Take Rates in China Will Quality Development Beat Out Traditional Distribution?

Sep, 2023 nikopartners.com | research@nikopartners.com | @nikochina | Silicon Valley . Shanghai . London . Bangkok . Jakarta

Take Rates in China

Will Quality Developm ent Beat
Out Traditional Distribution ?

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Asia Games Market Intelligence: Take Rates in China
Take Rates in China –
Will Quality Development Beat Out Traditional Distribution ?

Epic v. Apple S ets the S tage for D evelopers Evaluatin g High T ake R ates in Chin a

Apple charges 30% of every transaction that takes place in apps distribute d through the App
Store, worldwide. China App Store is no exception. In 2020 Epic Games challe n ged this
“standard” in an anti – trust case that has received wide recognition in the Wes t. Epic says
that the 30% “take rate ” is too high and wants to offer its o wn store on iOS as an
alternativ e . The Epic Games Stor e , currently available on PC , charges a 12% take rate to
thir d – party developer s who distribute via that stor e . Epic says that it only costs them around
5% to process payments, 1% for the CDN bandwidth a nd 1% for other costs, which means
the total cost per transaction is only around 7%. Epic takes roughly 5 % profi t on top, while
Apple takes approximately 23 % profit, assuming the cos ts are equivalen t .  

Notably, 28 Chinese app developers filed a complain t against Apple in 2017 for its abuse of
market power which included removing apps and charging a high take rate for in – app
purchases. Apple has a significant market share globally a nd roughly 25% of Chi n ese
gamer s play games on iOS smartphones. Chinese iOS gamers generally spend more on
games than do Android gamer s , with roughly 40% of mobile game revenue from iOS
smartphones. Epic could afford the risk of Fortnite getting kicked off the App Store for
violating payment policies in protest to the 30% take rates, but smaller de v elope r s cannot
afford that risk.

China Developer s Aren’t Challenging Apple, but Look Out Local Android Store s

While the media focuses on Epic v Apple, Chinese game develope rs are starting
to challen g e domestic Androi d app stores. This is something not seen in the West, although
Google Play, the world’s largest Android app store, also charges a 30% take r ate. Andro id is
an open platform and 3
r d
party stores exist on it, which is not possible with Apple’s closed
system. While Epic Games did initially try and bypass Google Play on Android, by
distributing the game directly, the company ended up changing course and put ting its game
on Google Play .

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Asia Games Market Intelligence: Take Rates in China
Google Play is not in China. Go ogle services are essentially banned in China. The void is filled
by hundreds of Chinese Android app stores, with about 10 – 20 of them taking the vast
majority of market share. M a ny of these di ctate their own take rates, as high as 50%. Some
developers taci tly protest that fee, including Lilith G a mes (Rise of Kingdoms) , miHoY o
( Genshi n Impact), and Giant Interactive (Pascal’s Wager). These games are not distributed
through big stores, rather dir ectly from the developer or via plat f orms that charge lower
take rates.

Genshin I mpact

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Asia Games Market Intelligence: Take Rates in China
Android App Store E c osystem in Chin a

Chinese smartphone manufacturers including Huawei, Oppo and Vivo dominate the
domestic Android smartphone market. These thre e , along with others , forme d the Mobile
Hardcore Alliance in 2014 to consolidate Android app distributio n . Smartphone
manufacturers pre – install their own app stores on their branded Android dev ice s and share
resources to increase appeal to developers. In 2020 the Global Developer Service Alliance
(GDSA) was la u n ched b y smartphone manu facturers, including Huawei, Xiaomi, Oppo, and
Vivo, to create a joint platform that would allow developers to up load apps and games to all
their app store s simultaneousl y .   This is another effort to simplify the disjointed China
Android ecosyste m and conso lidate power with smartphone manufacturers .

Smartphone Store s

As a result of the proactive approach to recruit apps and distribute them easily, s martphone
manufacturers a r e the dominant force in China’s Android app distribution market.
They have push ed out most competitio n from smaller companie s , though large tech fi rms,
such as Tencent and Alibaba, are still competitive. Tencent’s MyAp p store is one of the most
popular app stores on Android due to its integration with WeChat and distribution of
Tence nt games. Soon the manufacturers and tech giants determined th ey could justify
charging 50% take rates, by offering integrated services such as distribution across all GDSA
partners and marketing s ervice s to promote games. App distribution is a profitable business
for smartphone manufacturers, which often see low margins on hardware sales. For
example, gross profit margin for Xiaomi’s smartphone sales is just 7.2% while its Internet
Services, includin g app and games distribution, enjoys gross profit of 64.7 % .

The largest developers have had some success negotiating lower take rates. NetEase was
able to negotiate a lower fee for in – app purchases in   Fantasy Westward Journey   while
Tencent was able to negotiate a lower fee for some of its key titles. These ar e the only two
who have publicly said they have done s o , bu t even NetEase has been unable to extend this
offer to its newer titles. Game developers have effectively been forced into accepting the
50% take rate on these app stores as it has been the only wa y to r each a broad audience. If
Epic v Apple is causing a harder look at the 30% rate, the 50% rate may be short lived.

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Asia Games Market Intelligence: Take Rates in China
2021: Huawei Pokes at Tencen t

At the beginning of 2021 Niko Partner s became aware o f a revenue dispute between
Huawei and Tencent , with the former removing all Tencent games from its app store due
to a disagreement on take rate charge s . This dispute was resolved the same day, but it
continues to show how more developers are looking to exert their power over traditional
app stores to maximise their gross profit margin. One must acknowledge th e iro n y in that
example, becaus e Tencent also charges a 50% take rate for apps and games that are
distributed through its stor e yet fought Huawei’s identical rate a s unfair. We also became
aware o f NetEase opting fo r direct distribution rat h e r than vi a traditional app stores for one
of its newest titl e s , Yu – Gi – Oh: Due l Links, which was released January 14 .

Chinese Devs Going Direc t

NetEase is not the only company opting for direct distributi on. Duoy i ( Shenw u ), Giant
Interactive (Battle of Balls), and G – Bits ( AskTa o ) have all dropped from app stores and gone
direct to Android g amers . Othe r examples of developers that are going direct for specific
titles are : Hypergryp h ( Arknight s ), QC – Play ( Th e Marvellous Snai l ) , Giant Interactiv e (Pascal’s
Wager ) , Lilith Game s (Rise of Kingdoms ) , and   M iHoY o ( Genshi n Impact ) .  

The method can be hugel y successful. Duoyi’ s Shenw u has been a top 20 grossing hit, and
gross profit exceeded 95% on Android thanks to direct dis t ribution. The game would have
had 50% gross profit margin had it distributed via Android app stores – one could argue this
is still a big margin, but if you don’t need the Android stores, why forego it at
all? Shenw u has 70% margin on iOS, di stributing through the App Store as there is no other
option. It takes effort to create that level of success for a title. In this case, Duoy i invested
heavily in marketing and directing would be users to its own site. This was enabled by the
game having a popular PC version with avid user s who were a ready audience for such
marketing.

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Asia Games Market Intelligence: Take Rates in China
Other Success Storie s

New IP such a s Lilith’ s   Rise of Kingdom s , which launched in China on September 21,
202 0 , grossed aroun d $100 million in th e first month without l isting on major Android app
stores. Lilith h i red popular actor s known for historical roles (similar to the theme of the
game) as part of a high – cost ma rketing strategy. The company also invested in mass digital
and traditional ads t hat led t o more than 3. 5 million pre – registration s prior to launch .

Rise of Kingdoms

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Asia Games Market Intelligence: Take Rates in China
Smaller Devs May Conside r 50% Take Rates to b e an Acceptabl e Cost of Doing Busines s

Building strong direct distribution capabilities is a good strategy for som e , but it is not
easy. Smalle r developer s , and even some large developers , still value distribut i o n via
traditional Android app store s or via publishing pa rtner s such as Tencent, for distribution
and marketing service s . These smaller developers are unable t o utilise a direct to market
approach in an e fficient manner and so working with app store distributors or a publishing
partner makes more sense . This cos ts 50 % of their total revenu e , so they pay it. While they
would have a higher gross profit margin with direct distribution, it would be to a smalle r
audience and ultimately produce lower revenue.  

Fan Site s , Community drive n app stores and Influencer Marketing Boost Popularit y

High quality games get recognized, with critical marketing effort, no matter what the mode
of distribu t ion. An example is miHoYo’ s Genshi n Impact, which spent 4 years and $100
million to make it as strong as it is today. On e prong of miHoYo’ s strategy was to invest in
cultivating a fan base via communit y drive n app stores such as TapTa p and fan site s such
a s Bilibil i w hic h has the larges t anime, comic, game (AGC) fa n bas e in Chin a . TapTa p
channelled 4 million pre – registrations and Bilibil i added 3 million, plus miHoYo’ s own 9
million from direct distribution.

TapTa p does not charge a take rate for games. The business mo del is an ad platform on
which developer s bid to promote their game. TapTa p offers developers the ability to build
their own gaming commun ities through dedicated forums, access to game tests and more.
The platform is much stickier than traditional Andro id app stores and is a key user
acquisition tool . Chinese games publisher IGG recently announced that it would be
distributing all of its fut ure games exclusively on TapTa p . The developer has been extremely
successful overseas but hasn’t had a hit at home just yet. Rather than pay a 50% take
rate , to traditional app store distributors, the company is now looking to build a community
via TapTa p and reach players directly, while maintainin g a high gross profit margin.

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Asia Games Market Intelligence: Take Rates in China
Bilibil i charg e s a fee for games dist ributio n but has the right ACG audience for m iHoY o ’ s
gam e s. These types of fan sites are crucial for games in certain genre s and we expect to see
developers latch on to certain fan sites in order to market their games to these
communities prior to launch.

Influencer marketing use s key opinion l eaders, spokespeople and streamers to promote
games prior to launch. Other n ew marketing channels are ads via high engagement short
video apps such as Douyi n and Kuaisho u . User generated content on these platforms can
also play a huge role in having games go vira l . Traditional marketing also continues to play a
large role with billboards and TV commercials reaching a broader audience. This increased
investment in marketing is offset by higher gross profit margins v ia direct distribution
channels.  

Quality Content over Distributio n

Genshi n Impact was so successful via this direct distribution strategy that Xiaomi ended up
striking a deal with MiHoY o to bring the game t o its store with a reduced take rate of 30% .
Other app stores have not made similar moves just yet, and it should be noted that Xiaomi
has not extended this offer to other developers yet either. However, it is still a positive sign
for the industry and sho ws that developers going direct and communi ty driven app stores
are changing the app distribution landscape in China. We expect to see additional market
changes throughout 2021.

In summary, developing a high – qualit y game with broad appeal is a better way to impact
sales than broader distributio n of lesser games. Genshi n Impact   had a huge marketing
budget, but its success came from the fact that i t is fun to play, accessible on multiple
platforms, and is polished to a AAA level. Pairing a high – qualit y game with new marketing
strategies and promot ion via community driven platforms is a recipe for success that will
lead to higher profit margin s and more options for distribution for developer s , threatening
the current stat us quo under which traditional app stores have thrived . This is how market –
driv en changes will oc c ur – remarkably in Chin a , and perhaps even worldwide. We await the
outcome of Epic v Appl e to see .

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Asia Games Market Intelligence: Take Rates in China
Stor e Regio n IAP Take Rat e
Apple App Store Global 30 %
Google Play Stor e Global 30 %
Huawei App Stor e Outsid e Chin a 30 %
Huawei App Store Mainland China 50 %
Tencen t MyAp p Stor e Mainland Chin a 50 %
TapTa p Globa l 0 %
Epic Games Stor e Globa l 12 %

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Asia Games Market Intelligence: Take Rates in China
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