The National Press and Publication Administration of China (NPPA) published a draft guideline titled “Measures for the Administration of Online Games” on December 22, 2023. The draft regulations consolidate existing regulations into one document and introduce new clarifications and amendments across 8 chapters containing 64 articles. Approximately 10 of the 64 articles contain new or amended guidelines representing the largest regulatory changes since additional restrictions were imposed on Chinese youth gamers in September 2021. The draft is under review for the next 30 days, to allow stakeholders to provide feedback and changes to be implemented. Once the final caps are announced we will calculate the impact to the market revenue forecast, if any, for PC and mobile games, and we do not expect meaningful impact to console games revenue.

Article 18 covers excessive spending and speculation

The draft for Article 18 states that online games should not include reward mechanics that encourage users to overspend, such as providing users with additional in-game rewards by logging in each day, purchasing an in-game item for the first time, or purchasing an in-game item or service on a regular basis. This article also states that game publishers should not provide or condone the behavior of trading virtual in-game items through speculative auctions. Finally, publishers will also be required to warn users with a pop-up if they start to spend too much and set a cap on in-game spending which is outlined in the terms of service. We note that specific caps are not outlined in the current draft and that the impact of these draft regulations will be determined by how certain articles are defined, revised, and standardized during the 1-month feedback period.

The largest potential impact would come from a spending cap on users, which would primarily impact high ARPU games. We would not expect games such as Honor of Kings (Tencent) and Eggy Party (NetEase) to be impacted as they are high DAU, low ARPU games. According to our 2023 China Games Market Reports, 26% of mobile gamers in China are payers, with 2.5% being high spenders (over RMB 300 or $42 monthly). Likewise, the ban on additional rewards for daily logins and ongoing purchases, while less detrimental, would require publishers to find an alternative way to onboard and retain users given this is a key motivator for players returning.

How the industry and government is responding

Niko Partners’ research shows that broad sweeping regulations have previously been accompanied by a freeze on video game approvals (ISBNs) as the government works to create a final guideline and ensure compliance from publishers. This happened in 2018 and then again in 2021. However, the recent draft regulation announcement was followed by the approval of 40 import games and 105 domestic games. This was the highest number of approvals in a single batch for both import and domestic games in 2023, and a positive sign that the government is continuing to approve new titles.

We believe the government is aiming to promote a shift to high quality development with these new regulations and address user concerns and poor business practices around refunds, beta tests, loot boxes and pay to win mechanics. This was further evidenced by the release of a statement on December 23 from the NPPA that stated as much and acknowledged that it will listen to feedback from the industry on article 18 and further revise the draft. Reuters also reported that Feng Shixin, the director of the Publishing Bureau of the Central Propaganda Department in China which oversees the NPPA, has been removed from his position. Although it’s unclear if this removal is directly related.

Looking ahead to the final draft

A new revision is expected to be published after the 30-day review period which will include changes based on feedback from the industry. Niko Partners analysis shows that China has been moving towards a more comprehensive set of video game industry policies since earlier this year. We expect the new revisions to address some of the concerns around article 18 and clearly define how loot boxes, daily incentives and spending caps should be implemented, assuming the section is not removed in its entirety. While we’re waiting to see what the final draft looks like, our analysis of the current draft shows games that heavily rely on loot boxes to monetize, have a large number of high spenders (2.5% of mobile gamers are high spenders), or are reliant on ongoing incentives for user acquisition, will see the largest negative impact.

We’ll closely follow the development of the draft regulations. Stay tuned for future updates!

We have been interviewed by multiple leading news organizations on this topic, as we are regarded as subject matter experts. Please see these links to our recent press coverage:

Bloomberg Interview: https://www.youtube.com/watch?v=nLQsuwOLyxs

Bloomberg Interview: https://www.bloomberg.com/news/videos/2023-12-22/niko-partners-ceo-on-impact-of-china-s-new-gaming-curbs-video

VentureBeat: https://venturebeat.com/games/chinas-regulators-restrict-game-monetization-sending-chinese-game-stocks-down/

Forbes: https://www.forbes.com/sites/siladityaray/2023/12/22/shares-of-tencent-and-netease-nosedive-after-china-proposes-new-online-gaming-restrictions/?sh=12c2343a62dc

Wall Street Journal: https://www.wsj.com/tech/chinese-game-stocks-fall-after-china-proposes-online-game-regulations-9f7da96c

PocketGamer: https://www.pocketgamer.biz/news/83113/chinese-game-licence-approvals-surpassed-1000-in-2023-in-return-to-form/

 

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Photo by Freeman Zhou on Unsplash.