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Starting in 2021, Beijing has cracked the whip on the video game sector, but the China gaming industry is now seeing easing pressures. However, the world’s largest video gaming market has seen consolidation over the past 18 months or so, with 2022 revenues falling 10.3% to 269.5 bn yuan ($39.5 bn) compared to 2021.
The Gaming Publishing Committee of the China Audio-Video and Digital Publishing Association in a report said that the number of gamers too slipped in 2022 by 0.33%, due to regulatory concerns, economic headwinds and sluggish consumer demand.
Impact on China gaming industry
China’s biggest gaming firm, and one of the largest in the world, Tencent Holdings, saw its revenue drop for the first time in 2022 due to the freeze on new games as well as the zero-Covid policy.
Tencent’s 2022 annual revenue was down 1% at 554.55 bn yuan ($81.3 bn) compared to 2021, whereas annual profit dropped by 16% to 188.24 bn yuan ($27.6 bn). The company’s domestic gaming revenue was down 6% during the same period, while international gaming revenue dropped 6%.
“We’re now gearing up for global expansion of our games, and in the domestic market, we navigated through industry challenges during 2022 and are now well-positioned for igniting growth,” Tencent President Martin Lau told Nikkei Asia.
Lau’s comments come in light of China approving 27 foreign games this month, some of which will be published by Tencent in the domestic market. The first signs of a thawing of the regulatory freeze came in December when Beijing granted publishing licenses to 44 foreign games and to 84 domestic games.
Apart from games, Tencent is now also focusing on AI-generated content like ChatGPT, but concerns over chip supply remain.
Bilibili is another major player in China’s gaming industry, and the company’s stock is listed on the Hong Kong Stock Exchange with American Depository Shares listed on NASDAQ.
The company saw its 2022 revenue rise to 21.9 bn yuan ($3.2 bn) from 19.4 bn yuan ($2.8 bn) in 2021. However, Bilibili’s net loss for the year widened to 7.5 bn yuan ($1.1 bn) from 6.8 bn yuan ($995 m). The silver lining was that daily active users and monthly active users grew in the double digits.
Regarding video games, Bilibili’s mobile gaming revenue dropped 1% in 2022 compared to the previous year.
Internet giant NetEase saw better numbers in 2022, as gaming and value-assed-services net revenues rose to 74.6 bn yuan ($10.9 bn) from 67.8 bn yuan ($9.9 bn).
“The year-over-year increase in games and related value-added services gross profit was primarily due to increased net revenues from the operation of online games, including PC games such as Fantasy Westward Journey Online and Naraka: Bladepoint and mobile games such as certain newly launched games and existing hit titles like Infinite Lagrange,” the company said in its results announcement.
Some other big players in the China gaming industry include 37 Interactive Games, Century Huatong, Perfect World, Kingsoft and Sohu, among others.
Scope of China’s video game sector
China gaming industry shrank for the first time in 2022 since at least 2005, but the recent approvals granted by Beijing indicate that the sector might be coming out of a slump.
However, Tencent CEO Pony Ma believes it will be harder to get video game publishing licenses in China in the long run. “Tencent Games must focus on the best products and not waste any opportunity to get new approvals,” Ma said in an internal speech which circulated on social media.
In lieu of the regulatory concerns, top players in China’s video game sector drafted self-discipline guidelines which list the “do’s and don’t’s” for the distribution and promotion of games. The draft has been co-written by gaming and tech companies such as Tencent, Perfect World, 37Games, iDreamSky and others.
There are 11 requirements listed under these rules, including no “leaks of state secrets, endangering national security, or damaging national honour and interests” and must not “promote obscenity, pornography, gambling, violence, or aid crimes”.
“In the aftermath of tightened regulations, Chinese game makers also now have more global ambitions. Challenges exist but some early signs of potential success in the future are emerging,” writes Dillon Jaghory, Research Analyst at Global X ETFs.
Meanwhile, China is the biggest market in the world for video games, making up nearly half of APAC’s $90 bn gaming spend, as per Google Consumer Insights in collaboration with newzoo.
Another report by India-based research firm Makreo found that nearly 49% of gamers in China play on their mobile devices, accounting for over 70% of total games revenue.
Liu Yaokun, a Chinese internet and media analyst at UBS, sees a 6% growth in China’s video game industry in 2023.
“Rising interest rates and macro headwinds will likely drag down returns for video game stocks for at least part of 2023, as they did in 2022. However, innovation never stops… We see Asia as a crucial part of the investment thesis behind the video games theme. As 2023 shapes up to be a potentially exciting year for generative AI technology, which is already being applied to video game development, the entire industry both abroad and in Asia could see increases in productivity and new modes of development,” adds Jaghory.
