1. What’s going on and why?

HSR has seen accelerating levels of power creep and enemy HP inflation over time. And with the most recent Anniversary announcement, we see a new dimension being added in Global Passives.

This is on the surface, a very odd choice. Adding in things like Global Passives is a heavy handed design choice that games often make when they’re desperate.

In contrast, Honkai Star Rail is a game that’s only 2 years old and still seems to be growing. And there’s a wealth of design space that has yet to be explored. Why resort to such a desperate looking move?

And what’s with the new ways to spend money in HSR being given its own special marketing PSA infographic?

It’s very easy to just say: “Greed”. But that’s not a useful answer.

To answer these questions, we need to understand how Mihoyo as a company works.

Only then can we understand what the actual dialogue between the players and the company is actually about.

2. What actually is Mihoyo?

Mihoyo is a company that needs to manage a portfolio of IP. To accomplish this, it uses a federated business structure.

Within this type of business structure, each business unit operates independently. The role of the top management layer is to coordinate between the portfolio and provide shared service functions to the business units.

In Mihoyo’s case, each IP is run by a separate team led by an Executive Producer who holds control over the product roadmap for that IP.

The top Mihoyo management layer coordinates to reduce the intra-portfolio competition. For example, they might ensure Genshin / HSR / ZZZ do not release their most anticipated characters at the same time, allowing Mihoyo to maximize revenue across the portfolio.

The top Mihoyo management layer is also responsible for allocation budgets and resources across the portfolio.¹If this approach sounds very familiar, it should! This is how companies such as Tencent (another major Chinese Gaming company) or Procter & Gamble (one of the largest CPG companies in the world) operate.

3. What does this mean for HSR?

Imagine you’re the Executive Producer for HSR. You have a dream of running HSR where there is zero downtime in story content from Amphoreus onwards.

You have one major problem with this plan though:

Expanding to a full story content pipeline will probably double development costs for your game.²The raw development resources needed is potentially less than 2x since some roles can be multipurpose or do not need duplicating. However, managing a larger organization also creates operational complexity. So 2x cost is a fair estimate for this back of the envelope exercise. And you only have a limited development budget to work with.

This means you have two options:³Given that HSR Patch Events are less ambitious than before compared to Aurum Alley / Aetherium Wars and that HSR has moved to a full story patch cycle, the answer is they probably chose to do both at the same time.

1. Scale back your vision to something more manageable; OR
2. Go ask for more budget

3a. How do you ask for more budget?

It’s best to understand this if you flip the question around: How does Mihoyo allocate budgets?

Budgets in portfolio companies are a capital allocation exercise. In general, more capital is allocated to higher performing business units.

So if the HSR team wants a bigger budget, then they need to show higher levels of financial performance.

And how do they show higher levels of financial performance? By getting customers to spend more.

And how do they get people to spend more on the game? Well, in the Anniversary announcement alone we have:

• Cherished Recollection event that gives free items and cosmetics to players that buy Oneiric Shards with money to create FOMO toward topping up now (rather than waiting to see if there’s something you actually want to spend on later);
• Introduction of a low cost “Special Ticket” bundle containing 1x Limited and 1x Standard banner pull to eliminate the psychological barrier to spending for F2P players and normalize spending behaviours;
• Introduction of Global Passives to reduce the impulse to skip new character releases.

The monetization approach to HSR is a reflection of the ambition the HSR production team has for the content they want to develop.

It should also not be a surprise then that power creep and enemy HP inflation accelerated during Penacony and the 2.x Patch cycle, precisely when the development costs would be increasing for the 3.x Patch cycle.

4. Mihoyo makes so much money. Why can’t they just fund this using the money they already make?

This is an excellent question and worth exploring.

4a. Your desires are just one of many priorities for a company

The primary problem with this point of view is: Companies always have more things they want to fund than they have money available to spend.

Capital allocation within a company is about prioritizing the most important activities to fund. Choosing between different activities requires prioritizing your options based on the impact and return those actions give to the company.

For Mihoyo, these priorities can include, but are not limited to:

• Investing in new IPs: Expands revenue and reduces risk exposure to Mihoyo from any one game having difficulties;
• Expanding merchandise offerings for fans: This can include developing new types of merchandise as well as expanding distribution (such as introducing official merch on Amazon);
• Improving infrastructure: Such as IT (e.g. servers and networking) and physical real estate (e.g. new office buildings). This also includes their plans to build a Chinese version of Akihabara in Shanghai;
• Improving benefits and compensation for employees or hiring: This allows you to keep Mihoyo as a desirable place to work at and recruit from the best possible talent.

HSR needs to justify that the increased budget is more important than any of these priorities.The easiest way to do this is by showing that more budget investment into HSR will generate higher revenue and pay back the budget investment.

But it’s not just other business proposals that you need to compete against…

4b. You are always competing against “Do nothing”

As I wrote in my previous analysis about Genshin and “free stuff”:

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).

These words are even more true today than ever before. Have you looked at the state of the global economy today?

With fears about geopolitical tension, trade wars, and economic pressures in China’s domestic market, etc. … If you’re a large Chinese gaming company, this is a good time to be stockpiling cash.⁴A more complicated answer would require discussing Treasury management and different forms of financing. However, this is beyond the scope of this essay.

4c. Why do companies operate like this?

This approach for budget management is appropriate for a portfolio company looking to maximize value across the portfolio.

The traditional problem in companies is that the top level executives are out of touch with what is actually happening “on the ground” with their customers. The traditional solution is expensive reporting systems and complex decision making processes so each layer of management can monitor and manage the layer below them.

Mihoyo’s approach pushes as much of the decision making as far down the management structure as possible. The individuals who have the best information and ideas make the relevant decisions.

The individual business units are the best positioned to understand their customers. So each business unit has the freedom to decide what it thinks is the right approach based on their ability to read the market environment, their customer desires, and the risk they are willing to take.

They then tailor their ambition based on what they think is feasible:

• If you don’t think you can convince the customer to pay for the cost of increased development (or can but do not wish to), then you look to optimize within your existing budget;
• If you think you can convince the customer to pay for increased development, you look to expand the scope of your ambition to meet the customer’s expectations.

5. What did we learn?

The fundamental conversation between the HSR developers and the players is about what content they should develop, and what the player base is willing to spend to fund it.

Therefore, there are only two questions that actually matter:

• How much content do you want?
• How much are you willing to pay to fund the resources required to develop that content?

All other questions are irrelevant to the decisions the HSR production team is trying to make.

They have a vision for what they want the game to be. It’s just a question of how much of that vision (the content) they can make a reality (the budget).

So this is what the player base is going to have to respond to:

What level of content do you want and are you willing to accept the monetization structure needed to fund it?

• 1
  If this approach sounds very familiar, it should! This is how companies such as Tencent (another major Chinese Gaming company) or Procter & Gamble (one of the largest CPG companies in the world) operate.
• 2
  The raw development resources needed is potentially less than 2x since some roles can be multipurpose or do not need duplicating. However, managing a larger organization also creates operational complexity. So 2x cost is a fair estimate for this back of the envelope exercise.
• 3
  Given that HSR Patch Events are less ambitious than before compared to Aurum Alley / Aetherium Wars and that HSR has moved to a full story patch cycle, the answer is they probably chose to do both at the same time.
• 4
  A more complicated answer would require discussing Treasury management and different forms of financing. However, this is beyond the scope of this essay.