Chinese mobile gaming is more distribution than content

With the COVID-19 virus burdening countless industries, the mobile gaming operators are witnessing a spike is user activity as more find themselves quarantined at home. Tencent, a Chinese technology conglomerate known for its gaming and entertainment content, reported Rmb 2 billion in sales on January 24, the eve of the Chinese Spring Festival and the day following Beijing’s decision to place lockdown and travel restrictions across the Hubei province.

“It is a big market,” Hendrick Sin, co-founder and vice-chairman of CMGE Technology, a mobile gaming company that invests into smaller game developers and supports outsource game developing teams, told FinanceAsia.

With the virtual world helping distract the pandemic reality, sales of the top 60 games on the Apple app store doubled during the first week of Chinese New Year, according to the data website iiMedia. Investment analysts are estimating the sales for leading gaming companies could grow over 50% in the first quarter.

The industry reshuffle

“This year can be a turning point for Chinese mobile gaming industry,” according to Sin. “When people spend more time on games, they are expecting refined games which means beautiful scenes or interesting stories. The time for simple games to attract traffic volume has passed.”

But like other companies that provide online services and target those quarantined at home, the challenge is transitioning these users into paying customers. In China, mobile games are normally free, but revenues are generated when virtual items that enhance the user experience, are sold to players.

With existing game companies building on franchised and legacy story lines, the player acquisition costs are rising. Coupled with game development costs and associated marketing fees, smaller and new players are at a disadvantage. Regulation overhang is also an invincible and unpredictable burden.

“In 2018, there was a sudden suspension in the Chinese gaming industry,” one Hong Kong-based game developer told FinanceAsia. “A lot of small companies didn’t survive at that time. It also hurts the supply chain of gaming production. Graphic designer and scriptwriter all became expensive now.”

For the smaller gaming companies, becoming a vendor for larger companies was one survival strategy, but not necessarily sustainable. Distributors like Tencent often tenders several vendors to create similar games and compete to be on the conglomerate’s platform.

The cheat code

The bargaining power is incrementally moving towards game distributors over developers. As smart-phone app stores Huawei, Xiaomi, Oppo compete with software companies like Tencent and Alibaba, partnering on the right platform not only positions your game to the biggest market, but also provides traffic and volume data that is a valuable commodity for any software developers.

“There are a lot of good games out there,” Sin said. “But they are anonymous because they don’t have the support from distributors. The channel is really important for mobile games.”

Distributor's clout is becoming increasingly important, showing that better channels have an advantage over strong content. CMGE Technologies, which reported 310 million registered users in 2019, a 37% increase from the year before, used an external channel.

“We will let ByteDance ($90 billion the start-up behind TikTok) distribute two of our mobile games this year in 2020,” Sin explains. “ByteDance guaranteed a minimum sale of Rmb1.6 billion for two games as they want to build their presence in the industry.”

Who plays for regulation

As many Chinese companies learn, falling out of favour with regulators creates costly circumstances. Back in March 2018 when Beijing voiced support for curbing excess gaming, the overhang weighed on Tencent's outlook, dragging the share price more than 40% lower by the end of the year.

Although central authorities have alleviated their stance, the biggest challenge occurs when home quarantine ends. Even as game downloads have risen, the policy direction is expected to tighten again in June 2020.

Plague Inc, a poorly timed virus pandemic game, was removed from the Apple app store in China, with Beijing asking that all games requiring license approval from the state, a new requirement.

Beijing’s political decision may effectively curb the market size, creating an advantage for Tencent and Netease which together control 75% of the market, and reinforcing their bargaining power.

Small game developers are possibly thinking about abandoning the Chinese market altogether. “For small developers, it is almost impossible to get a license,” the Hong Kong-based game developer told FinanceAsia earlier. “There will only be big players in the market soon because it is so hard for us to survive.”