This article is a copy of a post I wrote on Reddit in Feb 2024. You can read the post and the comment discussion HERE.

This is primarily written about the gaming industry, but the ideas of risk mitigtation and cost analysis are applicable to nearly all industries.

1. Introduction

There has been a lot of discussion about “free stuff” in Genshin lately. And a lot of discussion about what Mihoyo should and should not do about “free stuff”.

Much of the discussion from a business perspective however has been very poor. A lot of this comes from people’s lack of exposure and understanding about how large corporations actually make decisions.

If you want to make a corporation behave differently, then you need to convince them through the formal channels through which decision making happens.

This post aims to provide the average lay person some insight into:

1. How large corporations make decisions;
2. Why “free stuff” isn’t free;
3. Why Mihoyo probably doesn’t want to give you “free stuff”; and
4. What will it take to change Mihoyo’s mind?

This post is not intended to be a comprehensive education about business processes, incentives, and marketing. However, by knowing more about these types of issues, hopefully the quality of discussion about this topic can become much better.

Or at least social media PvP will be less terrible than it already is. ¹Maybe.

2. What influences corporate decision making?

2a. Rule 1: Don’t get fired

Companies don’t make decisions. Employees at companies make decisions.

This seems obvious but is an incredibly important point to make. What an employee wants vs what a company wants is not always the same.²Some of you will recognize this as the principal-agent problem.

One of the biggest sources of risk for an employee is getting fired. This is especially true if you happen to work in a volatile industry that’s going through layoffs.

Like the gaming industry.

This means that employees are typically more risk-averse than the company is. Keeping the status quo is safe. You know what that status quo is. Change is scary. Change could mean your job getting harder. Or worse, change could mean getting fired.

The fear of change also means that proposing new ideas is risky. If you propose a stupid idea or lose money… what happens when the blame game starts?

Do you want to be the person who gets blamed for proposing a bad idea that loses a lot of money?

Do you want to be the Executive Committee / Operational Committee member who approved that bad idea?

This is the “Don’t get fired” rule. If you like your job, then don’t do things that get you fired. Avoid any unnecessary career risk.

This can lead to people making decisions that are “safer” for themselves but worse for the company overall.

2b. Rule 2: Avoid one-way doors if you can

An important lesson in decision making is avoiding one-way doors where possible. This means “avoid making decisions which are super difficult to reverse.”

Walking through that “one-way door” means you are now committed to that decision and have to ride it out, for better or for worse. This is bad. You lose “optionality”, which is the ability to change your mind.

What you want is a “two-way door”. This is a decision which allows you to change your mind for little to no cost.

A type of two-way door you can use is called “just make up your mind later”. This is good because:

• It’s easy to do;
• Some things are just difficult to predict and sometimes waiting longer for better data / information lets you make a better decision than guessing blind; and
• You follow Rule 1 and avoid taking on career risk. Don’t get blamed for making a bad decision you can’t fix.

Committing to a decision therefore requires:

• A strong business proposal / vision;
• Sufficient data; and
• Buy-in from the relevant stakeholders

to overcome the inherent inertia within business decision making processes.

2c. Rule 3: Dollar dollar bill y’all

Don’t apologize for making money.

Business is risky and uncertain. If you have a good way to make money right now, there is no guarantee this will continue.

If you try to overcorrect for every little possibility (e.g. competition, customer complaints, etc.), you will overcompensate and stop making money.

For example, sometimes I see people say “Well why didn’t X large company immediately respond when a new competitor entered the market and then destroyed them? Are they stupid?”

If you jump at every last shadow you see, you very quickly stop making profit. Making money requires you to be willing to ignore potential threats, or you just self-sabotage.³Some of you may recognize this as the core issue behind Disruption Theory, the idea that companies must constatly disrupt themselves to stay ahead of competitors.

This is a complicated issue and I do not believe the only answer (that consultants love to preach) is constant distruption. This is too disruptive to business processes and also leads to jumping at every shadow. The issue of when and how companies should react to disruption is complicated and likely needs a sepearate essay to discuss in full.

3. “Free stuff” isn’t free (in Genshin)

Genshin at this point is a fairly mature product. Mature products need to be treated differently versus new products. (To be clear: mature is not a “good” or a “bad” label. It’s just a state that something becomes over time.)

One aspect of this is revenue modeling. The trick with a product such as a game is that Mihoyo completely controls the “Genshin economy”. Very roughly speaking, you can think of the revenue generated in Genshin as:

Revenue = Player Desire to Consume (e.g. gacha / Resin refresh / BP / etc.) – Free Income

So there’s only two ways for Genshin to make more money. Either make you want to consume more, or limit your free income.

At Genshin’s operational scale / size / maturity, Mihoyo should have a pretty good sense of how much the average person wants to “consume” in Genshin at any given moment of time. People’s spending habits are also, across a large enough player base, somewhat predictable.

e.g. If you’re a BP + Welkin only buyer, there’s not that much Mihoyo can do to make you suddenly 2x your spending that can be consistently applied across a 50M+ player base without getting into some really scummy tactics

This means that once you achieve a base equilibrium state in your player base, any additional “free stuff” you give is just a direct hit to your revenue.

I suspect there will be objections to this framework. So let’s proactively address them.

4. Why Mihoyo probably doesn’t want to give you “free stuff”

4a. “But free stuff attracts more players (especially F2P players) who may choose to spend or can attract and retain whales”

This argument is essentially that incremental F2P players have value to Mihoyo.

In a freemium model, attracting players like this primarily has 4 benefits:

• Word-of-mouth marketing;
• Providing a large player base to sustain co-operative gameplay;
• Providing a community that leads to increased retention of people who actually make you money; and
• Finding ways to convert F2P players to actual paying customers.

Let’s address each one in turn.

Point	Issue
Word-of-mouth marketing	At this point, most people who haven’t heard about Genshin aren’t people who your word-of-mouth marketing will reach. It’s like saying who in the mainstream gaming sphere hasn’t heard about WoW / League / Fortnite / etc.
Sustain co-operative gameplay	Co-op is a minor part of Genshin gameplay. As a primarily single-player experience, Genshin does not require a large player base to function the way games whose core gameplay requires matchmaking systems or group-based content do.
Increased retention of people	As a mature product, your most critical retention of whales is now handled by sunk cost fallacy. It takes a lot for a whale to walk about from $’000s or more sunk into an account. While exceptions may apply, if a whale chooses to quit and accept sunk cost then this is likely due to a problem that having more players cannot directly fix (e.g. dissatisfaction with your content pipeline)
Paying customer conversion	Thankfully here I can point to real data. The recent Sony leak showed that 54% of Genshin players made their first transaction within the first month playing Genshin. 90+% of Genshin players made their first transaction within their first year playing Genshin. So at this point if you’re still F2P, Mihoyo has given up on you as a source of money.

The conclusion of this is that F2P players aren’t as valuable anymore in Genshin as they were before.

They are critical when your product is new and still building momentum, but their value declines over time. As such, retaining them purely for financial reasons is less important at later stages of a product’s maturity.

4b. HSR can do it, so why can’t Genshin?

There are a few reasons for this.

Firstly, HSR has a much more aggressive character release schedule. If you give away more “free stuff”, then you need to have a plan to make it back.

So some quick data:

• In 2023, Genshin released 15 Limited Characters (from Yaoyao to Navia);
• In 2023 with only 9 months (more like 8 due to end of April release) HSR released 19 characters (from Seele to Xueyi);
  • Normalizing for a full year from 8 to 12 months, that’s a release pace of 28.5 characters, or nearly 2x the pace of Genshin

Encounter design in HSR is also becoming increasingly more specialized as well (e.g. AoE focus on Pure Fiction, increasing single-target focus in MOC, and Path specific needs in Simulated Universe).

When you control the entire “in-game economy”, you get to control what gets sold, create reasons why you want people to buy, and control the “supply” of money.

Secondly, HSR competes in a different market to Genshin.

While both are gacha games, this is like saying McDonalds competes with a furniture store because they both operate physical store locations.

The method of how a product is sold / monetized is less important than what that product is actually competing against.

HSR is primarily driven by turn-based gameplay with auto-battle features. This market is much bigger and has much more aggressive competition in the mobile gaming space (gacha systems or no gacha systems).

This market is also characterized by giving away a lot of “free stuff” to lure and retain players. To maintain parity, HSR is influenced to be more generous.

Genshin is an expansive open-world RPG mobile game that competes with… Tower of Fantasy (ToF)? It’s such a non-factor that it doesn’t qualify as a competitor.

The fact the biggest point of comparison when Genshin first released was Zelda: Breath of the Wild I think is telling. And as an expansive live services game, Mihoyo player surveys often ask about AAA-tier action-adventure games like Destiny 2, GTA V, and ARK.

Companies will typically benchmark their products against competitors to make important decisions. If Mihoyo doesn’t think other gacha games are peers to Genshin, then all their subsequent decisions will flow from there.

Finally, Mihoyo also needs to believe that “free stuff” is the only solution to a problem it is trying to solve.

Let’s say we live in an alternative universe where another action adventure game called Roaring Ripples is released by a studio called Shiro Game Studios. And it has several in-game experiences and mechanics that are the primary reason why people prefer it over Genshin.

Mihoyo can just… copy those features? If you’re leaving Genshin because you enjoy certain gameplay experiences, bribing you with “free stuff” doesn’t address the fundamental reason you prefer the other product.

You may recognize “just copy your competition” as the same strategy that products such as Instagram, Fortnite, WeChat adopt.

4c. It’s just a one-time thing!

First rule in consumer marketing: Customer expectations are sticky.

People have a tendency to remember extremes. And they start forming expectations based on those extremes.

A good example in gaming is the “Steam sale” mentality. A large proportion of consumers refuse to buy a game on Steam unless it is on sale.

Constant discounting has permanently altered how consumers think about their purchasing decisions. And game publishers will probably never be able to reverse this expectation once it has formed.

Increasing your Primogem income therefore isn’t a one-time decision. It is a permanent decision that is very hard to take back. (See: Rule 2)

Let’s now apply this to Genshin. Let’s say Mihoyo panicked at the first anniversary. And then were forced to permanently increase free income to save Google Classroom.

Let’s do some simple math.

• This says Genshin has made over $5B across 3 years;
• So let’s assume for simplicity per year
• Let’s say giving away more “free income” only has a 1% impact on revenue;
• revenue impact

Do you feel like taking $26M in career risk? (Again, Rule 1)

What is most important here is that this would be a permanent change. Let’s say you think Genshin will last 10 more years. That’s an additional:

revenue impact

To put this into context, HSR’s total development budget is around $100M to $200M. Marketing is typically half the cost of development so the pure product cost is about $50M to $100M.

So making that first anniversary panic decision would have cost Mihoyo basically the product development budget of HSR.

Do you feel like taking the career risk of being the person that made HSR cost twice as much to produce?

4d. But Mihoyo has so much money!

Okay. So what?

There seems to be a weird belief online that just because a company has money, it’s obligated to spend it. (And preferably on what you personally feel is most important right now.)

This is just… not true?

But let’s say you have a really good argument about why Mihoyo should spend more money. There are still good reasons not to do so.

Businesses don’t like running out of money. The more volatile your industry, the more safety you want. The more stable your industry, the more risks you can afford to take.

Gaming is a terrible industry to be in. Consumers are fickle, trends can suddenly and dramatically change, and competition is fierce.

Hoarding a giant pile of cash is a good thing if you want to feel safe. It lets you wait out downturns in the economy, it means you don’t have to resort to layoffs just to stay alive, and it means you can fund new projects cheaper (since profit is “free” but loans have interest costs).

You want to avoid dipping into your “safety money” if you can avoid it. So even if a company has a good idea, it may still choose not to spend because the fear of things going wrong is too important. (Again, Rule 1)

And at worst, you can just wait and see before committing to any spending decisions. (Rule 2)

“You have money you can spend so go spend it” is not sufficient justification to overcome the inertia in the system. And saying this will likely get you blacklisted by your Finance department.

4e. How else can Mihoyo attract new customers if they don’t do giveaways like other gachas?

Word-of-mouth and online hype are critical for companies when they are starting up and don’t have access to a ton of cash but need to build up a loyal customer base.

But it is telling that once companies do have real cash, they still go back to all the traditional marketing methods.

Mihoyo doesn’t need “free stuff” to pay for its marketing anymore. It will happily take advantage of it where it can (e.g. the player recall web events). But it also pays several tens of millions in real $ for its actual marketing budget.

This is also helpful because as I said before, Genshin is probably big enough where everyone who would have heard about the game naturally has already heard about it.

The new growth target audience isn’t in the traditional gaming sphere anymore. So free stuff isn’t important, and this target audience probably doesn’t even know what a gacha is.

A simple example is the global advertising campaign Mihoyo launched for 3.0 and 4.0. They bought out huge swaths of traditional advertising such as banners, billboards, subway and bus advertising, and more within large cities such as London, Paris, New York, Jakarta, etc.

Mihoyo isn’t targeting the traditional gaming market by buying out the Waterloo Tube Station in London or the billboards on the Avenue des Champs-Élysées in Paris.

Some basic cost assumptions:

• A large billboard program can run maybe $500k in a major city;
• Bus station advertising can run about $1k per location;
• I have heard that buying out a full subway station from JCDecaux can go for $50k+ depending on location;
• Large event promotion runs from $500k to $1M+ for marquee events.

So then let’s say that…:

• The most expensive city costs $2M in traditional advertising
• Mihoyo markets in the top 100 cities in the world, with each city costing 5% less as you go down the list
• says my multiplier is 20
• So in traditional marketing costs
• Marketing costs are typically 10% of revenue in the entertainment industry, so $1.3B per year means a total marketing budget of $130M per year
• So the launch cost for each of 3.0 or 4.0 through traditional marketing channels alone was about 15% of Mihoyo’s annual marketing budget

You don’t spend 15% of your budget on a single event because it’s a low priority.

4f. Won’t HSR vs Genshin comparisons hurt Mihoyo’s reputation and eventually revenue?

I’m actually not so sure.

Mihoyo is running a portfolio business now. They have multiple IPs and need to think about company performance from an overall level.

Part of running a portfolio means you need to make decisions that are overall beneficial for the portfolio, but internally result in trade-offs between products.

This means you need to be willing to make sacrifices in one product if it’s overall healthier for the company.

You don’t want your two products to compete too heavily with each other. Instead, they should synergize and divide up customers in an optimal way. You see consumer packaged goods (CPG) companies do this really well.

Genshin’s success is also an existential risk for Mihoyo. If you have one hit product, you need to find a second as fast as possible. Because otherwise you live or die on one thing alone. That’s risky. (Rule 1, but this time for the executives)

So your problems are:

• Genshin’s at the “so big it’s like 20+% of the market by itself” stage of its life. Its biggest risk is players leaving for other games;
• You want to diversify your portfolio and make another big hit game to reduce your risk exposure; and
• Genshin has a large F2P population that’s not as valuable anymore in a mature game. This is a good asset going to waste.

What do you do?

“Find a way to increase asset utilization” is what the McKinsey consultant would bill you $200k for saying. But here I am giving away this advice for free.

So what you want to do is deliberately churn your most “at risk” players off of Genshin and into HSR.

If players are going to quit, then at least make them quit back into your portfolio. Just like how some people quit drinking Coke and then instead buy vitamin water … made by Coke.

But how do you encourage proactive but controlled churn? You don’t want to completely blow yourself up by accident.

One approach is to create deliberate comparisons between products. This is a tactic used by CPG companies.

• You deliberately handicap a feature in one product but raise its visibility in another product;
• This artificial comparison encourages your customers to self-select into their desired product;
• But the point of comparison is never serious enough to fundamentally threaten your core products.

If someone in Genshin is quitting because HSR players were given a free 5-star character, this player was a retention risk to begin with.

A happy player who plans to stick with you will complain, but won’t quit. They are a straw free camel, not the camel whose back is about to break.

But for the player who is about to churn? “Go play HSR. It’s got the Mihoyo polish you love so much but has free stuff and other features you wish Genshin had. Please don’t try a different game not made by us. You may not like Genshin but you love Mihoyo right?”

This is especially true if the player in question is only playing Genshin because it was simply part of a cultural zeitgeist.

Mihoyo has made it very clear that Genshin’s primary feature is open-world exploration backed by an incredibly aggressive 6-week content pipeline release schedule.

If this is not fundamentally what appeals to you, it is very hard for Mihoyo to quickly develop new content production processes without compromising the core audience.

So the best thing to do is retain you by shifting you to a second product inside their own portfolio rather than let you go to a competitor.

And when Mihoyo can finally develop the internal processes to create content that does suit your taste, it becomes a lot easier to onboard you back into Genshin. You’re still exposed to Mihoyo marketing. If you’ve completely left the portfolio and have zero contact with them, then Mihoyo’s marketing’s job becomes a lot harder.

5. What will it take to change Mihoyo’s mind?

Money.

Okay. But more seriously this time.

If you want to make a corporation behave differently, then you need to convince them through the formal channels through which decision making happens.

Mihoyo’s decision making is constrained by several factors:

• Its employees are naturally predisposed to not want to take aggressive risks because of Rule 1: Don’t get Fired;
• Mihoyo now runs a portfolio of IP. This means it needs to shift from a business strategy that maximizes the value of a single game to a strategy that maximizes the overall portfolio;
• Mihoyo’s marketing focus de-emphasizes the importance of giveaways because their goals for Genshin cannot be achieved through “free stuff”; and
• Any change in the balance of “free stuff” has permanent repercussions for Genshin’s lifetime revenue and is a high risk action that must be compensated for a very clear high reward outcome.

If you want to change Mihoyo’s mind, you therefore need to:

1. Find a way to empower junior and middle level staff with the right data and processes so they feel they have the safety to propose risky ideas; and
2. Ensure that key decision makers at Mihoyo have their personal incentives aligned with the that of the company and player base; and
3. Prove a clear business case that demonstrates a clear issue that needs to be addressed and also propose a solution that does not contradict the overall company’s business strategy; or
4. Have competitor products that:
   • achieve sufficient success for a sustained amount of time to demonstrate a persistent and credible threat to Mihoyo’s business; and
   • can only be addressed through financial generosity and not just copying features and implementing them into Genshin.

If you cannot achieve this, then you will never be heard by and influence the actual committees and organizational structures within Mihoyo that hold the real decision making power.

And therefore you shouldn’t be surprised if Mihoyo is uninterested in changing its mind.

• 1
  Maybe.
• 2
  Some of you will recognize this as the principal-agent problem.
• 3
  Some of you may recognize this as the core issue behind Disruption Theory, the idea that companies must constatly disrupt themselves to stay ahead of competitors.
  
  This is a complicated issue and I do not believe the only answer (that consultants love to preach) is constant distruption. This is too disruptive to business processes and also leads to jumping at every shadow. The issue of when and how companies should react to disruption is complicated and likely needs a sepearate essay to discuss in full.