Summary of Key Points
NetEase's second-quarter financial report may suggest a decline in profits (a 18.6% year-over-year decrease in net profit), but the main reason is the nominal losses on investments such as Pinduoduo. The gaming business itself is still growing (gaming revenue increased by 10% year-over-year). What truly caused panic in the market is the poor performance of the flagship product "Forgotten Sea," which took seven years to develop. On the first day of its release, it only ranked 100th on the iOS bestseller list and subsequently dropped out of the top 100. Additionally, NetEase has made excessive bets on the "search, fight, retreat" (search-and-destroy) game genre, which is already highly competitive. The gameplay conflicts with mobile users' habits, and there is a lack of other significant new products to compensate in the short term, thus magnifying the risks.
1. Decline in Financial Profits? Don't Be Misled by Nominal Losses; the Real Problem Lies with the New Game
Many people think the decline in NetEase's net profit indicates a decline in its gaming performance, but that's not the case. Gaming revenue actually increased by 10%, and operating profit even rose by 33%. The decrease in net profit is due to the decline in the value of stocks such as Pinduoduo that NetEase owns, resulting in a nominal loss of nearly 3 billion yuan (the stocks were not sold). So why did the stock price still fall by 5.85%? The key reason is that Ding Lei admitted during a conference call that "Forgotten Sea" has received negative feedback from players. This highly anticipated "next-generation flagship" product, after seven years of development, has a poor start, raising concerns among investors about NetEase's ability to create successful new games.
2. "Forgotten Sea" Fails: Why Don't Players Buy In?
This game attempts to combine elements such as "search, fight, retreat," a resource-gathering and combat system, turn-based gameplay, and an open world, but it ends up being something that doesn't fit any category clearly:
- Gameplay Conflict: The "search, fight, retreat" mechanism requires players to carry equipment into the map and evacuate within a countdown, with their in-game levels reset. Mobile players prefer a more immediate and engaging experience; who wants to invest hours only to fail and get nothing in the end?
- Misleading Promotion: The game is promoted as a maritime-themed adventure, but 80% of the gameplay consists of land-based turn-based battles, making naval battles insignificant. Players complain that the high level of effort is not rewarded, and the tutorial is overly lengthy, making the game too difficult for new players to get started.
- Performance Metrics: On the first day of the public beta, it only ranked 100th on the iOS bestseller list (compared to "Yunyun Shiliu Sheng," which ranked 13th on the same day). The TapTap rating is 6.5, and investment banks have reduced their forecast for annual revenue from 3 billion yuan to 1-2 billion yuan, meaning seven years of development have been in vain.
3. Why Does NetEase Persist with the "Search, Fight, Retreat" Genre?
This gameplay was pioneered by "Escape from Tarkov." NetEase has made money with competitive games like "第五人格" and "Endless Night," so it believes this genre falls within its expertise. However, the challenges include:
- Competitive Market: After Tencent's "Dark Zone Breakout" became successful, other companies like Giants, ByteDance, and MiHao Games are also developing similar games (with Giants' "Supernatural Action Team" generating over 5 billion yuan in revenue). With so many options, it's difficult for a single product to stand out.
- Poor Adaptation for Mobile: The "search, fight, retreat" gameplay works well on PC with hardcore players, but mobile users prefer a more lightweight and casual experience. Asking commuters to play a game that requires understanding and practice in the subway is unappealing.
- Overconcentration: NetEase is not only focusing on "Forgotten Sea" but is also testing other games with this gameplay, such as "Guǐyǐng Cángfēng" and "Wùhǎi Zhī Xià." What if this strategy fails?
4. The "Search, Fight, Retreat" Genre Is Overcrowded: Can NetEase Survive?
This genre seems popular, but success is often short-lived:
- Past Examples: Games like "ARC Raiders" sold 16 million copies globally but saw a 90% drop in online player numbers within half a year; "Marathon" lost 95% of its players. Popularity often leads to quick decline.
- Difficulty in Differentiation: NetEase tries to differentiate with Chinese fantasy and magical elements, but whether players will accept these innovations is uncertain. For example, during the testing of "Guǐyǐng Cángfēng," players criticized the strange feel of the combat mechanics.
- Relying on Old IPs: While NetEase's existing games like "Dànzi Party" and "Nìshuǐ Hán" are still profitable, they are based on established IPs. With few new products besides those with the "search, fight, retreat" gameplay, NetEase faces a shortage of revenue sources in the short term (with only "Dream of the West: Reconnecting Past Bonds" planned for the second half of 2026 and "Wúxiàn Dà" yet to release, with the next round of new products not expected until 2027).
5. Conclusion: NetEase's Real Risk Lies in Its Overreliance on the "Search, Fight, Retreat" Genre
The "search, fight, retreat" gameplay itself is not the problem; the issue is that NetEase has tied all its new products to this crowded genre:
- The gameplay conflicts with mobile users' habits, leading to poor new game performance.
- The competition in this genre is fierce, making it difficult to stand out with differentiated offerings.
- With a lack of new products in the short term, NetEase's existing IPs will not be enough to sustain its success.
Ding Lei mentioned that "Forgotten Sea" has a high learning curve for players. The underlying message is that mobile gamers want an immediate and enjoyable experience, not one that requires learning. If NetEase does not adjust its product strategy, the same outcome is likely for its next generation of games.
(The entire analysis is written in plain language, making it understandable even for non-financial and non-gaming enthusiasts.)