Surprising Winners Emerge During China’s Game Industry Decline

“Even creating a title specifically for the Chinese market can be successful,” according to Niko Partner analyst Daniel Ahmad.

By Ryan Carroll, Editor-at-Large

November, 2018.

China’s restructuring of regulatory bodies that oversee content and entertainment has effected one industry more than others; the Chinese gaming industry. The world’s largest and an industry that is expected to reach, at least, $42BnUSD in revenues by 2022 (currently $32.5Bn) but revenues in China for the gaming industry have come to a near halt due to this reorganization. This suspension of new game publishing and monetization licenses may also have another reason for its prolonged hiatus, according to SCMP there may be a single change that is having more of an effect than others.

The naming of Zhuang Rongwen, head of State Administration of Press and Publication, has been named the new leader of the Cyberspace Administration of China. His naming to this top governmental position also coincided with the closing of the so-called “Green Channels”. A month long test of distribution and monetization for Chinese game publishers, developers, and studios, during this period of reorganization which has not seen a single new game approved for official publication (monetization) in China for months.

An issue which has caused, not only the giants, but many indie and smaller game studios to struggle for survival. With Tencent Holdings, the first non-American company to reach $500BnUSD in valuation and to become the 5th most valued company in the world, to loose $220Bn of its valuation during this timeframe.

It is said that it may be February before this unofficial “ban/restructuring” is complete. If game companies are unable to publish new games before next year’s Spring Festival (Chun jie) on February 5th, then the amount of money lost by Chinese game companies could be monumental; effecting the entire industry as a whole.

Worldwide battle royale phenomenon Fortnite, whose studio Epic Games is 40% controlled by Tencent, has been released in China but Tencent Games has not been allowed to monetize off of the hit. Resulting in limited play by gamers in China, and millions (potentially billions overall) in lost revenue via microtransactions for Tencent and Epic.

Fortnite is not the only game to languish in monetization during the game approval pause. PUBG (PlayerUnknown’s Battlegrounds) another battle royale developed by Korea’s Bluehole a company that is reportedly owned by Tencent has suffered as well.

Tencent appears to be hit the hardest among the gaming giants, but they are not the only player to see a dip in their Q2 returns. ACGN giant Bilibili a dedicated platform to all things Anime, Comics, Games, and Light Novels, that controls 7.5% of the video streaming market in China, saw disappointing results in Q2 after a strong comeback from its initial American IPO. 83% of Bilibili’s revenues come from games on its platform, but the resilience of the ACGN market should not worry those who have been watching Bilibili.

Tencent’s recent restructuring highlights a company whose connected ecosystem will allow it to bounce back after the game licensing suspension is lifted. With Tencent upping its stake in Bilibili Group to 12% with a $300MMUSD+ infusion of new capital. A move to link Bilibili more closely into Tencent’s connected ecosystem, in particular with Tencent Games its leading revenue driving division. To further connect Tencent’s valued IP to the stickiness of the ACGN demographic, Chinese Gen Z (ages 17–24), a group that is more devoted to the products it grew up with than any previous generation in China.

This makes sense as Tencent’s Steam-like distribution platform WeGame was released just months before the stall (unofficial ban?) of new game approvals. WeGame even had to pull another Tencent-backed mega-hit Monster Hunter: World from its platform just days after it was released. The combination of all these issues arising has led to an unexpected winner coming out of this situation in China, Washington State software company Valve.

Valve’s digital distribution platform Steam (Steam China) has been in the Middle Kingdom since 2013, even though it is not officially approved though it is not banned either. Steam reports that they have 30M registered in China, allowing users in China (they must register their country’s location) to pay for the games on its platform via WePay or Alipay.

One winner on Steam is the Chinese indie game The Scrolls of Taiwu, a fighting game set in a wuxia (martial arts) universe and was an instant breakout hit, becoming a Top 5 game on Steam.

In response to this, Chinese game companies have been pushing for expansion oversees seeing $4.6Bn in revenues outside of China in the first half of 2018. Major players like Tencent and NetEase pushing to strengthen their ties with game companies in key markets like the United States, Korea, and Japan.

One thing that is unclear though, with the regulatory shakeup, is its effect on eSports in China. A market that is seeing a surge in China and is leading to growth in several new industries such as live-streaming, with companies like Huya (a Tencent backed Twitch-like service) successfully listing on the NYC stock exchange.

The outlook on the Chinese gaming industry seems bleak, but this is just a bump in the road, a momentary hiccup, for the world’s largest gaming industry. As the market will continue to see growth across all avenues and aspects of the industry, and will likely continue to grow outside of China. Especially, in the mobile game space where China is the obvious leader.

With the continued popularity and growth of the ACGN market, growth is still being seen in China with anime-themed games contributing to 40% of the revenues seen in Q3. Games that had received publishing licenses before the SAPP’s suspension on new games. This and along with indie games like The Scrolls of Taiwu becoming hits on non-Chinese platforms, the outlook of China’s game industry, from mobile to eSports, is still the most promising in the world and one that just requires a little extra patience.

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About the Author
Born and raised in the Missouri-Ozarks Ryan studied Film Production, and East Asian Culture, at the University of Kansas where he was a UGRA recipient that led him on a seven-year long, Journey From the West, to China. Where he worked with Warner Brothers, the China Film Group Corp. and the National Bureau of Statistics of China. Before returning to the States, where he specializes in Chinese Anime & Comics, China’s Box-Office, and Chinese entertainment-tech industries. He has a dog in China, Abigail, and a dog in the Arkansas-Ozarks, King Blue, who help ease his anxiety of suffering from the “Two-Dimensional Complex” that is trying to understand the Culture Industry landscapes of the Middle Kingdom.

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