By Sagar V. Mankar In a not-so-surprising move, the Chinese government has released a set of strict rules that aimed to curb spending and rewards in online video gaming. The significant development has sent shockwaves through the gaming market, resulting in substantial losses for major players.
So, what exactly went down?
The new regulations, announced on December 22, primarily focus on setting spending limits for online games.
This has led to considerable panic among investors, with China’s top gaming companies witnessing a collective market value drop of nearly $80 billion.
Tencent, the world’s largest gaming company, and its closest rival, NetEase, experienced significant stock price declines, underlining the severity of the impact.
What are the Restrictions on Gaming?
Under the new rules, online games face a ban on providing rewards for various player activities, including daily logins, first-time spending, and consecutive spending.
These practices, common incentives in the gaming sector, are now deemed unacceptable.
The market responded swiftly, with Tencent’s shares plummeting by 16% and NetEase experiencing a staggering 25% drop.
The Ripple Effect on Investors
Investors, already navigating the complexities of the gaming industry, are now grappling with heightened policy risk.
Steven Leung, executive director of institutional sales at UOB Kay Hian in Hong Kong, notes, “It’s not necessarily the regulation itself—it’s the policy risk that’s too high.”
This abrupt regulatory move has shaken confidence, prompting a reassessment of fundamental factors within the industry.
Industry Responses and Reassurances
Tencent Games’ vice president, Vigo Zhang, stated that the company would not need to fundamentally alter its business model or operations. He emphasized Tencent’s strict compliance with regulatory requirements and highlighted that minors’ spending on Tencent’s games had remained at historically low levels since 2021, aligning with Beijing’s focus on minor protection.
Beijing’s Stance on Gaming
Beijing’s stance on video games has been progressively rigorous. In 2021, playtime limits for those under 18 were introduced, and approvals for new video games were suspended for approximately eight months due to concerns about gaming addiction.
While the formal crackdown ended last year, ongoing restrictions continue to target in-game spending.
The Impact on Game Design and Monetization Strategies
The latest rules, arguably the most explicit to date, not only ban reward features but also require games to set limits on in-game spending. Analyst Ivan Su from Morningstar predicts that the removal of these incentives may reduce daily active users and in-app revenue, potentially forcing publishers to revamp their game design and monetization strategies.
Balancing Act: Welcome Changes Amidst Stricter Rules
Amidst the stringent regulations, there’s a glimmer of positivity. The rules propose a 60-day timeline for regulators to process game approvals, a change anticipated to be welcomed by the industry.
Simultaneously, Beijing granted licenses for 40 new imported games for domestic releases, signaling a willingness to allow more games in the country.
Addressing User Data Concerns
The regulations also reflect Beijing’s concerns over user data. Game publishers are now required to store their servers within China, highlighting the increasing importance placed on data security and sovereignty.
Tumultuous Journey of Chinese Gaming Industry in the Past Few Years
The year 2022 marked the most challenging year on record for the Chinese gaming industry due to Beijing’s crackdown in 2021.
However, 2023 saw a remarkable turnaround as the domestic gaming revenue rose by 13% to 303 billion yuan ($42.6 billion), according to the China Game Industry Association (CGIGC).
Global Implications: Shadows on Gaming Stocks
The impact of China’s draft rules extended beyond its borders, casting a shadow on gaming stocks globally.
U.S. gaming stocks, including Roblox, Electronic Arts, and Unity Software, experienced declines, while in Europe, French video game developer Ubisoft also faced a dip.
Conclusion: Navigating Uncertain Waters
As the industry adapts to China’s stringent regulations, the gaming landscape is undergoing a profound transformation. Publishers and investors alike must carefully navigate these uncertain waters, considering both challenges and opportunities. The proposed changes in approval timelines hint at a potential streamlining of regulatory processes, providing a ray of hope amidst the regulatory uncertainties.