Sat, July 13

China’s Gaming Industry: Navigating New Regulations and Global Expansion

Some have posited that taking a step back from video games might lead to a significant leap forward in children’s education. Whether this statement holds true, I cannot say for certain. However, it’s undeniable that the gaming industry has recently experienced a dramatic downturn. On December 22nd, a draft for public consultation, originally intended to enhance game regulation, unexpectedly sent shockwaves through the market. The gaming sector plummeted across the board, with NetEase dropping nearly 25%, shedding over 100 billion Hong Kong dollars in value, and Tencent also facing a steep decline of 12%, vaporizing 367.1 billion Hong Kong dollars in market value in a single day. Many assumed this to be an abrupt event that caught giants like Tencent and NetEase off guard.

Yet, this year has been filled with events so fantastical they defy rational explanation. Following the stock plunge, the responses from the industry leaders were of notable composure and perspective. NetEase calmly stated that the new regulations would not fundamentally impact their operations. Tencent expressed that the measures were aimed at ensuring and promoting the healthy development of online games. Perfect World also saw positive implications in the new regulations, expressing hope for their swift finalization and enactment. This reaction showcases the high level of strategic thinking typical of industry magnates, whose demeanor remains unshaken in the face of adversity.

There’s been talk among the giants of the internet world, including Alibaba, Baidu, ByteDance, and Tencent, about the challenges they’ve faced in recent years. Alibaba’s e-commerce was overtaken by Pinduoduo, Baidu was replaced by ByteDance, shifting the triumvirate to Alibaba, Tencent, and ByteDance. Among these, Tencent has remained notably composed, largely thanks to its gaming division, which continuously supports its other businesses. According to its 2022 financial report, Tencent’s gaming sector accounted for about 3% of its total revenue, a significant contribution. NetEase, a longstanding player in the internet industry, has seen many come and go—through e-commerce battles and the rise of short video platforms like Douyin—but it remains, thanks largely to its focus on gaming. The 2022 annual report revealed NetEase’s gaming and related value-added services brought in 74.567 billion yuan, a 9.9% increase year-over-year, with mobile gaming revenue at 58.338 billion yuan, up 10.5%, making up 77.4% of the total. Thus, it’s evident that those who master gaming not only thrive but live lavishly off this lucrative “money tree.”

The recent release of the draft for public consultation has indeed caused a significant tremor in the gaming industry, leading some to speculate whether gaming might follow the same path as the education and training sector. Personally, I hold reservations about this comparison. In 2023, China’s gaming market exceeded the 300 billion yuan threshold for the first time, with actual sales revenue reaching 3029.64 billion yuan, an increase of 370.80 billion yuan or 13.95% year-over-year. Additionally, the number of gaming users in China climbed to 668 million, a 0.61% increase from the previous year, setting a new record. These figures represent tangible market data that cannot be overlooked. Following the initial shock and dismay at the draft’s publication last Friday, which was a natural knee-jerk reaction, the mood remained gloomy into the following week. However, by Monday, December 25th, the government promptly issued signals to boost the gaming industry by announcing the release of 105 domestic game licenses. This quick shift from a discouraging draft to offering a “sweetener” clearly indicates an intention to keep the industry engaged, suggesting that the situation is not as dire as it was with the education sector’s overhaul.

The draft, in terms of its content, appears well-targeted in addressing certain issues within the gaming industry. For instance, it prohibits online games from offering inducements such as rewards for daily logins, first-time recharges, and consecutive recharges. It also mandates setting spending limits for users. These measures directly address the factors that entice users to play games and impact the daily active users (DAUs) and profitability of games. According to statistics from CICC, there are roughly five revenue models in the gaming industry: buy-to-play, where a game is purchased once and owned forever, common in single-player games; downloadable content (DLC) or expansion packs, where players pay for additional content released post-launch, such as weapons, virtual assets, narratives, and maps; subscription-based models, where players are charged based on their playtime, often via prepaid cards; freemium or in-app purchases, the prevalent model in China where games are free to download but monetized through in-game purchases like item malls; and advertising, where revenue is generated through ad placements within games, as seen in the viral game “Sheep Shear Sheep” last year. These strategies are critical for understanding the dynamics of gaming revenue and user engagement.

To summarize, the profit model for games either revolves around microtransactions (often referred to as “pay-to-win” strategies) or advertising. The recent draft essentially targets games that heavily rely on microtransactions. This approach is fundamentally unobjectionable, especially considering the precedent set in August 2021, when regulations were introduced to prevent minors from becoming addicted to online games. These measures included restricting gaming services for minors to one hour a day on Fridays, weekends, and public holidays between 20:00 and 21:00, with no gaming services allowed at other times. This latest regulation extends its reach to adults as well, notably impacting university students who, having crossed the hurdle of college entrance exams, now face the anxiety of potential unemployment upon graduation. Preventing addiction among university students is also a targeted goal. Regulation, in essence, is not problematic and, in the long run, might even benefit the healthy development of the gaming industry. The timing of the announcement, however, is critical. Given the fragile state of expectations in the current macroeconomic climate, such a sudden strike at year’s end could exacerbate an already vulnerable situation.

The traditional approach of implementing strict prohibitions might have worked in the past, but it’s crucial today to consider the connection between policy and public confidence. Otherwise, the effort and time to recover from any damage might be significantly greater. Yet, beyond regulation, there are alternative strategies to consider for adult gamers, such as imposing a luxury tax on high spending in games, akin to the import tax on luxury cars, offering a win-win solution.

So, what breakthroughs could the gaming industry pursue amidst strict regulation? One avenue is the development of mini-games, such as the previously mentioned “Sheep Shear Sheep,” which are simple, cater to users’ fragmented entertainment needs, and importantly, are popular among users over the age of 24, accounting for 80% of this demographic. Another strategy is to explore overseas markets. Given the current preference of international audiences for IP-based and casual games, combined with the popularity of Chinese online literature abroad, leveraging IP adaptation presents a viable opportunity for expansion.