China’s digital games market has endured a temporary game licensing freeze since April 2018, which we explained in our blog post published on September 17, 2018. The cause is regulatory agency restructuring, and it has impacted all game companies operating in China. Tencent, previously a top 5 internet company globally by market cap, has lost over $200 billion in market value this year as a result of the freeze.

It is important to note that demand from gamers has not decreased at all. Despite the lack of many new titles, Chinese gamers are still enthusiastically gaming and spending money on and in games. The market revenue continues to grow.

Here is our update on what has happened with regard to the regulatory restructuring and licensing freeze, since our September post:

Games are allowed to commercially launch in China if approved prior to the freeze

Games that had been licensed prior to the freeze date of March 28, 2018 were allowed to proceed with commercial launch during this period. Some industry observers have said that zero games have launched in that time, but it is untrue. Tencent noted in its Q2 conference call that it had more than a dozen games that had been approved prior to the freeze that they are allowed release. Red Alert OL and My Name is MT4 are two titles Tencent released after March 28, and are now among the top 5 grossing iOS games in mainland China.

Chinese developers have ramped up export efforts for their new titles

Tencent has the luxury of a large pipeline of titles that had been approved prior to March 28 to publish, but most Chinese game companies do not. To compensate for being unable to publish new games in China, they have turned their sights overseas. According to App Annie, Chinese game developers grossed $600 million in the US market alone (let alone other markets), during the first half of 2018.

Steam is proving to be a big help to Chinese indie devs

The temporary game approval freeze has led to Chinese indie developers launching their games on the platform to target the more than 30 million gamers in China using Steam. The Scrolls of Taiwu, an indie Wuxia game, sold over 800,000 units in less than a month while Chinese Parents, a life simulation game, became a viral hit overnight. People’s Daily, the biggest newspaper in China, even published an article about the game. Steam currently operates in a grey area within China (actually, the games are published without license, which means Steam operates illegally – but it hasn’t been shut down, so it feels “grey” to us). Chinese gamers can access and download any game published on Steam, despite not being licensed for operations in China. Valve and Perfect World are working on a China only version of Steam that will operate in line with regulations.

China’s State Council is promoting gaming and introducing reforms

China’s State Council posted a notice to reform the approval process for new business creation, effective November 10, 2018, for 106 types of businesses, of which 3 are gaming related. The reforms promote new internet cafés, arcades and gaming entities, by centralizing and cutting the approval process time by a third. The State Council also released a notice on how it plans to promote the online games industry and standardise the approval process as well as improve the approval process for game hardware. This is a positive sign for the industry as it shows China’s government is still very much in favour of developing a healthy games industry.

There is a vacant spot for director of SAPP, extending delay of reforms

China’s State Administration of Press and Publication (SAPP) is the newly minted regulator tasked with game licensing (among other things). Zhuang Rongwen was appointed director of SAPP in May, departed in August 2018. The vacancy appears to be one of the primary roadblocks to resuming game licensing. It is still unclear as to when the SAPP will complete reforms and restart its mission.

China’s green channel approval process is no more

In response to the ongoing game freeze, as well as pressure from game companies, the SAPP introduced a temporary green channel approval process earlier this year. This allowed publishers to apply for a temporary game license that allowed for the title to be distributed and monetised for 1 month. This helped provide some relief to the market, but it was always a temporary measure, due to the time limit, and it was an extremely limited channel that only a few publishers and games benefited from.

Shortly after the departure of Zhuang Rongwen, a few publishers noted that this temporary approval process was no longer an option. This means that game publishers are now in the same position they were in before the temporary approval process was introduced. Game publishers will not be able to have new games approved until the SAPP carries out reforms and begins issuing licences again.

The good news

Despite a tough regulatory environment, Chinese gaming companies are finding ways to weather the storm. Demand from gamers has not wavered and we continue to see strong performance from legacy titles and new tiles launching during the current period. The newly formed SAPP is aiming to reform the game approval process but without solid leadership it remains unclear as to when this will happen. Niko Partners has revised our market forecast for 2018 with a revenue decline of merely a few percentage points for the year, because demand remains high.