China’s video game makers are coming in cold as crackdowns ease

HONG KONG (Reuters) – China’s end to a massive crackdown on the video game market is expected to revive the battered industry this year, but remaining restrictions on some content and economic headwinds will limit the extent of the recovery.

Severe restrictions imposed by Beijing in 2021 have laid waste to the once thriving industry, slashing more than half the market value of sector leaders such as Tencent Holdings. (0700.HK) and NetEase Inc (9999.HK) The world’s largest gaming market shrank for the first time.

Shares of Tencent, the world’s largest game company, and NetEase soared this week after China’s video game regulator awarded the first games licenses in 2023, the latest sign that the campaign has come to an end.

Analysts expect China to approve between 800 and 900 games this year, possibly more, topping 512 games released in 2022 and 755 in 2022. Between August 2021 and March 2022, no titles were approved.

“We believe the approvals indicate a more benign regulatory environment for the games industry in China,” JPMorgan analysts wrote in a note on Wednesday. “With the rich supply of games, we are more positive about the overall growth of the online game market during the Chinese New Year, which is a traditionally strong season for the online game market in China.”

The campaign was aimed at reducing gaming addiction among youth and purging content that had not been approved by the government, with companies requesting removal of content deemed violent, believed to celebrate wealth or promote celebrity worship.

That caused China’s game sales to drop more than 10% to 269.5 billion yuan ($40.1 billion) in 2022, the first decline since figures became available in 2003, according to a report by CNG, an industry data firm backed by China. the government.

In November last year, Tencent, the world’s largest game company, announced that its domestic game revenue shrank by 7% in the third quarter. Total gaming revenue decreased by 4.45%.

Shares of Tencent, China’s most valuable company, fell 24.7% in 2022 but are up 21% so far this year, recouping nearly all of last year’s losses. Hong Kong stock NetEase, which fell 27.3% in 2022, is up 21.4% this year.

Tencent and NetEase did not respond to a request for comment.

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It’s also hopeful for investors to agree to bigger budgets for games now, a sign that publishers are willing to invest more in improving the regulatory environment.

Since December, licenses such as Tencent’s Valorant, NetEase’s Justice Mobile, and miHoYo’s Honkai: Star Rail have been awarded, the largest ticketing items since August 2021.

In December, Chinese regulators approved 44 foreign games, the first to be given the green light in 18 months and widely seen as the last regulatory hurdle to clear, inspiring hope for foreign developers to return to China again.

If approval ads return to normal, City analysts said, it’s likely that more games will be approved than their current projection of between 800 and 900 licenses.

“Among game studios, we see higher upside risks to Tencent’s game revenue recovery,” they added.

However, some of Beijing’s regulatory restrictions are here to stay. Most notably, in September 2021, China banned under-18s from playing games for more than three hours per week, a rule that forced Tencent and its peers to abandon targeting young gamers.

And Tencent said in November that the total time spent by people under the age of 18 on its games fell by 92%.

For the upcoming Lunar New Year holiday, Tencent and NetEase have implemented rules to limit gaming for those under 18 years of age beyond the legally permitted hours, in line with recent practices on other major holidays.

Strict censorship of game content will also remain, preventing popular but violent games like Grand Theft Auto from entering China.

Whether the gaming market can get back into shape also depends on the recovery of the Chinese economy, which has been hit by a surge in COVID cases.

The unprecedented drop in game sales last year was also likely, Citi analysts said, because mobile game players remain “more price sensitive in discretionary entertainment spending amid a weak macroeconomic environment.”

However, the data shows that the total number of gamers in China is still stable, decreasing by only 0.33% in 2022 from 2021 to 664 million.

“In 2023, online gaming in China will return to growth, but it (will not be) huge at all,” said Chenyu Cui, an analyst at research firm Omdia. “The growth will be slow and incremental.”

Reporting by Josh Yee; Editing by Anne Marie Rountree and Sam Holmes

Our standards: Thomson Reuters Trust Principles.

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