

I have been eagerly anticipating this game for years, and finally, I had the chance to dive into it last weekend, completing 30% of the storyline. My most profound impression is that the game's exquisite visuals and vivid narrative consistently resonate with me on a subtle level.

Single-Player Games: Cornered but Unyielding

As a trader, beyond enjoying the game itself, I want to explore why renowned Chinese gaming companies show little interest in developing AAA titles.

First, let me share two key data points: 1. In 2023, the global gaming market generated $184 billion in revenue, marking a 0.6% increase from the previous year. Mobile games accounted for 49% of the total revenue. 2. In China, mobile games accounted for 74.88% of the gaming market's total revenue in 2023.

Clearly, mobile games dominate the Chinese market far more than the global average. Most mobile games are online games, and it's evident that online games currently dominate the Chinese market, leaving single-player games in a small niche. Companies like Tencent and NetEase invest far more in and earn significantly more from online games than from single-player titles.

Market Behavior or Consumer Choice?

Some argue that instead of blaming game companies for not making single-player games, we should blame the consumers. It is the consumers' willingness to pay for online games that has driven companies away from the single-player market.

On one hand, I acknowledge that Chinese consumers generally have fragmented gaming time, with far fewer PC and console owners compared to mobile devices. Most entertainment takes place on mobile phones.

On the other hand, I believe the more critical issue lies with game companies. While their behavior is not wrong, it lacks innovation and ambition. They remain content with their market share in online gaming and the established distribution channels, reaping quick profits. In the absence of high-quality single-player games, players are forced to make do with what's available.

Indeed, the dissatisfaction with online games has been longstanding. Fortunately, facts speak louder than words. The explosive sales of Black Myth: Wukong have revealed the enormous potential of the single-player game market in China.

Monetization of Single-Player Games

Most of the profits from online games come from in-game purchases, such as character skins, weapons, and other items. But how can single-player games generate revenue beyond the initial game sale? The mainstream methods include the following:

1. DLC (Downloadable Content): Many single-player games release DLC after the main game launches. This content may include new levels, storylines, characters, or items. Players can purchase DLC to extend their gaming experience, providing developers with additional revenue.

2. Merchandise:

   Physical Goods: Developers of popular single-player games often release related merchandise, such as clothing, toys, books, and art prints.Digital Goods: Digital merchandise includes items like the game’s soundtrack, art books, and wallpapers, which players can purchase separately.

3. Licensing:

   Movie, TV, or Book Adaptations: If a single-player game becomes highly successful, the developers might license its IP for adaptations into movies, TV shows, or books, earning licensing fees and profit shares.

Is the Gaming Industry Worth Investing In?

According to the latest analysis by Professor Aswath Damodaran of NYU Stern School of Business (as of January 2024), various industries’ stock P/E ratios were evaluated.

The chart below illustrates the P/E ratios of several sectors:

Software, Entertainment, Advertising, Healthcare Products, Automobiles, Banks, Regional, Oil/Gas, Integrated, Retail, General

Here’s my analysis of the gaming industry:

1. The gaming industry is part of the software industry: One inherent advantage of the software industry is its "develop once, distribute everywhere" nature, which allows for an extremely high ROI (Return on Investment) ceiling. Unlike traditional industries that require ongoing resource input, software products can be duplicated and distributed globally at virtually no cost. As a result, the software industry typically enjoys high P/E ratios.

2. The gaming industry has a shallow moat: Although the gaming industry benefits from being part of the software sector, its competitive moat is relatively shallow. Unlike operating systems, games lack user stickiness, as players can easily switch to other games. Additionally, compared to sectors like computing chips, the gaming industry lacks significant technical barriers, which often involve complex hardware design and substantial R&D costs. Consequently, the gaming industry faces intense competition, requiring companies to constantly innovate to maintain market share.

3. Games have short life cycles: In today’s market, most games have a life cycle of just a few years or even shorter. Only a handful of games, such as World of Warcraft and Minecraft, can sustain long-term vitality. This scenario means that gaming companies must continually release new products to maintain revenue growth. If they fail to do so, their stock prices could experience significant volatility—a major risk for investors.

Conclusion: Due to my conservative investment approach, I tend to avoid companies that heavily rely on gaming revenue, aiming to ensure stable growth for my assets. Instead, I prefer to invest in companies with stronger moats, stable cash flows, and higher user stickiness. This strategy allows me to achieve more consistent returns over the long term while minimizing risks from market fluctuations.

Play Great Games, Invest in Great Stocks

It brings me great joy to see a high-quality AAA game like Black Myth: Wukong successfully combine traditional Chinese culture with modern gaming, delivering it to players worldwide. I sincerely hope that Black Myth: Wukong is just the beginning, and that we will see more great games in the future.

As players, we should choose good games to play and vote with our feet, leaving no room for poorly made online games. And as traders, we should choose the right stocks to invest in, waiting patiently for the right opportunities and avoiding impulsive decisions.