A notice once again brings the game developers and distribution channels' game to the forefront.
Recently, the operating team of Tencent Holdings (0700.HK)'s mobile game &#34;Dungeon &amp; Fighter: Origin&#34; (referred to as &#34;DNF Mobile&#34;) announced that starting from June 20th, DNF Mobile will no longer be available on certain top Android app stores.
The fundamental reason for delisting is simple: uneven profit distribution.
In the mobile game industry chain, content is provided by game developers such as Tencent and NetEase (9999.HK), and distributed by downstream app stores.
Specifically, Apple's iOS channel splits revenue with developers at a 70/30 ratio; while in the domestic Android channels represented by self-operated stores of mobile phone brands, developers generally have to give up 50% of their revenue.
In other words, if a player spends 100 RMB on in-game purchases, 50 RMB will go into the pockets of channels like Huawei and Xiaomi.
By contrast, in overseas markets, the revenue split ratio for the Android system's Google Play channel is the same as Apple's, both at 30%.
The announcement indicates that Tencent's cooperation contracts with these Android channels will expire on December 31, 2023, and currently, both parties have not signed new cooperation agreements. During this period, either party can suspend or terminate the cooperation at any time.
Since its launch on May 21st this year, DNF Mobile has been at the top of the iOS bestseller list for a month, giving Tencent the confidence to delist the game.
According to data from Point Data, DNF Mobile contributed to over two-thirds of the new game market revenue in China in May.
In fact, this is not the first time that game developers have had conflicts with distribution channels. Earlier, games like &#34;Genshin Impact&#34; by miHoYo, &#34;Awakening of Nations&#34; by Lilith, and this year's new work by NetEase, &#34;All-Star Streetball Party,&#34; were not initially available on stores like Huawei and Xiaomi.
While game developers are &#34;rising up&#34; against Android channels, they may benefit from third-party channel platforms seemingly &#34;lying low and winning.&#34; For example, the first release channels for the above three games all chose the independent mobile game platform under XD Inc (2400.HK) - TapTap, which takes 0% revenue share.
Since the beginning of this year, against the backdrop of a full recovery in the Hong Kong stock market, as of the close on June 19th, XD Inc's stock price has doubled for the year, with an increase of 109.82%.
Insiders from XD Inc told Xin Feng (ID: TradeWind01), &#34;TapTap's user activity and advertising revenue in the first half of this year have been very promising,&#34; and &#34;XD Inc has already reaped the benefits of this channel dispute.&#34;
<h2>Metaphor of Delisting</h2>
Game developers have long been suffering from the &#34;channel tax&#34; of the Android system.
NetEase CEO William Ding once said, &#34;China's Android channel revenue share is as high as 50%, even 20% more expensive than Apple, making it the most expensive and unhealthy in the world.&#34;
In August 2014, OPPO, vivo, Huawei, and other mobile phone manufacturers formed the &#34;Hardcore Alliance,&#34; raising the revenue split ratio for game developers to 50%. Although Xiaomi did not join the Hardcore Alliance, the revenue split ratio for most developers has also been maintained at a 50/50 ratio for a long time
With the continuous increase in the penetration rate of smartphones, the Matthew effect of leading manufacturers is gradually becoming prominent.
The channel service games downloaded from app stores such as Huawei and Xiaomi (different from official service games downloaded from official websites) have intervened in the SDK (Software Development Kit) of mobile app stores. The money spent by players on in-game purchases first enters the account of the mobile phone manufacturer, is intercepted, and then settled with the game developer after a certain period.
As a result, game developers are being squeezed by downstream distribution channels and can only offer channel taxes.
According to Guotai Junan analyst Qin Heping's research report, the total profit scale of domestic game channels in 2021 reached 99.1 billion, with the total scale on iOS reaching as high as 20.6 billion and the total scale on Android reaching 78.5 billion.
Qin Heping estimates that after a 30% deduction on iOS, game developers can retain 10%-30% of gross profit, while after a split with hardcore alliance channels, their gross profit can only be 1%-20%.
This means that for every 100 yuan of revenue earned by game developers, after being split with Android channels, they may only have 1 yuan left. After calculating some production and promotion costs, they may even end up &#34;losing money to gain popularity.&#34;
However, Android channels are not always taking half of the revenue. Game developers have different bargaining power, and the way they split revenue with channels varies after negotiations.
An insider from a game company in East China told Xinfeng (ID: TradeWind01), &#34;Top game developers can negotiate with channels based on the attractiveness of the content and the demand for customer acquisition (split ratio).&#34;
&#34;For example, some games that are perennially in the top five of the best-selling and top-up charts will try to give the channel a lower split ratio or no split at all, mainly using the CPS (cost per action) method for splitting, based on download volume, in-game purchase player ratio, game duration, and other data for settlement,&#34; the company insider added.
Strong game developers often have more say. Tencent's removal of the DNF mobile game from channels such as vivo and Huawei this time not only due to the expiration of agreements but also implies an increase in bargaining chips for future negotiations.
There have been cases in the industry where channels have made concessions: in September 2020, when miHoYo's &#34;Genshin Impact&#34; was first released for public beta testing, it was not available on Android channels such as Huawei and Xiaomi. However, in February 2021, Xiaomi broke the usual 50-50 split and adopted a 70-30 split with &#34;Genshin Impact,&#34; allowing it to be officially launched.
But some channels still remain tough. For example, to this day, &#34;Genshin Impact&#34; has not appeared in the application stores of hardcore alliance members.
<h2>Attack and Defense are Interchangeable</h2>
Regarding the relationship between game developers and channels, XD INC's Chairman and CEO Huang Yimeng once said, &#34;As game development gets better and better, we no longer need you (referring to app store channels) to promote our game. In fact, channels need this game: if your platform doesn't have my game, the competitiveness of your platform will decrease, (thus) the entire discourse power will be overturned.&#34;
In overseas markets, cracks have already appeared in the channel barrier built by mobile phone manufacturers.
In 2020, Epic, the game developer of &#34;Fortnite,&#34; tried to bypass the 30% split with channels and was mercilessly removed by Apple and Google, followed by Epic launching lawsuits against the latter two
Despite the litigation result showing that Epic lost to Apple in the lawsuit, Apple also made many concessions during this period, such as conditionally reducing the Apple tax, lowering the revenue share for small developers to 15%; allowing users of apps like Netflix and Spotify to bypass the Apple payment system and redirect to the official website for payment.
On the other hand, Epic won the lawsuit against Google, with the Google Play Store being ruled as an illegal monopoly, and there is a possibility of adjusting or even canceling its 30% commission rate.
In the domestic market where app stores impose heavy taxes, independent channels like TapTap, which do not take a revenue share, and game developers' self-built official channels have emerged.
The methods for dealing with channel diversion in Android app stores are quite different from Apple and Google - the channels downloaded are often not interoperable, and players on channel servers cannot add friends with official server players. Even if you change phones, you have to reinstall the original channel server app.
After the recent removal of the DNF mobile game, Huang Yimeng immediately criticized on social media: &#34;The domestic Android channels are indeed disgusting. Not only do you have to split half of the revenue when you go online, but your official website package will also be 'switched out,' secretly replaced with a channel package that requires revenue sharing. It's better to just take it offline and only operate the official website.&#34;
Currently, major game companies are gradually taking this step.
At the beginning of this year, NetEase's new work &#34;All-Star Street Basketball Party&#34; was not launched on Huawei, Xiaomi, and other app stores, but was exclusively released for a limited time on TapTap (except for the iOS channel, it was only available on this platform for a period of time); Xishanju's upcoming &#34;Sword Net 3 Unbounded&#34; will also be launched exclusively for a limited time on TapTap.
Major companies are starting to experiment with independent channels one after another, which has its own internal logic.
On the one hand, under the trend of game refinement, while developers significantly increase R&amp;D investment, the attractiveness of games to players is also strengthening, and the bargaining power of channels is correspondingly increasing. A typical example is the renegotiation of revenue sharing between &#34;Genshin Impact&#34; and Xiaomi.
On the other hand, the number of game approvals issued from 2021 to 2023 is 748, 512, and 1161 respectively. Thanks to changes on the supply side, developers who do not want to put all their eggs in one basket do not need to focus so much on traditional Android top app store traffic.
Qin Heping, an analyst at Guotai Junan, believes that the refinement of domestic games, the focus on self-built direct charging channels and marketing channels will further reduce the bargaining power of channels, drive down revenue sharing ratios, increase game developers' profit margins, and high-quality game developers with strong self-research capabilities and vertical channel developers are expected to rise.
<h2>Reaping the Benefits</h2>
In this changing landscape of game channels, XD INC has reaped some of the benefits.
As a game distribution platform under XD INC, TapTap does not rely on channel fees to make money on the Android side, but earns more from advertising fees.
In 2023, TapTap is expected to contribute revenue of 1.298 billion yuan to XD INC, a year-on-year increase of 32.63%, accounting for 38.3% of the revenue
As early as January 2021, XD INC had attracted considerable attention.
At that time, due to revenue sharing issues, Huawei's delisting of Tencent games briefly became a catalyst for XD INC's stock price - it surged by over 60% in less than a month, reaching a market value of HKD 50 billion.
However, due to stricter regulations on game approvals and lower-than-expected returns on self-developed game products, XD INC suffered losses for three consecutive years from 2021 to 2023, accumulating a total loss of HKD 211 million. As a result, its stock price plummeted to a low point, with a decline of over 90% from its peak.
After experiencing such highs and lows, XD INC's management became more cautious in terms of cost control and expectation management.
The cost reduction efforts of XD INC have been remarkable, with its sales expense ratio decreasing from 29% in 2021 to 26% in 2023, the R&amp;D expense ratio dropping from 46% to 30%, and the administrative expense ratio decreasing from 9% to 7%.
During the 2023 performance briefing, XD INC's management stated that there are no plans to significantly increase marketing expenses for TapTap.
Now, with the conflict between game developers and major app stores intensifying once again, TapTap, as an independent distribution channel, may once again reap the benefits.
According to information obtained by TradeWind01 from sources related to XD INC, &#34;TapTap had very ideal user activity and advertising revenue in the first half of this year.&#34;
The above-mentioned source attributed this to the increasing awareness among users to download official game versions from TapTap platform or official websites due to the ongoing disputes in game distribution channels.
On one hand, TapTap is striving to attract more users; on the other hand, as the trend goes, many developers are voluntarily choosing not to use major app store channels.
&#34;Just need to get enough volume on TapTap,&#34; the source said. &#34;In this wave of channel disputes, XD INC has already reaped the benefits.&#34;
<h2>Channel Disputes</h2>
Relying on developers' &#34;tax avoidance&#34; benefits is not a sustainable strategy in the long run.
Under the high pressure of channel taxes, some mainstream app store channels are also offering more favorable terms.
According to media reports, Huawei is considering charging developers on the HarmonyOS app store a 20% revenue share, which is not only lower than the 50% share in the previous Hardcore Alliance but also significantly lower than Apple and Google's 30%.
It is worth noting that Huawei surpassed Apple in market share in the first quarter of this year, ranking as the number one smartphone manufacturer. This may lead to more Android phone manufacturers following suit in reducing channel taxes.
After the &#34;tax reduction,&#34; the attractiveness of major app stores will significantly increase.
For developers, the importance of major app stores as the main distribution channel remains difficult to shake.
Many hit games still heavily rely on these channels, such as NetEase's decision to not launch &#34;All-Star Streetball Party&#34; on major app stores first, while their big IP, high-production game &#34;Justice&#34; cannot abandon those mainstream channels.
If &#34;tax reduction&#34; becomes a trend, it will correspondingly weaken the appeal of platforms like TapTap as &#34;tax-free&#34; platforms.
XD INC's management stated that they will focus on user growth, whether the user group's spending power increases, whether they generate value for advertisers; from a marketing perspective, they will pursue high-quality, high-spending users
User quality is often closely related to platform environment and content quality.
Currently, one of XD INC's core competencies lies in the community co-built by developers and players.
Developers receive game feedback from it, while players interact with developers through the community. The enhancement of social attributes and network effects will in turn strengthen the moat of the community platform.
For this reason, when XD INC went public in 2019, it was once expected by the capital to be the &#34;Chinese mobile game version of Steam.&#34; However, whether XD INC can meet these expectations is still worth observing.
After all, in terms of content ecology, there are significant differences between PC games dominated by Steam and mobile games on platforms like TapTap.
Mobile games often lack the high degree of freedom features such as self-made mods and patches found in PC games, and most of them come with social attributes, with not a strong demand for player communities.
Exclusive content is also a tool to attract traffic to the platform.
Steam has Dota 2, Epic has Fortnite, and the existence of such popular games is another source of activity for platforms like Steam.
XD INC is also a game developer. In May this year, XD INC's &#34;Let's Muffin&#34; Chinese version was launched on TapTap.
According to GameLook's prediction, the Chinese version of &#34;Let's Muffin&#34; had a revenue of about 300 million RMB in May, but it still lags behind the monthly revenue of over 1 billion RMB for popular games from major companies.
Another type of &#34;exclusive&#34; content on the content side comes from external collaborations—namely, those popular games outside the top Android store channels.
For example, one of miHoYo's popular games, &#34;Honkai Impact 3rd,&#34; was not available on the hardcore alliance channel but was launched on channels including iOS and TapTap. It generated an estimated revenue of over 1.2 billion RMB within 5 days, topping the bestseller lists in China, the US, Japan, and South Korea, and ranking second in China's mobile game overseas revenue for a long time.
However, once the top stores implement &#34;tax reduction&#34; measures, similar &#34;tax avoidance supply&#34; may be impacted.
Moreover, TapTap will also face fierce competition from other independent channels. For example, Bilibili's client has a &#34;Game Center&#34; that recommends and distributes games for download internally. By 2023, Bilibili's monthly active users across all platforms reached 336 million, while TapTap is only one-tenth of that.
Game developers are also strengthening their self-operated channels, which will also have a crowding-out effect on independent channels.
The combination of these multiple challenges may collectively weave the predicament faced by TapTap as a representative of independent channels

Gaming giants "decouple" from Android app stores: Can independent channels like TapTap benefit?