China’s game industry is in decline after years of growth

Business & Technology

Unfriendly regulators and restrictions on teenagers playing games have taken their toll on China’s enormous online gaming sector.

Illustration for The China Project by Alex Santafé

Last week, the China Audio-video and Digital Publishing Association (CADPA) and the China Game Industry Research Institute jointly released a report on China’s gaming industry for the first half of the year.

For the first time ever, China’s game industry has recorded a “double drop” of negative revenue growth and a decrease in users:

  • Total revenue in China’s game industry was 147.78 billion yuan ($21.88 billion), a year-on-year decrease of 1.8%. Revenue from mobile games, accounting for 74.75% of total industry revenue, declined for the first time ever.
  • User numbers have peaked: From 667 million during last year’s Spring Festival (February 2021), the total number of users has fluctuated below 666 million, a year-on-year decrease of 0.13%.

Why are revenues and users down?

According to the report, the main reason for the decline in revenue and users is COVID, which has led to decreased consumption and higher corporate costs. But this explanation is disingenuous at best: Of all industries, video gaming is most ideally suited to the pandemic lockdown lifestyle.

In fact, there are several obvious factors behind the gaming industry’s troubles:

The government has almost frozen approvals of new games: From June 2021 until April 2022, China did not issue a single new license for monetizable games.

  • Since April, the authorities have approved 172 online games, but not a single one for the leading game company, Tencent 腾讯, and only one for its closest rival NetEase 网易.

Under-18s are limited to only three hours of gaming per week as per rules introduced in August 2021.

  • Game license approvals have also begun to favor games that are educational in nature, which may be popular among parents, but is unlikely to benefit the gaming companies’ bottom lines.

The government’s ongoing squeeze on the “platform economy” has resulted in hefty fines for Tencent, Alibaba 阿里巴巴集团 and various other tech companies for monopolistic behavior, reducing their appetite for new product development and marketing in gaming and other sectors of which the government takes a dim view.

  • The gaming companies have got the message: The CEOs of NetEase and Xiaomi both stepped down from their roles at the companies’ related video gaming entities in June this year.

Impact on big gaming companies

Tencent had already announced two rounds of layoffs this year, but in June, Tencent’s gaming department reportedly cut staff by 20-30%, and some product teams were cut entirely.

Right now, when it comes to games, Tencent is in something of a crisis mode:

  • The company’s gaming revenue declined for the first time in 2021 by 8.8% year-on-year.
  • Before 2018, Tencent was able to release around 1,000 games each year, but due to the vast reduction in game approvals, this number has dived to only about 200 games per year.

NetEase, despite only gaining one new game approval this year, appears to have ridden the regulatory storm slightly better than Tencent: In the first quarter of 2022, NetEase’s online game revenue was 17.3 billion yuan ($2.56 billion), a year-on-year increase of 15.3%.

  • Tencent’s game revenue was 43.6 billion yuan ($6.46 billion) in the first quarter, almost equal to the same period in 2021.

Can esports save the gaming industry?

Despite the government’s hostility to online gaming, there seems to be a slightly different official attitude to esports — organized competitive gaming that is managed like physical sports with amateur and professional teams, regional associations, and international competitions that are watched by tens of millions of spectators around the world.

Indeed, last week another report from CADPA was released, this one focusing on the esports industry in China during the first half of the year:

  • Total esports revenue was 76.49 billion yuan ($11.32 billion), a year-on-year decrease of 10.12%, of which esports tournaments accounted for 83.29% of total revenue, and broadcast revenue accounted for 13.96%.
  • There are 487 million esports users in China, a slight decrease from the same period last year, but a total of 62 esports competitions were held in the first half of the year (40 of them in Shanghai), a slight increase from last year, although nearly half of the competitions took place online due to restrictions on offline events.

Despite the drop in industry revenue in 2021, esports in China is expected to grow:

  • According to an industry forecast, the scale of China’s esports market will reach 184.33 billion yuan ($27.29 billion) in 2022.
  • According to the Ministry of Human Resources and Social Security, in 2019 there were more than 5,000 esports teams and clubs in China, with about 100,000 professional esports players, and a total of 500,000 people employed in the industry.
  • There is a shortage of trained personnel in the industry, which is paying relatively high average monthly salaries in excess of 10,000 yuan ($1,480).

There is now also a dedicated higher education major focused on the esports industry, and China’s very first batch of esports majors graduated in 2021. The esports management major wasw added by the Ministry of Education in 2016, and more than 50 domestic colleges and universities now offer this degree, whose graduates work in game development, esports events and services, esports media, and esports training.

New approvals and overseas markets?

There are some other signs of hope for the industry, but nothing you could take to the bank:

New approvals: On July 18, the Ministry of Commerce issued new guidelines to simplify and expand the approval process for online games.

  • Today ​​NetEase launched “Diablo Immortal” in China with government approval, and the game is expected to be a hit. Jointly developed by Blizzard Entertainment and NetEase, this game is the latest version of the Diablo franchise which has been a global success since 1997.

Expansion abroad: Tencent, NetEase and other Chinese gaming companies have for several years looked overseas for growth opportunities, but foreign scrutiny of Chinese corporate activities may slow this down:

  • Until this year, Tencent’s foreign investment strategy focused to a large extent on games and entertainment companies, accounting for 99 of the company’s 312 foreign investments in 2021, but so far in 2022, only five of Tencent’s 67 foreign investments have been in the gaming industry.
  • Overseas sales revenue of Chinese self-developed games in the first half of the year amounted to 8.98 billion, a year-on-year increase of 6.16%, but this rate has declined from last year due to increased global trade barriers, mainly with the U.S.

The takeaway

Left unregulated, the demand for games in China is enormous, and the potential of Chinese gaming companies to grow abroad is equally big.

But right now, the outlook for the domestic gaming industry is uncertain, and it’s not clear if Chinese companies can continue their march into overseas markets.