Newsletter: Published Tuesday, 4 September 2018.

  • China's gaming freeze;
  • Earnings: Activision Blizzard, Alibaba, IDP Education, Appen.

China's gaming freeze.

‘Electronic heroin’ is a rather harrowing description of internet addiction.

But if you consider the compulsive, isolationist and relentless focus on one thing to the exclusion of other events in one’s life, it isn't really a false one.

Either way, internet and gaming addiction are real enough for the Chinese government to begin cracking down on the number of new online games released, in a bid to save its population from short-sightedness and crippling behavioural addictions.

There is currently a nationwide freeze on new titles, which is affecting a fair few of the businesses that operate there.

Shares in Tencent - indirect owner of Fortnite through its holding in Epic Games and the owner of WeChat - have taken a dive. As have shares in NetEase, another Chinese internet and video game company - and the company through which Activision Blizzard reaches its Chinese audience.

China has always had an unusually restrictive approach to games, which is an extension of the government’s tight control over the internet and media.

From 2000 to 2005, console games were banned while China's Ministry of Culture developed a reform program that made sure nothing made would "harm national unity ... [or] violate public morality."

We’ve written a bit about China’s control over its markets and economy here.

Online, mobile and console games go through a strict, two-step process - first so they can be offered to customers, then second so companies can profit from the games.

Tencent’s bottom line was stung last month after Chinese authorities ordered it to shut down 'Monster Hunter: World' from its PC downloads service just days after its debut. The company reported a rare decline in profit.

China has grown into the largest games market in the world with $US38 billion in estimated revenue.

(This is compared with the global market which was last estimated - in June - to be worth $US137.9 billion).

In June of this year, the World Health Organisation recognised gaming disorder as a medical disorder and listed it under “disorders due to addictive behaviours”.

Here is a documentary made in 2014 by the New York Times on China’s web junkies

(It’s 7 minutes long) and looks at a cohort of young men who are sent to a facility to quit internet gaming cold turkey.

A mother describes doping her kid with sleeping pills before bringing him to the facility, where they learn to adapt to a world where they aren't online for 12-14 hours a day.

But the most harrowing quote in the documentary is; “They believe if they take a restroom break it will affect their performance at these games. So they wear a diaper. That’s why we call it electronic heroin.”

While the condition is no doubt confronting, looking at our Chinese e-sports holdings, Spaceship’s investment team aren’t particularly concerned about the ban.

Rather than impact the likes of Tencent and NetEase, these kind of restrictions are likely to wipe out the smaller companies. About 8,000 to 10,000 online games are released every year in China, with Tencent and NetEase accounting for around 100 of those together.

The distribution base of Tencent is enormous and so many of its games are already entrenched and accepted by the government. Further to that, these heavyweights have introduced controls to regulate how much time children spend playing these games.

That said, we are thinking a lot about ESG investing (Environmental, social and corporate governance) at the moment. In the next few weeks we're aiming to roll a survey out to members asking them how they feel about putting their money in certain businesses.

Internet addiction could very possibly be something that concerns you and we'd like to respond to that kind of thing. Any pre-emptive thoughts, do them through to jessica@spaceship.com.au.

Editor's note: The original newsletter version of this post incorrectly stated that Tencent was the maker of Fortnite. Tencent has a 40% holding in Epic Games, the creator of Fortnite.

Earnings season.

  • Activision Blizzard launched its new World of Warcraft expansion pack and several folks around the Spaceship office grew uneasy. Uncomfortable memories of dark rooms, endless quests and realistic South Park episodes surfaced. 3.4 million other folks weren’t able to resist the temptation on Day One though, and Battle for Azeroth became the fastest selling WoW expansion pack ever. Despite the worldwide success of Tencent’s Fortnite game, Activision is having a good year. It recently partnered with Tencent to launch Call of Duty on mobile in China and its Overwatch ESports League generated plenty of cash with the 12 team franchises selling for $20-25 million each. 📈

  • Alibaba - the largest e-commerce site in China - reported its results. Revenue soared 61% year over year, boosted by its core e-commerce business and fast-growing cloud division. Commerce is still the company's biggest unit, accounting for around 86% of revenues, but cloud computing revenues have enjoyed a 93% year-on-year rise. The average annual active customer places 90 orders across 16 different product categories per year. 📈

  • IDP Education is an Australian business that teaches people English. They co-own one of the most widely accepted English language proficiency tests: International English Language Testing System or IELTS. The company is expanding globally and that seems to be going well and revenue is up 24%. Please read this column for the an excellent sentence about rainbows and the CEO of this business. 🤔

  • Appen creates quality data sets and sells them to companies experimenting with machine learning. The key thing to understand about Appen is how much data deep-learning algorithms need. According to the company, acceptable performance comes from ~5,000 labelled examples per category. Human matching or better can take 10 million labelled examples. This is data that needs to be labelled by hand and data that often needs to be refreshed. They estimate one third of training data needs to be refreshed on a monthly basis and one quarter needs a daily refresh. Of course, Appen is likely just talking up their own business, but machine learning is a really powerful global trend and all information about its evolution is interesting. Revenue was up 106% to $152.8 million with most growth coming from existing customers. 📈


Important! We’re sharing with you our thoughts on the companies in which Spaceship Voyager invests for your informational purposes only. We think it’s important (and interesting!) to let you know what’s happening with Spaceship Voyager’s investments.

However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance. The Spaceship Universe Portfolio invests in Activision Blizzard, Alibaba, IDP Education, NetEase and Tencent.

The Spaceship Index Portfolio invests in Alibaba and Tencent.

Check out more companies in your Spaceship Voyager app (if you have an investment in the Spaceship Universe Portfolio) or visit our website, if you'd like to get a better idea about the business models of these companies.