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It is no secret that China has strict gaming regulations, especially regarding what is allowed in a game to be given a green light for publication in the country. Recently, the government has proposed new regulations for online games, strengthening its restrictions on gaming monetization and login incentives.
It is to be noted that the new regulations have yet to be approved, however, the news has brought about a massive crash in stocks for major game companies in China such as Tencent and NetEase, resulting in a nearly $80 billion loss in market value.
Of course, this is only one instance of new regulations affecting the domestic gaming industry in China greatly, and thus many Chinese companies have increasingly eyeing overseas markets in recent years.
Just a month ago, we saw Shanghai-based developer Hypergryph Network Technology, best known for their mobile title Arknights, establishing the global publishing brand GRYPHLINE and a new headquarters in Singapore. This is only one example of some of the known Chinese companies opening up new subsidiaries in other countries to publish games in overseas markets and improve localization.
As noted, China has been looking to strengthen its regulations on gaming with a newly proposed guideline that sees the ban of certain practices, such as daily login, and installing daily spending limits.
In fact, the government of China has been strengthening its regulations on video games seemingly every year. In 2020, China unveiled a list of banned topics or depictions not to be shown in video games.
Apple also halted the updates for thousands of titles in China’s App Store in the same year, after pressure to comply with local regulations as the affected games lacked publishing licenses in the country. It was reported by The Financial Times that Apple’s biggest App Store market is China, with most of the $16.4 billion revenue coming from games.
The most notable restriction came in 2021 with the Minor Protection Law where minors in China were hit with a more restrictive gaming hour in an attempt to curb game addiction. The implementation of this restriction forces minors in the country to be allowed to play games for one hour a day on Fridays, Saturdays, Sundays, and public holidays only.
Imagery of effeminate male characters or any depiction of same-sex relationships in games was also subject to bans in the same year. However, it seems that this rule may not apply to already established characters as many of them are still in their games and have not asked to be removed. For example, Venti, a rather feminine male character from Genshin Impact, a game designed and published by HoYoverse, a Chinese company.
Approval of Publishing License
Given the strict regulations on gaming, a title can only be published in China if it has been approved by the country’s National Press and Publication Administration (NPPA). The approval of a game generally depends if the title complies with China’s Law such as not depicting taboo subjects and overly sexual themes.
To circumvent it, developers have been releasing separate versions for China and the global market, such as TFT: Teamfight Tactics. As the certification for online game publishing services can only be obtained by Chinese companies, overseas studios are required to form a partnership with Chinese distributors to publish their titles in China.
In general, a game’s approval process may take six months or even longer, which is a relatively long time considering the evergrowing gaming market and development cost. Sometimes it can even take more than a year before approval such as Riot Games’ competitive FPS Valorant, which was only approved end of 2022, despite the game being already out in other parts of the world in 2020. Similarly, it takes more than a year before Nintendo’s Pokémon Unite to be approved.
Unfortunately, in 2021, the issuance of publishing licenses for games was frozen for almost a year to impose new regulations around gaming.
Game development is not cheap and having months of work suddenly halted by the license freezing means no way to publish games to gather revenue to fund the employees and companies. This resulted in more than 14,000 companies shutting down and many game studios subjecting to massive layoffs in China, while around 300,000 studios reportedly earned less than 10 million yuan that year.
Consequently, it was reported that the gaming market in China has been going on a downward trend in 2022. To circumvent the competitive pressure in the domestic market and gaming policies in the countries, we have been seeing Chinese companies opening offices overseas and focusing more on the international market.
For example, HoYoverse, the studio behind the extremely popular Genshin Impact, opened an office in Singapore back in 2022 after the establishment of branches in several other countries. After its release in 2020, Genshin Impact has been performing extremely well in the global market, often topping the revenue ranking each week according to mobile app analyst website AppMagic data.
Like HoYoverse, large Chinese companies such as Tencent and NetEase are also expanding their reach overseas, opening offices in many countries such as the USA, South Korea, and Singapore. Both companies had also acquired developers outside of their country to release games in the global market. NetEase had previously acquired Grasshopper Manufacture, the Japanese developers behind No More Heroes and Killer 7.
Aside from acquiring studios, NetEase has also been forming partnerships with overseas distributors to publish games outside of China such as the recent team-up with Singapore’s GCL Global. Meanwhile, just a few months ago, Tencent acquired Dying Light series developer Techland as its majority shareholder.
In a report by technode, Tencent saw a 31% sales increase overseas in 2021, but had only grown 6% in its domestic market. Meanwhile, in the same year, NetEase unveiled that its overseas sales account for about 15% of total revenue.
The Challenge in Global Market
Amidst the uncertainty of regulations updates in its domestic market, Chinese companies have been expanding their reach to overseas markets as evident with new offices opening elsewhere and high-profile acquisitions happening.
The lengthy approval process and sudden suspension of publishing license issuance also place a lot of pressure on Chinese game developers as development costs are expensive. With months of waiting before a game can be published and start generating revenue, developers are losing money during the period while also feeling pressured that their game may not be approved.
One may say that Chinese companies should push their games to the global market to escape the uncertain regulation changes and lengthy approval period instead. However, Shenzhen-based industry insight firm DataEye noted that there are challenges to achieving sustained growth internationally, especially when it comes to understanding the global market as compared to the familiarity that is their home country.
Thus, we are seeing efforts by Chinese studios to open offices overseas to improve localizations and, gain an understanding of the global market in regions outside of China such as Hypergryph with their global publishing branch GRYPHLINE.
The familiarity in their home country is also why many companies are still focusing on their local market first before localizing and releasing their games in other regions. Meanwhile, large companies like Tencent and NetEase have been funding and publishing games developed outside of China such as Goddess of Victory: Nikke and OCTOPATH TRAVELER: Champions of the Continent.
The Push for Global
As noted previously, the new gaming regulations in China are still under reviewing process and have not been implemented yet. In a recent report, Feng Shixin, the publication bureau chief at the Communist Party’s Central Propaganda Department who was said to have pushed for the new regulations, has left his official role. Feng’s sudden exit is likely a sign that the government may be softening and winding back some of the proposed guidelines by the NPPA, according to the South China Morning Post.
However, considering the impact of the regulations announcement and the uncertainty of future changes, there may be more Chinese companies already eyeing to expand outside of their country more in the future.
That said, the China market is still a major source of revenue and many companies still strive to push their game out in the country. According to the mobile app analyst website AppMagic, China contributed 66% of all revenue for PUBG MOBILE while 38% of Genshin Impact’s total earnings are from the country.
The uncertainties of regulations and lengthy approval process may be some of the reasons that Chinese companies expand outside the country. However, it is worth noting that the continuous growth of the overseas gaming market especially in Southeast Asia also played a huge factor, especially considering the rising popularity of many Chinese games in the region.