Ding Lei and NetEase are maneuvering through a landscape filled with both challenges and opportunities.

The metaphor of ‘ice’ represents the harsh external environment. Amidst the deceleration of the internet industry’s growth, intensified cross-sector competition, and the waning benefits of traffic growth, NetEase has achieved steady profit growth. This success is attributed to decisive ‘strategic pruning’ and a focus on core businesses, resulting in cash reserves of RMB 163.5 billion—a figure that far surpasses its competitors.

The metaphor of ‘fire’ symbolizes the internal transformation challenges. The widespread use of AI for cost reduction and efficiency improvement has triggered player backlash against the ‘AI replacement of human labor’ in major games like Identity V. Additionally, minor refund issues in Eggy Party have brought to light gaps in management.

For Ding Lei and NetEase, the long-term challenge lies in balancing AI-driven efficiency with player experience to ensure both commercial success and user trust.

Ding Lei Steps In: Pruning Businesses to Secure Financial Stability

2024 marked a significant turning point for NetEase.

Amid fierce competition in the gaming sector, the market performance of NetEase's highly anticipated new game, Heroes of the Sword, fell far short of expectations. Multiple self-developed games also failed to meet internal revenue targets after launch. Under these pressures, the company's annual revenue growth slowed to below 2%—its lowest level in years.

By the end of the year, Ding Lei returned to frontline operations, taking direct control over gaming strategy with a new directive: ‘Engage only in battles you can win; divest from those you cannot.’ This led to a comprehensive and targeted cost-cutting campaign.

The core of the reform was straightforward: ‘prune.’

1. Product culling: NetEase discontinued 14 underperforming games, including War Clash, Tiya Chronicles, Super Mecha Champions, Pokémon Quest, and Apocalypse Rising.

2. Overseas studio closures: Japan's Ouka Studios, Canada's Worlds Untold, and the U.S.'s Jar of Sparks were closed or suspended, while funding for Toshihiro Nagoshi's Tokyo studio was halted.

3. Non-core business downsizing: Yanxuan was repositioned as a ‘small-but-premium’ platform, while innovation and other business units reduced their scale to prioritize quality over quantity.

These cuts stopped the financial ‘bleeding’ and redirected resources to proven revenue generators like Fantasy Westward Journey and Westward Journey Online II. Coupled with renewed partnerships with Blizzard and the global launch of Where Winds Meet, revenues rebounded.

By 2025, NetEase reported total revenue of RMB 112.6 billion and net profit of RMB 33.8 billion (up 13.68% YoY). Most notably, net cash reserves reached RMB 163.5 billion by the end of the year.

Ding Lei's cautious strategy amid industry turmoil—proactively shedding non-core assets—has positioned NetEase with RMB 163.5 billion in cash reserves, preparing it for future uncertainties.

AI Efficiency Initiatives and Emotional Backlash

AI has become essential for the transformation of the gaming industry, and NetEase, with its strong cash flow, leverages it as a competitive advantage.

The company has achieved large-scale AI integration across its production pipelines, with tools deployed in art, design, programming, animation, and quality assurance—boosting some workflow efficiencies by up to 300%.

From a business standpoint, AI reduces outsourcing costs and accelerates content creation, aligning with capital markets' demands for ‘cost-cutting and efficiency.’ Ding Lei noted during earnings calls: ‘AI lowers game development barriers but raises success standards for top-tier products.’

However, NetEase's AI-driven efficiency push has sparked player discontent. Controversy arose over AI-generated art in Identity V during the launch of its 8th-anniversary ‘Ivory Tower Series’ skins.

After event posters revealed ‘amateurish errors’—such as a character's four-fingered hand, a tripod piercing a flask, and asymmetrical proportions in another figure—players flooded official channels with comments like ‘No to AI content,’ ‘Boycott AI art,’ and ‘Stop AI exploitation.’ On April 23, some players organized a collective spending halt to protest.

In the otaku subculture, players value not just the skins but the emotional connection tied to character lore, art style, and creators' dedication. AI-generated flaws were perceived not as production errors but as cost-cutting measures masked as price increases, eroding player enthusiasm.

The incident exposed NetEase's organizational gaps: AI-generated rough drafts should have undergone rigorous manual review before release, indicating a lack of quality control in its AI industrialization efforts.

Domestic Challenges vs. Global Success

Beyond AI controversies, NetEase faces compliance and social responsibility challenges.

Domestically, gaps in minor protection systems remain a compliance risk, as highlighted by governance issues in Eggy Party.

Targeting primary school students with cute visuals and casual gameplay, Eggy Party consistently ranks among China's top-grossing mobile games, attracting a vast underage user base—and subsequent refund disputes.

The Black Cat Complaints platform has logged over 52,000 cases, mostly involving minors making large unauthorized purchases, with parents struggling to secure refunds.

Despite iteratively upgrading its youth protection platform and anti-addiction systems, NetEase's risk controls and refund mechanisms fail to satisfy parents amid fragmented payment scenarios and a massive young user base, raising doubts about the effectiveness of minor protection measures.

In stark contrast, NetEase's global gaming expansion has yielded outstanding results, with multiple self-developed titles gaining international traction—a testament to its R&D and operational capabilities.

Where Winds Meet debuted at #2 on Steam's global bestsellers list, topped iOS download charts in over 60 countries, and amassed 80 million global users. Marvel Rivals earned Steam Platinum annual sales status with a 4.2 million-strong Discord community. Meanwhile, Justice Online International, Knives Out, and All-Star Street Basketball Party excelled across overseas markets.

Behind this diversified global success lies NetEase's core strength: mastery of complex numerical systems and long-term social ecosystems—what Ding Lei refers to as ‘unbreachable moats for new entrants.’

Conclusion

Ding Lei’s pragmatism and ‘strategic pruning’ have enabled NetEase to navigate the industry downturn, stabilize operations, and build capital reserves for future cycles.

However, the ultimate competition in the gaming industry hinges on content quality and emotional resonance. As AI reshapes production logic, NetEase must avoid the pitfalls of ‘efficiency at all costs.’

Thus, while embracing AI, rebuilding quality control layers and preserving player trust will be crucial for Ding Lei and NetEase's continued success.