China games revenue projections revised downward due to China’s game approval freeze

Niko Partners has published an updated market model and 5-year forecast through 2022 for China’s PC Online and Mobile games market in Mainland China. 2018 games revenue has been adjusted downwards due to the ongoing temporary game approval freeze that started in April 2018. We now project total games revenue in China to reach $30.8 billion in 2018, up 11% YoY, compared to our original projection of $31.8 billion, which would have been 15% YoY increase.

Earnings from Tencent and NetEase, which were released after we published our update, back up our findings. Despite the temporary game approval freeze, combined gaming revenue from Tencent and NetEase for the first 9 months of 2018 was up 9.4% YoY. In line with our projected 11% increase in games revenue for the whole industry for the full year.

More specifically, we project that mobile games revenue will reach $15.6 billion in 2018, down from our original projection of $16 billion but still up 28% YoY. Tencent and NetEase’s combined mobile games revenue for the first 9 months of 2018 grew over 20% YoY. In line with our increase for the full year. For PC games we project total revenue of $15.2 billion in 2018, down from our original projection of $15.6 billion and down 2.1% YoY. Tencent and NetEase’s combined PC games revenue for the first 9 months of 2018 was also down by 5%.

We continue to see strong demand for mobile games in 2018 as legacy titles such as Honor of Kings have seen paying users and revenue increase this year. Tencent and NetEase have also launched more than 30 brand new mobile games this year, which were approved prior to the temporary game approval freeze, with many of them debuting in the iOS top ten grossing chart. Whilst the temporary game approval freeze has certainly had an impact on growth rates this year, we project that total mobile games revenue in mainland China will reach $24.1 billion in 2022.

PC gaming will see a slight decline in revenue this year due to the temporary game approval freeze. Brand new games have been unable to launch and monetise whilst players of legacy titles continue to shift more time to mobile games. We expect that PC game publishers will continue to feel pressure on their profit margins through 2020 but we do forecast that PC games revenue will see a slight rebound and reach $15.5 billion in 2022, driven by new game launches, esports and buy to play games.

The ban on new licenses is likely to persist until the restructuring of the newly formed agencies is complete. We anticipate this to be done by the end of 2018, but the agencies do have until April 2019 by law. Other policies announced recently, intended to protect youth gamers particularly ages 12 and under, should not have meaningful impact on revenue. 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 titles launched during the current period (if they had received a license prior to April 2018).