A dramatic overhaul to the regulation and licensing of digital games took place in China from March 2018-April 2019.
The State Administration of Press and Publications (SAPP), formed in 2018, introduced a new approval process for digital games on April 22, 2019, including new application forms for publishers to access online. The SAPP had to work its way through a very large backlog of applications that had been submitted in the 9-month ban of 2018, and those submitted in 2019 prior to the new rules being posted. Games submitted after August 2018 are required to resubmit under the new approval process, games submitted prior to August 2018 were grandfathered under the previous rules.
New Regulations and Impact
- Game content regulations are stricter
The paramount edict is that content regulations are there to promote unity and support the values of the Chinese government. Understanding what type of games and content is allowed in China is key to being awarded a license.
Changes from previous regulations are:
- All text in the game must be Simplified Chinese, including the name of the game. We have seen cases where games were rejected simply for having words like ‘Winner’ and ‘Attack’ show up on screen in English instead of Simplified Chinese.
- Loot box systems or lucky draw systems must include the probability of obtaining an item either on the game website or in game. It must show the number of times you will need to draw, as opposed to a percentage chance.
- Dead bodies must “disappear” quickly (fade away or otherwise), and pools of blood of any color must not be included in the game.
- Minors playing the game should not be able to access any in-game marriage system.
- If a game is unable to pass the review process three times in a row, it may not be allowed to reapply.
- There will be a limit on the number of games approved each year
The SAPP will control the number of digital games that receive a license each year. Certain types of games will no longer be approved by the regulator. This will primarily impact low quality copycat games, which currently flood the market, as well as poker and mah-jong games that have been targeted in governmental enforcement over the past year. According to Niko’s tracking, 37% of games approved in 2017 were poker and mah-jong games. Games that include overly obscene or immoral content, and imperial harem games, will not receive approval. Our tracking indicates that the elimination of new poker and mah-jong games, copycat games and low quality games has led to far fewer titles approved in 2019.
- Anti-addiction systems to become standard in mobile games
A major concern in the games industry is game addiction among minors. China introduced anti-addiction policies for PC games in 2007, which limited the amount of time and money that minors could spend in-game. This policy is now being expanded to mobile games with all publishers introducing anti-addiction systems across all of their games. Tencent was the first company to do so in 2017 for its mobile game Honor of Kings. Users were required to register with their real name and ID details before they could access the game (however, in past attempts to use this method youth gamers subverted by logging in with their parents’ IDs). Tencent restricted players under the age of 18 on the amount of time and money they could spend in the game each day, and in September 2018 added measures to confirm the validity of the ID with the player with real time checking against a national citizen database provided by the Ministry of Public Security.
Other publishers are following suit, and some also offer parental control apps that can monitor a child’s gaming account. Whilst the SAPP introduced this recommendation, it did not mandate a date for compliance.
- Mini Games and HTML 5 games cannot launch without a license
Mini games and HTML5 games have been popularised in China by platforms such as WeChat. These games do not require download and are played within an application. Previously these games were exempt from licensing, but this will be changing going forward. Mini games that have already launched are required to apply for a license from the SAPP at the provincial level within 10 days of the new regulation in order to continue operation.
- Publishers must self-regulate before submitting games
Chinese game publishers are being asked to self-regulate their games with an independent editor team that will check the content of games before submitting them for approval (this policy had been in effect for many years, but not enforced). The SAPP plans to make content regulations more transparent so that these teams can provide useful guidance to developers.
- Games that promote traditional culture and history should be prioritized
Game publishers are encouraged to create titles with China’s core social values in mind, which includes games that promote traditional culture, particularly with accuracy regarding history, politics and law. This is being done in a bid to improve the quality of games in the market and expand the gaming audience. Honor of Kings and other titles have been criticised in the past for misrepresenting the lives of historical figures.
- Loot boxes must be heavily regulated
Loot boxes have always had strict regulations in China, with previous policies requiring game publishers to disclose odds on the game website. New regulations state that game publishers must provide transparency regarding loot boxes, and have a hard limit on the number of times players can open loot boxes before they are guaranteed a specific item. The new limit on the number of loot boxes that players can open is 50 per day. The goal is to keep the mechanic fun, whilst ensuring players understand what they are buying into.
- Chinese developers can submit foreign IP as a domestic title
China’s game regulators have always prioritised domestic titles over foreign titles when it comes to game approvals. In 2019 there were 1,385 domestic titles approved but only 185 import/foreign titles approved. In rare cases, a Chinese game developer may submit a game based on a foreign IP to be approved quicker in the domestic queue if the game is developed by the domestic developer, if the IP has been fully licensed to the domestic developer, and if the IP has been licensed for a global release.
Submitting a foreign game for a license
The new documents entitled ‘Examination and Approval of Publishing Video Game Publications Authorized by Overseas Copyright Owner’ and ‘Examination and Approval of Publishing Online Game Works Authorized by Overseas Copyright Owner’ were uploaded to the SAPP website at the end of April. The documents outline the process that game publishers must follow when submitting a foreign game for approval.
Before submitting the game:
- Foreign game companies must work with a domestic game publisher who will operate the game in China.
- The game being submitted for approval must have already obtained a certificate from the National Copyright Administration for the game.
- The domestic game publisher / operator must have the correct business license and ICP certificate before submitting the game.
- The domestic game publisher must ensure that changes have been made to the game so that it complies with all content regulations, monetisation regulations and protects minors online.
- The application is submitted with all relevant material to the local provincial publishing administrative department who will review it and issue a preliminary approval. The game is then submitted to the State Administration of Press and Publication who will offer the final approval.
How to submit the game:
- PC client games must submit three CDs with the game.
- Webpage games must provide access to a website where the game can be played.
- Mobile games must provide an installation package, either on a CD-ROM or through an APK that can be downloaded from a website.
- Standalone/B2P games must provide a website or platform where the game can be downloaded and specify the distribution platform and other information.
- Console games must be submitted with the game preinstalled on two different game consoles. These consoles will be returned to the publisher after review.
- The games must be consistent with the final version that will be published and all features must be enabled.
Materials to be submitted with game:
- A game demo video, no less than 10 minutes, must be submitted. This must show the healthy game advice pop up, the game titles, the main interface of the game, all character images, all accessible scenes and the gameplay systems. Games with combat must show the actual combat effects of each game. Anti-addiction systems must also be demonstrated.
- The full game script must be submitted in Simplified Chinese, including, but not limited to, system prompts, NPC conversations, task scenarios, game props, etc.
- The approval form will also need to include the date that the game was first published overseas, the countries or regions where the game is currently in operation, the number of users playing the game, the total income from the game and other information about the current iteration of the game being operated outside of China.
It can take up to 80 working days after application before a license decision is made.
China cracked down on gaming addiction among minors in November 2019
On November 5, 2019, the State Administration of Press and Publication released a notice titled ‘Notice on Preventing Addiction Among Minors in Online Games’. The notice builds on existing gaming regulations to create a stricter environment regarding youth online gamers. These new regulations are something we have expected and written about for a while, but we do not expect them to have a material impact on game publisher earnings and growth.
The notice proposes six measures:
- Implement real name identification systems across all games
Real name registration systems were first introduced into PC games in 2007 by China’s gaming regulator at the time (General Administration of Press and Publications and Ministry of Culture). Players were required to register for PC games using their ID number and if identified as a minor their account would be subject to various account level restrictions such as a limit on the amount of time they could play each day. These systems were easy to bypass with borrowed or fake ID numbers.
The new policy calls for upgraded systems to be used across both PC and mobile games, such as the real name identification system that Tencent rolled out last September, as written above. Under the new system, players register with their ID number which is then checked in real time against a national citizen database provided by the Ministry of Public Security. We note that Tencent is currently rolling out this system across all of its games to be fully compliant with these new regulations. Other game publishers are also rolling out similar systems or planning to roll out similar systems soon.
- Limit the amount of time that minors can spend in game
As with real name registration, limits on the amount of time that minors can spend in game is not new. China’s gaming regulator originally introduced time limits for minors across PC games in 2007. If a player was identified as a minor by the real name registration system, the account holder would be restricted to three hours of gameplay per day with the game operator required to limit the user’s ability to keep playing, either by stopping play or by reducing the amount of rewards that a player could receive.
The new policy goes one step further by mandating time limits across both PC and mobile games for minors. Once the real name identification system identifies a user a minor, the game operator must implement an anti-addiction system that will stop minors from playing after 1.5 hours of game time on weekdays and 3 hours during weekends and holidays. Minors should also be blocked from playing games between 10pm and 8am.
Tencent implemented its own anti-addiction system through self-regulation in 2017 and has been extending it to all of its titles in 2019 in preparation for these upcoming regulations. Under Tencent’s system, minors under 13 are limited to 1 hour of gameplay, those between 13 and 18 are limited to 2 hours of gameplay per day. Minors were also blocked from playing games between 9pm and 8am. Tencent will need to update its system in line with the new limits outlined in this notice, which we believe will be easy enough given that Tencent developed the system well in advance of these regulations. Other publishers such as NetEase have a similar system too. Publishers that do not have a current anti-addiction system in place will need to develop one as per this notice.
- Implement limits on the spending of minors in online games
Spending limits for minors has been an option in past games via parental control apps for game publishers like Tencent and NetEase, yet this is the first time there is an official policy on the subject. As per the notice, game publishers are required to block all payment options for players under the age of 8. For players between 8 and 16 years old, game publishers are required to implement a limit of RMB 50 on single transactions and RMB 200 each month. Players between 16 and 18 years old will have a limit of RMB 100 on single transactions and a limit of RMB 400 each month.
These limits are being implemented due to concern from parents regarding accidental spending by children. Stories of minors spending thousands of dollars on mobile games are common all around the world, including China. Game publishers have attempted to self-regulate in this area through parental control apps that allow parents to set spending caps. Under the new policy, game publishers will be required to implement hard caps.
- Implement age rating systems in online games
China has never had an official age rating system, unlike in the West where the ESRB and PEGI strictly regulate games and provide age guidance for all games. China has previously experimented with its own age rating systems, including one based on a color coding system, but these did not take hold.
The new policy will require game publishers to adopt an age rating system to provide guidance to parents and minors about which games are suitable and unsuitable. Game publishers will still have to abide by existing game regulations that ban excessive violence, drug use gambling and pornography. In other words, while an 18+ game will be able to include more adult content, it must still fit within the existing regulatory framework outlined by China’s online games ethics committee.
Earlier this year, The People’s Daily worked with over 30 game companies to create a new age rating system that could be implemented for both PC and mobile games. The proposal created four ratings categories: 6+, 12+, 16+ and 18+ with the proposal stating that players under six should not play games unaccompanied. It’s unclear if the SAPP will use this exact system, but we note that this is the most robust age rating system in China to date and more than 50 games have been rated using this system.
- Actively work with parents, schools and others to fulfill responsibility to minors
Game publishers will be required to work with parents and minors to help establish healthy game behaviours through education and tools that parents can utilize. This will consist of campaigns that teach people how to consume and play games without becoming addicted, strict implementation of the regulations outlined in this notice, customer service support for parents and minors as well as parental control applications that give parents additional oversight.
Companies such as Tencent and NetEase have launched parental control apps that allow parents/guardians to link their child’s account to the app and control the amount of time and money that they can spend in the app, as well as instantly block them from playing games at any times. These apps are designed to give parents more control and oversight.
- The sixth measure is for game publishers to work with local regulators to implement these changes and ensure they are complying fully with regulations.
The SAPP noted that these regulations must be implemented by December 31, 2019. Game publishers who do not comply within this time limit could risk having their licensed revoked.
Impacts of these changes
These changes will primarily impact the amount of time minors can spend in game, the amount of money they can spend in game and the types of games they can play.
We believe the impact from these changes will be limited for the following reasons.
- Minors account for a low percentage of spenders
There are approximately 170 million internet users under 19 in China, accounting for approximately 20% of total internet users. We note that the number of gamers under 19 is less than 20% of total gamers, but more importantly, they account for a much lower percentage of spending overall. Media and investors often report that minors are the main consumers of digital games, but the typical cohort is adult males between the ages of 18 and 35. This cohort spends more time in games and has higher spending power. Minors have low spending power and therefore the changes regarding spending and time limits will not have a material impact on total game spending in China.
- Self-regulation and past policies have not had an impact
As noted in the sections above, there are many new policies that are either based on old policies from the PC era or based on self-regulation activities that game publishers are currently carrying out. Real name registration systems and time limits on PC games have been active since 2007, yet the PC games industry has grown significantly in the past decade. Tencent currently includes both an anti-addiction system for minors and a digital age lock for players under age 16, in Peacekeeper Elite. Players who are 15 or younger cannot register for the game, whilst players who are between 16 and 18 can register but are subject to daily time management restrictions. It’s clear that most of the fear about impact from these new laws has already subsided.
- Other Regulations provide more risk
Whilst we do not expect these regulations to have a material impact on total game spending in China, we note that other reforms over the past year are expected to have a notable impact. China’s gaming regulator recently introduced a cap on the number of domestic and foreign games that can be approved each month. There were more than 8,500 games licensed in 2017, yet only 1,570 titles received licenses in 2019 due to the cap on game approvals and crackdown on certain genres such as poker and mah-jong games. On one hand this encourages more high-quality games to be produced, on the other it means that publishers may find themselves waiting months before they can start commercial operation of a game. The SAPP also set up an online game ethics committee to introduce stricter content policies to force games with illicit or violent content to comply with new policies. We expect these two changes to have a larger impact than the policy on minors.
- Publishers may have to shut down incompatible games
All games will need to use a modern anti-addiction system that is linked to a national citizen database provided by the Ministry of Public Security by the end of 2019. Tencent, the largest games publisher in China, has already implemented anti-addiction systems in 116 mobile games and 31 PC games. However, the company recently said that it would close down 32 games as they cannot support an anti-addiction system for technical reasons. Incompatible games could negatively impact various game publishers, but in Tencent’s case it appears most of the 32 games were at end of life already.
The implementation of these systems across both PC and mobile games is an inevitable development and an important step for China’s games industry, allowing for games to target different age demographics and become more diversified. Demand from gamers continued to remain strong in 2019 with key titles continuing to drive growth.
2019 Game Approval Totals
A total of 1,570 games were approved by China’s gaming regulator in 2019. 1,385 games were classified as domestic titles, accounting for 88.2%, whilst 185 titles were classified as import/foreign games, accounting for 11.8%.
Mobile game approvals reached 1,462, accounting for 93.1% of all games approved. There were 1,323 domestic mobile games, accounting for 90.5% of total mobile games. The number of import/foreign mobile games reached 139, accounting for 9.5% of total mobile games.
PC and Web Games approvals reached 85, accounting for 5.4% of all games approved. There were 53 domestic PC and Web Games approved in the year compared to 32 import/foreign games.
Console game approvals reached 23 in 2019, accounting for 1.5% of all games approved. 14 of the titles were classed as import/foreign titles and 9 were domestic console games. 13 games were approved on PS4, 8 on Xbox One, 1 on Switch and 1 on Nvidia Shield. This is the only category where the number of import games exceeds the number of domestic games.
Table: Domestic game approvals by month, 2019
Domestic total: In 2019 a total of 1,385 domestic games were approved, of which 1,323 were mobile games, 53 were PC and Web Games and 9 were console games. The number of games approved in the first 3 months of the year were higher than any other period, this was primarily due to the fact that the gaming regulator was working through a backlog of titles from March 2018. No new titles were approved in May 2019 as a new approval process was introduced during April that required all games to be resubmitted. This also explains why only a small number of titles were approved between June and August. We expect a run rate of 100 to 200 domestic titles to be approved each month in 2020, leading to between 1,200 and 2,400 domestic titles being approved this year.
Table: Import game approvals by month, 2019
Import/foreign total: In 2019 a total of 185 import/foreign games were approved, of which 139 were mobile games, 32 were PC and Web games and 14 were console games. The SAPP did not start approving import titles until March 2019 and we note that there were no games approved during April and December. Currently there is one batch of import games approved every month, whilst multiple batches of domestic games are approved each month. In 2020 we project a run rate of 20 to 30 import titles to be approved each month, leading to between 240 and 360 import titles being approved January-December 2020.
Appendix: The Backstory – the regulatory overhaul and game licensing freeze in 2018 and into 2019
During the 13th National People’s Congress in March 2018 it was confirmed that the State Administration of Press, Publication, Radio, Film and TV (SAPPRFT) would be disbanded and a new regulator known as the State Administration of Press and Publication (SAPP) would be formed to continue regulating the game market. The new regulators first move was to freeze the game approval process in the country as it looked to reform the approval process itself. The freeze lasted a total of nine months between April 2018 and December 2018.
During this nine-month period, the Ministry of Education issued a notice asking the SAPP to strengthen regulations and limit the amount of time that minors can play online games, investigate the implementation of an age rating system and limit the number of new games approved for distribution each month. An Online Game Ethics Committee was also established in Beijing under the guidance of the Publicity Department of the Central Committee of the Communist Party of China (CCPD). The committee is formed of game experts and scholars who will evaluate whether certain games abide by the social values that China holds dear.
Primarily, smaller developers and publishers were affected by the gaming approval freeze as they relied on short development cycles and quick releases to stay afloat. Many small developers went out of business or merged with larger publishers. Larger firms were able to offset the impact of the freeze by increasing marketing activities for existing titles or by launching new games overseas. Companies such as Tencent and NetEase also had titles approved prior to the freeze that they were able to release during the nine-month period. However, all game publishers recorded either a decline in profit or decline in growth during 2018 due to the freeze.
Gaming Approval Restart in December 2018
The SAPP restarted game approvals on December 19, 2018 with the regulator working through the backlog of titles that had formed since March 2018. 80 domestic games were approved in the first batch in December 2018 whilst the first batch of foreign games was not approved until April 2019. On February 19, 2019 the SAPP announced that it would no longer accept new game approval applications as it was currently working through a large backlog of titles and because it would be shortly introducing a new game approval process in April. We note that through April 2019, a total of 999 domestic games and 30 foreign games were approved by the regulator.