Chinese gaming giant miHoYo wants to avoid Apple’s 30% revenue cut. Can it succeed?

On the surface, American tech giant Apple and Chinese video game developer miHoYo appear to be getting closer than ever this year.

In March, when Apple CEO Tim Cook visited China, he made a stop at miHoYo’s Shanghai office, where he thanked “the phenomenal team” behind blockbuster game Genshin Impact (原神 yuánshén) and exchanged pleasantries with miHoYo’s founder, Liú Wěi 刘伟.

Six months later, at Apple’s annual keynote event introducing the latest iPhone 15 series, two titles by miHoYo were demonstrated to showcase the new models’ groundbreaking performance for gaming.

But behind the scenes, the two companies have been at odds. Since August, miHoYo has tried — and failed — twice to set up its own payment methods that let it bill customers without paying Apple, which extracts a commission of up to 30% for every transaction made within its digital distribution platform, the App Store.

The notoriously high commission rates, infamously known as the “Apple tax,” have long been a source of frustration for game developers and publishers around the world, explained Daniel Ahmad, the director of Research & Insights at Niko Partners, a market research and consulting firm covering video games, esports, and streaming in Asia and the Middle East.

With its attempts to do payments itself, miHoYo has joined a growing cohort of global companies that “have been making a concerted effort to drive in-game purchases outside of traditional app stores to increase gross margins,” Ahmad told The China Project.

The P.R.C.’s first major cultural export?

Founded in 2012 by three Chinese engineering postgraduates who shared a passion for technology, anime, and games culture, miHoYo is one of the biggest gaming success stories of the last few years, transforming from a dorm room startup to a multibillion-dollar company beloved by fans across the globe. Genshin Impact, a free-to-play fantasy role-playing game released in 2020, was the game that put miHoYo on the map, earning it over 60 million players monthly and billions of dollars in user spending in 2022. Some called it China’s first real 21st-century cultural export.

Across miHoYo’s offerings, a crucial element to its business models is a mechanism called gacha — meaning “toy vending machine” in English — which encourages players to make micropayments in exchange for playable anime characters and limited-edition items they want. (Gacha is from the Japanese word ガチャ ゲーム pronounced gacha gēmu, written as 扭蛋游戏 niǔdàn yóuxì in Chinese.)

Albeit controversial due to its gambling-enabling nature, the randomized system has made Genshin Impact one of the highest-grossing mobile games since its launch.

By eliminating Apple as the middleman in in-game transactions and replacing it with a third-party service that charges less, miHoYo would see a significant increase in revenue, despite adding friction to the payment process.

In China’s gaming industry, miHoYo is far from the first developer to use web shops that “allow players to buy virtual currency using processors such as WeChat or Alipay, without needing to transact inside the game itself,” said Ahmad.

Prior to miHoYo, major gaming companies such as NetEase and Perfect World have tried kicking players off to mini programs on leading Chinese payment app and digital wallet Alipay, which takes a smaller cut than Apple does. But because these attempts were “allegedly in direct breach of Apple’s rules regarding payments processed on iOS and anti-steering regulations,” they were all nixed by Apple sooner or later, Ahmad added.

Quiet launch and swift shutdown

miHoYo’s own recent attempts to get around Apple’s rules started in August via its official community forum app Mǐyóushè 米游社, where fans of its flagship games — such as Genshin Impact and its latest release, Honkai: Star Rail — are given exclusive access to promotions and all things related to their favorite titles. The move was low-key and discreet: Rather than launching and advertising a brand-new payment channel publicly, miHoYo reportedly instructed customer service staff to direct users to make in-game purchases via miHoYo’s website, where they could directly buy digital goods without Apple taking a cut in sales.

Although the instruction only impacted a small group of users with payment questions, miHoYo’s community app was kicked off the App Store on August 22. Four days later, when the program reappeared in the marketplace, the web-based payment option was no longer recommended, fueling speculation that the temporary removal was triggered by miHoYo’s furtive maneuver.

Then on August 30, miHoYo unveiled a new mini-program in Alipay. Like its short-lived predecessor, the new payment method went live without much fanfare — except for brief postings about it on social media platform Weibo. Nonetheless, Apple disabled the feature for iPhone users on September 11.

Apple’s profits and headaches

More than a decade ago, when Apple introduced the App Store as the sole gatekeeper between programs and its devices, claiming that the 30% commission helped pay for the costs it incurred to host the apps and ensure they meet certain standards, few voiced objections. Although then CEO Steve Jobs said that Apple didn’t “intend to make any money” from it, the commission has proved to be a major driver of growth for a company that facilitated $1.1 trillion in developer billings and sales in 2022.

But outside China, the App Store rule has also created some of Apple’s biggest headaches, drawing scrutiny from antitrust regulators and complaints from major developers such as Spotify and Epic Games, which have accused the tech giant of engaging in unfair and anti-competitive practices.

In August 2020, Epic Games, which produces the wildly popular game Fortnite, initiated a conflict with Apple by updating its app with an external payment method and offering discounts to Fortnite players who used the new feature. As was to be expected, Apple pulled the game from the App Store within hours of the update’s appearance, citing a violation of its rules. The kerfuffle snowballed, resulting in a messy lawsuit and a flashy publicity campaign launched by Epic with the hashtag #FreeFortnite.

While Apple landed a small win, with a federal appeal court deciding that the company does not have a monopoly in the mobile games market, the legal feud prompted some regulatory developments. In 2021, South Korea banned Apple from forcing developers to use its payment system. Earlier this year, ​​as part of a sweeping government-wide plan to tackle corporate consolidation across industries, the Biden administration urged Congress to open up app stores to greater competition.

So far, miHoYo has not escalated its challenge to “the Apple tax.” But Ahmad said, “We do expect to see further challenges in the China market, too, not just from the games industry.”