Ongoing regulations in China have foreign investors looking to understand its effects on gaming/tech companies bottom lines
China is the epicenter of online gaming globally. According to Lai Lin Thomala of Statista, over 666 million players make up China’s lucrative gaming market. Figures from state-run news outlet People’s Daily cite over 400 million viewers and fans supporting the nation’s enormous esports industry. The pandemic has certainly shocked many sectors across the globe with the gaming industry being no exception. State crackdowns especially on the tech industry in China have investors and gamers alike puzzled. The outlook will be different but the question is how much and to what extent?
Curbing “Spiritual opium”
Parents in China may no longer have to enforce curfews on their kids' gaming habits. New regulations are aiming to help get minors focused on their studies or outside with their friends. Here are the rules. Chinese adolescents below the age of 18 can play video games from 8 am to 9 pm on Fridays, weekends, and public holidays, effectively lowering the total gaming time allowed for minors to three hours per week. Previously, kids could play for one and a half hours on any day, and even longer on holidays. The rule is implemented by having users verify their identification to access online gaming. This means that the new rule may not apply to offline gaming. It is also unclear at the moment on how or if the mobile gaming industry may be affected.
Game developers have already had the preexisting responsibility of complying with requirements to receive a Software Copyright Certification, complete an Internet Content Provider filing, and undergo a security assessment prior to publishing. Once published, all games have required real name verification to restrict minor’s access to games containing inappropriate content. If a game costs money to play or includes in-game purchases, developers must apply for a National Print and Publications Administration game license, which requires a review of the game’s content, artwork, and storyline according to China Business Review. These previously established restrictions already pushed gaming titans like Tencent and NetEase to further expand abroad instead of overleveraging on the Chinese market. That trend is expected to continue as further regulations may continue to be rolled out.
As the Winter Olympics were coming to a close, news and speculation about the expanding crackdown in the gaming industry as well as food delivery caused Tencent, Alibaba and Meituan to shed 96 billion USD in market value according to Bloomberg. Beijing’s lack of guidance on the resumption of new video game approvals is fuelling even more speculation of an extended licensing freeze. The state’s control and pace of licensing new video games has proved to be an effective regulatory tool in the Chinese gaming sector. Since 2019 approvals have dropped dramatically with foreign approvals becoming even more rare. Last year, domestic companies like Tencent and Netease were also summoned to talk with regulators about “profit-making practices.” These developments could lead to increased market volatility and more job cuts for Chinese gaming stocks. Hongxing has reported that companies like Netease, Baidu, Lilith, IGG, and Perfect World have all made cuts themselves and have also been forced to cut projects. South China Morning Post reported late last year that around 14,000 small studios and gaming-related firms went out of business in 2021. China’s National Press and Publication Administration could begin approving licenses eventually though it is unclear how many.
By the numbers
The China Audio-video and Digital Publishing Association’s 2021 Chinese Gaming Industry Report highlighted continuous growth of China's gaming industry both in its market size and in its user base. However, the report also pointed out a slowdown of the growth rate. That should raise some concerns for the industry insiders. Since 2020, China’s gaming industry growth rate dropped sharply from 26.7% to 6.5%. There are concerns that the market might have begun reaching the industry ceiling. The report indicates that slow growth is expected because China is recovering from the pandemic’s 'lockdown' economy and would likely experience declines gradually. Developers may also have been disincentivized from releasing ”hit” games during a demand downturn. The report acknowledges that the demographic dividend on gaming is diminishing, however, the growth could be interpreted as the demographic growing into a healthier user structure since the number of underage players is limited due to the latest restrictions.
One aspect of the gaming market that is seeing sustained success in China is online PC gaming. Year-on-year upward growth has seen a 5.15% improvement to reach the market size of 9.2 billion USD. This is a positive change in comparison to the three consecutive years of negative growth with PC gaming. Another bullish aspect is that games independently developed by Chinese companies contributed 86% of the actual sales revenue of the overall gaming market. There are plenty of bright spots to give investors confidence in China’s voluminous gaming industry. The healthier the market the better. Clearer cultural standards for foreign investors stabilizes the market. Nonetheless, Daniel Ahmad of Niko Partners states that only around 1% to 5% of revenue comes from the around 110 million teens playing online video games in China.
Video games across the globe have been notorious for distracting kids from homework and burrowing them in their bedrooms. Professional gamers are usually younger and have trained for years. Bios of pro esports gamers reveal that most of them started gaming in their early teens, some having become professionals at just 14 or 15. If gamers want to start young at pursuing a professional esports career, the new regulations might disrupt that potential. Sun Shoushan, the chairman of China Audio-video and Digital Publishing Association affirms that esports have already grown into an important new business model in the gaming market and that the association encourages localities to implement policies that support the esports industry. It has also been woven into the culture of the next generation. The esports market in China generated 22.11 billion USD in sales revenue, a year-on-year growth of 2.65% in 2021.
CPPCC delegate Xu Jin has said that “Many minors are purchasing game accounts or the personal information of adults online to get around the playtime restrictions.” Though the Observer Research Foundation has reported that 13.2% of China’s minors reportedly played games for over two hours per day on weekdays, loopholes will be a growing concern for the CCP in further regulating the market. Facial recognition will be utilized and violators of the new rules will likely face some form of substantial penalty. China has clearly emphasized that the goal of new regulation is not to stunt the growth of their esports success but to encourage a societal prioritization of moral standards. Investors who go with the flow and understand these conservative regulations will weather the short term negative sentiment and reap the benefits. The data shows that despite the pandemic and tech crackdown, the gaming industry in China will likely get healthier and rely on macroeconomic fundamentals to sustain growth like all other similar sectors. Pay attention to actions or lack thereof from the Chinese government and stay informed. Companies will do what's best to balance domestic opportunities as well as lenient international opportunities abroad.