China’s New Gaming Regulations: What it Means for Investors
(For information on the latest regulations on curfew for minors and the real-name registration system, see our article here.)
China is the world’s largest gaming market, with 583 million active gamers. In 2017, the industry was worth 203.6 billion yuan (US$29.6 billion).
However, new gaming regulations have upset the status quo.
On March 28, the body licensing games in China was shifted from the State Administration of Radio, Film and Television (SARFT) and the Ministry of Culture to the Central Propaganda Department. Since then, China has halted licensing new games and the industry has entered a period of uncertainty.
Given these recent regulatory developments, we discuss the prospects for foreign investors in China’s gaming industry.
Local players dominate China’s massive gaming industry
China’s gaming industry enjoyed a tenfold increase in revenue between 2008 and 2017, rising from 18.6 billion yuan (US$2704.1 million) to 203.6 billion yuan (US$29.6 billion). As a leading market, China accounted for 26.1 percent of global revenues in the first half of 2018.
According to Newzoo, there are 850 million netizens and 783 million smartphone users in China. Mobile games and PC games are the primary type of products in China’s gaming market, and account for 66 percent and 28.5 percent of revenues, respectively.
Revenues from China’s mobile gaming market reached 116.1 billion yuan (US$16.9 billion) in 2017, while the PC gaming segment’s revenue accounted for 64.9 billion yuan (US$9.4 billion).
In 2017, the governing body approved 9,800 new games and the number of games published by domestic companies reached 9,310. Tencent, the largest gaming company in China, occupies more than a half the country’s market share. The second-largest gaming company in China is NetEase, which has 13.6 percent of the market share for PC games and 14.8 percent of the revenues from the mobile game market.
In comparison, foreign companies play a minor role, accounting for only 20 percent of revenues from China’s gaming market. According to Niko Partners, South Korean gaming companies enjoy 14 percent of the market share in China’s gaming industry and American developers claim just five percent of the industry’s revenue.
China’s licensing freeze a game-changer
The Chinese government has suspended the approval of licenses for new games since March 2018. The suspension may extend by up to four to six months more.
All games need to get a license to be published in China. China has stricter regulations for video games as it actively considers the ‘inappropriate’ content of video games. For example, China banned the sale of “Monster Hunter: World” due to its violent content. China also blames the country’s widespread myopia among children on playing video games.
Following the regulatory change, China’s gaming industry has suffered its slowest growth in a decade. In the first half of 2018, the industry’s revenue increased by only 5.2 percent year-on-year, showing single-digit growth for the first time since 2008. Annual growth rate of the industry in the past three years was at 21.9 percent, 30.1 percent, and 26.7 percent, respectively.
Overall, 52 listed companies in China’s gaming industry lost 856.6 billion yuan (US$124.7 billion) in value. Among these listed companies, 45 companies have seen their share prices drop and 38 companies’ stock value suffered from a 20 percent slump. Specifically, Tencent’s share price dropped by 14 percent and suffered 1,100 billion yuan (US$160 billion) loss in value in 2018.
Foreign gaming companies have suffered economic loss as well since Tencent licenses games from international developers. For instance, Nexon’s share price dropped 5.9 percent, while the value of Konami Holdings Corporation and Capcom plunged 4.2 percent and 2.7 percent, respectively.
Gaming opportunities for foreign developers
Chinese law prohibits foreign and foreign-invested gaming companies from publishing and operating video games in China directly. The Chinese government identifies video games as an internet cultural activity, which is a sector that bans foreign participation.
One exception is Apple’s App Store, which allows foreign companies to distribute their games in China independently. However, 89 percent of Chinese mobile users use a non-iOS phone.
To enter the general Chinese market legally, foreign companies are required to license their games to a Chinese domestic company for distribution. Tencent has licensed ‘Call of Duty’, ‘NBA 2K Online’, and ‘FIFA Online 3’ from American developers for operation in China. As a result, these foreign companies share a part of the game sales with the domestic distributors.
Chinese companies offer American developers only 30 percent to 50 percent of PC games’ sale and 15 percent of revenue from mobile games in China. In comparison, foreign companies receive 70 to 85 percent of their game sales in China when using Apple’s App Store.
IP protection in the gaming industry
Foreign gaming companies should be concerned about IP protection in the industry, particularly with respect to piracy and game cloning in China, which can result in huge financial loss. Poor IP protections from Chinese regulators mean that piracy is widespread in China, especially for single-player games, which do not need online accounts.
A Chinese website, Ali213.net, lists out 7,231 pirated single-player games for download, including most games developed by foreign gaming companies. Accordingly, sales of PC single-player games were slightly less than 1,500 million yuan (US$218 million), accounting for only 0.1 percent of China’s gaming market’s revenue. In 2013, unauthorized copies of ‘Grand Theft Auto V’ were downloaded 14 million times, causing US$840 million in loss to the game developer.
At the same time, China is the leading manufacturer and exporter of circumvention devices. These devices allow users to use bootleg games in their consoles. Another IP issue in China’s gaming industry is game cloning. Cloning entails the creation of unauthorized copycat games imitating another game with little changes.
The cloned games are usually foreign products and released before the games’ authorized release in China. Some cloned games are produced for a different platform as well, including the transfer of a mobile game to a PC game.
Game cloning thus undermines the sales of foreign games in China and has triggered lawsuits for IP infringement. For instance, Blizzard, an American video game developer, sued five Chinese gaming firms for copyright claims in 2014 due to their loss incurred.
Why Chinese market holds enduring appeal
The regulatory crackdown on licensing may continue for at least a few months longer, but prospects in China’s gaming industry is expected to bounce back in the longer term. According to UPS, China’s gaming market will reach US$200 billion in revenue by 2030 owing to its strong and pervasive gaming culture and the success of existing titles.
Foreign gaming companies should learn from DeNA China, which successfully entered the Chinese market through a localization strategy. The Japanese mobile gaming company delegated innovation to Chinese specialists and produced localized games for Chinese consumption.
In 2015, DeNA China developed the mobile game “One Piece: Grand Voyage”, combining the acclaimed Japanese manga series ‘One Piece’ with a popular Chinese collectible card game. The game was among China’s top 10 games for that year, and was exported to other international markets as well.