The Great Freeze of 2018: How Regulatory Gridlock Pushed Chinese Gaming to Go Global
The last twelve months have been pretty crazy here in China.
Back in March 2018, the Chinese government paused all new video game approvals due to a restructuring of the agencies that vetted video game applications and content. At first, most of us assumed that this would be a temporary thing lasting maybe two or three months. As it turned out, the government was in no hurry, and a temporary inconvenience turned into an almost year-long freeze of new ISBN (or 版号) applications. The Chinese tech sector in general operates at an insane pace, and this sudden gridlock has hampered one of its greatest strengths—raw speed and rapid deployment.
As of March 2019, approvals are starting to flow again, but confidence in the gaming sector hasn’t fully recovered. A lot of indie studios have closed, and a bunch of gaming-adjacent companies that relied on a steady stream of new games have to search for other revenue streams.
Megacorps Weather the Storm and Indies Tread Water
Chinese tech giants like Tencent and NetEase had the capital reserves and alternative revenue streams to weather this storm without releasing new games. The same can’t be said, however, for small and mid-sized developers. Stripped of the ability to bring new games to market, these smaller companies watched their cash flow hit dangerously low levels while salaries, office rents, and server maintenance costs kept rolling in.
According to platforms that track domestic business registries, the financial toll on these smaller firms is severe:
| City | Estimated Closures |
|---|---|
| Shenzhen | ~3,200+ |
| Guangzhou | ~2,800+ |
| Beijing | ~2,400+ |
| Shanghai | ~2,100+ |
Estimated studio + game-related closures (March 2018 - March 2019)
Across China’s tier 1 cities, an estimated 10,000+ gaming-related companies have closed. These companies are small to mid-sized indie developers, boutique publishers, art outsourcing companies, and companies focusing on niches like Unity/Unreal assets and development.
The contraction is showing up in public earnings reports, too. Tencent, widely regarded as the largest game company on Earth, posted a 32% decrease in quarterly profit at the end of 2018. If companies like Tencent were experiencing these kinds of losses, the smaller studios and outsourcing companies that depend on them didn’t stand a chance.
Big Player Pivot: Buy Abroad
Faced with a highly uncertain domestic market, Chinese gaming capital has started to pivot. To larger publishers like NetEase and Tencent, globalization has become an existential hedge against regulations that seemingly drop from above with little warning. Since these giants can’t reliably publish games inside China itself, they’re starting to snatch up studios and operations entirely outside the regulatory reach of their home country.
Tencent’s Silent but Steady Empire Building
Tencent has spent the last year quietly expanding across North America and Europe. Instead of forcing their own brands onto western playerbases, they’re straight up acquiring foreign IP.
Recent activity includes:
- Buying a minority stake in Marvelous, the Japanese developer behind Story of Seasons
- Buying a minority stake in Paradox Interactive, the Swedish developer of Crusader Kings and Europa Universalis
- Taking a majority stake in Grinding Gear Games (The New Zealand studio behind Path of Exile)
- Expanding their reach across European developers as a hands-off investor
And Tencent also already owns 40% of Epic. While this isn’t a recent move, Fortnite’s success is, making this look like a very shrewd investment.
NetEase Purchases Some Prestige
NetEase has taken a similar approach:
- Announcing an early 2019 investment in Quantic Dream, the French studio behind Detroit: Become Human
- Investing $100 million in Bungie (Destiny)
NetEase’s ongoing partnership with Blizzard also uniquely positions them to weather these new regulatory uncertainties. Since Blizzard’s games are already online in China, this partnership will continue to generate revenue regardless of approvals for new games.
China’s Smaller Mid-tier Publishers
While Tencent and NetEase may be viewed as throwing money at a problem, there are some mid-sized publishers in China that are already targeting western markets with their own games. Lilith Games (Rise of Civilizations), IGG (Lords Mobile), and FunPlus (King of Avalon) have recently enjoyed a lot of success as global publishers.
These companies are smaller, more agile, and thus they can respond better to the demands of localization and regional marketing discrepancies. If you do a Google search or two for these games, you’ll see that although their advertising tactics may be… distasteful to some, it is clear that they know how to find and engage with players outside of China in a way that NetEase and Tencent really haven’t.
A Permanent Shift or Temporary Adaptation?
As of spring 2019, the NPPA is finally starting to issue game approvals again, but has the damage already been done? How much confidence remains in domestic publishing? Though approvals are starting to flow, it has been said that the regulating bodies inside China are now more strict when it comes to historical inaccuracies, violence in games, and loot box mechanics.
The recent freeze has taught Chinese game companies a lesson about concentrated geographic risk. The domestic market on its own may not be enough for predictable growth, and it is wise for NetEase and Tencent to spread the risk by diversifying in the types of games in which they invest. By forcing the gaming giants to look elsewhere, Chinese regulation may have ironically accelerated China’s transformation into a more visible, permanent force in global gaming.
