Kingsoft's 'Gaming' Challenge: Can 'Black Myth: Wukong' Shake Off the 'Black and Gray Industry'?

Introduction: Lei Jun, who is "focused" on car manufacturing, hopes to be a "long-term player" in the gaming business.

Against the backdrop of a general recovery in the gaming industry, the performance of Kingsoft's gaming segment has been significantly weaker than its competitors.

Recently, $KINGSOFT(03888.HK) released its financial report, showing that the revenue from its gaming and other businesses in the first half of the year was 1.988 billion yuan, accounting for about 43% of total revenue, but a 10% decrease year-on-year; in the second quarter, revenue from this segment was 952 million yuan, a 26% decrease year-on-year.

Lei Jun, Chairman of Kingsoft, stated that the company's online gaming business will continue to focus on high-quality games, deepen IP ecosystem development, steadily advance global expansion, and achieve long-term operations.

Zou Tao, Executive Director and CEO of Kingsoft, believes that the year-on-year decline in online gaming and other businesses is mainly due to the high base in the same period last year.

01 Burning 700 Million in Marketing, Yet Gaming Revenue Declines

What has drawn investors' attention is that Kingsoft's marketing expenses (sales and distribution costs) in the first half of the year surged by 19% year-on-year to 765 million yuan. The company explicitly stated in its financial report that this increase was mainly used for:

Supporting pre-launch activities for new games and increased promotion and advertising efforts.

However, this move can be described as "much ado about nothing." as the gaming business saw a nearly 20% increase in marketing expenses but a year-on-year decline in revenue.

Kingsoft's gaming products are primarily developed and operated by its game studio Xishanju, including the "Swordsman" series, "Whiteout Survival," "Mecha BREAK," and "Bipolar" (a free public welfare game).

Among them, the "Swordsman" series has been operating for over 15 years and is considered an "evergreen" by many gamers. Veteran gamers, in particular, generally regard the "Swordsman" series as the only domestic classic game that can rival "World of Warcraft."

However, the issues faced by Xishanju are also prominent. The fan base of "Swordsman" primarily consists of middle-aged players, whose gaming time and investment are not what they used to be. Although Xishanju has been developing new games in recent years, their popularity pales in comparison to the "Swordsman" series. Moreover, the iterative products of "Swordsman" face competition from rivals, with some products neither well-received nor commercially successful.

According to a report by "National Business Daily," the "Swordsman" IP-derived game "Swordsman Love: Zero" "flopped upon release." On its launch day, the game briefly ranked 5th on the domestic iOS free chart, but its highest position on the bestseller chart was only 97th, with subsequent rankings continuing to decline, failing to become the expected "growth engine."

Kingsoft stated that the decline in its gaming business performance in the first half of the year was mainly due to the high base of "Whiteout Survival" and "Swordsman World: Origin" in the first half of 2024, partially offset by the growth of "JX3." However, the company's gaming revenue in the second quarter fell by 8% quarter-on-quarter, showing a significant decline compared to the first quarter.

02 Underwhelming Industry Performance, Rampant "Black and Gray Industries"

Compared to peers like Tencent and NetEase, Kingsoft's gaming segment has performed noticeably worse.

In the first half of the year, Tencent's gaming revenue continued to grow, with popular games like "Honor of Kings" and "Peacekeeper Elite" expanding into overseas markets and launching new hits, driving steady performance growth.

In the first half of the year, Tencent's gaming revenue reached 118.7 billion yuan, accounting for 32.6% of total revenue—nearly one-third. Domestic games contributed 83.3 billion yuan, while overseas games contributed 35.4 billion yuan.

In the second quarter of 2025, Tencent's gaming revenue grew by 22% year-on-year, maintaining a growth rate of over 20% for three consecutive quarters. Games like "Delta Force," "Valorant," and "Peacekeeper Elite" accounted for a significant portion of domestic gaming revenue, driving overall gaming revenue growth of 17% to 40.4 billion yuan; international gaming revenue grew by 35% to 18.8 billion yuan; social network revenue grew by 6% to 32.2 billion yuan, benefiting from mobile game virtual item sales, video account live streaming service revenue, and music subscription revenue.

Although NetEase's gaming performance lags behind Tencent's, its gaming revenue in the second quarter also grew by 13.7% year-on-year to 22.8 billion yuan. In the first half of the year, NetEase's gaming and related value-added services revenue reached 46.8 billion yuan, a 12.5% increase year-on-year.

In its competition with rivals like Tencent and NetEase, Kingsoft must also address the issue of "black and gray industries" in gaming.

During the operation of "Mecha BREAK," Kingsoft's management admitted to underestimating the domestic gaming ecosystem, with rampant "black and gray industries" disrupting the gaming atmosphere for normal players, directly affecting player retention and spending.

Cheating, gold farming, and other "black and gray industry" activities severely disrupt the game's economic system and fairness, leading to the loss of many normal players and causing significant damage to the gaming business. Based on player feedback, Kingsoft's measures to combat these issues still need improvement to further curb the spread of "black and gray industries."

03 "Mecha BREAK" Approval Rate Only 45%, How to Retain Players?

The "Swordsman" series, "Whiteout Survival," and "Mecha BREAK" are Kingsoft's main gaming products, each with its own advantages but also facing unique challenges in the market.

As Kingsoft's largest gaming IP, the "Swordsman" series has seen multiple iterations in recent years, including mobile versions. On one hand, it faces growth challenges due to its high base; on the other hand, new products have been criticized by players.

For example, the cross-platform version "JX3 Unbounded" for mobile has been criticized for its large file size, severe overheating, and poor action system experience.

Meanwhile, "Mecha BREAK," a core new game Kingsoft had high hopes for, has underperformed expectations after over a month of launch. Zou Tao, Executive Director and CEO of Kingsoft, admitted during the earnings call: "After more than a month of public testing, the product has certainly not met our previous expectations."

Zou Tao stated that during the testing phase in early 2025, the development team had already made adjustments based on player feedback. At the time, players generally felt that the game "required too much time and money investment," prompting the team to tweak the gameplay mechanics to lower the barrier to entry. However, the actual result was that "the adjustments made the game less meaningful," leading to a decline in player recognition of gameplay depth and indirectly affecting user retention and spending conversion.

Among player comments, "Mecha BREAK" has been heavily criticized for its gameplay.

On the popular gaming forum NGA, some players pointed out issues like poor combat balance, shallow gameplay, and a lack of synergy between the search-and-destroy mode and the game's ecosystem. The game's narrative is also weak, with clunky mech controls, a plastic-like aesthetic, and subpar UI design, significantly impacting the gaming experience.

According to data cited by "International Finance News," the mobile gaming platform "Xiaoheihe" reported that "Mecha BREAK" peaked at 132,800 concurrent players on Steam on its public testing day, but the number dropped sharply to 70,000 within three days. As of August 27, the latest data showed its peak concurrent players had dwindled to just 6,874. In terms of ratings, as of August 26, "Mecha BREAK" had around 24,000 reviews, with an overall approval rate of about 59%, while the Chinese approval rate was only 45%.

Meanwhile, players of "Whiteout Survival" have taken to social media to complain about the game's poor shooting mechanics, unreasonable weapon design, and balance issues. For example, on the Bilibili gaming community, many players have posted videos criticizing the game's handling.

Additionally, as a light sci-fi 3D third-person shooter with an anime aesthetic, "Whiteout Survival" faces challenges breaking through in the fiercely competitive shooter market, not only contending with popular "battle royale" shooters but also competing with other developers entering the "girls + shooter" genre.

In its gaming business, Kingsoft has provided its studio Xishanju with financial, technical, and talent support. However, amid industry adjustments, Xishanju must promptly adapt its product strategy to avoid becoming a drag on Kingsoft.