When we think of giants in the gaming industry, some companies that come to mind may be Nintendo, Sony, Activision Blizzard, Bandai Namco (Tekken), Sega (Yakuza, Sonic), and EA. Many of these studios are the ones behind the Triple-A games (the rough games equivalent of “blockbuster” movies) that have, for a long time, dominated the western market. 

Interestingly, none of the top companies nor games that most of the western world is familiar with come from China — even though the Chinese gaming market is huge, and game developers battle fiercely to gain entry and capture the Chinese market. 

However, this could be positioned to change: although developing and propagating a game remains difficult in China due to government regulations and bottlenecks, a COVID-boosted international surge in mobile gaming, an increasing acceptance of microtransactions, continued Chinese influence in global game development, and the skilled engineers and designers powering China’s tech surge may mean that China won’t just be a key consumer in the western gaming market, but a competitive producer as well.

Why should we care about the gaming industry?

Video games have become a permanent fixture in modern society. They play a significant role in pop culture (a lá Farmville to Fortnite) and in daily life, with streaming platforms and e-sport organizations further transforming the sector into one of the most successful parts of the entertainment industry today. 

The industry produced $120 billion in revenue in 2019 and is only growing, with estimates of $159.3 billion in revenue in 2020, a 9.3% year-over-year growth. It has also done especially well in quarantine. For instance, the Solactive Video Games & Esports Index, an index that tracks several prominent gaming and esports companies, has gained 77% since March, compared to Netflix’s 44%. Average returns on video game ETFs have also totaled about 56% during quarantine, beating out returns on other tech stocks like cloud-computing ETFs (which earned 49%). 

Video gaming is a burgeoning industry that more and more investors will likely look into, especially as the younger generation of financial professionals will be much more familiar with the terminology, key players, and workings of this sector.

What is China’s role in this market?

China is a coveted consumer market for the gaming industry. Video game revenue from China was $33.1 billion in 2019, accounting for nearly a third of the industry’s global revenue. This year, it generated a revenue of $41 billion USD, overtaking the U.S. to be the largest gaming market in the world.

China is actually a large producer of games as well, with some of the biggest game companies in the world, such as Tencent and NetEase. These studios have not just been developing and publishing games, but have bought other studios, IPs, and stock in foreign game companies as well. 

The main reason why China isn’t seen as a powerhouse in game development yet may be that China hasn’t successfully exported their games to the rest of the world. 

Part 1: Game of Clones

First, Chinese game development has a notorious association with piracy and cloning. Established games are copied with clearly stolen assets and ideas, and sometimes incredibly quickly. Supercell’s blockbuster mobile game Clash Royale was replicated in China in just under a week, for example. The piracy of existing IP makes it difficult for these games to be exported (and has led to lawsuits once the original developers notice), and so, most of these games are consumed within China only. 

Loose copyright protections contribute to how rampant the piracy is, but a large reason for why the pirating happens at all may lie in the Chinese government’s regulation of media content. Domestic and international game developers need to gain government approval before their games can be officially published in China, and ones that contain pornography, gambling, violence, or other content deemed inappropriate are usually outright banned unless the studio will adjust their content. 

This means that for Western developers, the launch of their game in the Chinese market is usually delayed or impossible. In the interim, Chinese consumers either have to wait for the games they want to play, or never even learn about the original version. Cloned games exploit this imbalance of demand and availability. 

Even domestic game companies in China have leaned into this vacuum. In 2019, Tencent shut down its test version of PlayerUnknown’s Battlegrounds (PUBG), and shifted players to a clone that was more patriotic and was allowed to profit from in-app purchases. Tencent is a primary shareholder in PUBG’s parent company, and had waited over a year to get government approval to earn money off of the game. In the face of continued red tape, however, making their own version of the game with a different name and socialist overtones seemed to be their most attractive option for making profit.

Part 2: Different (but Converging!) Tastes

Another reason why Chinese games haven’t made it big in the Western world yet is that there are differences in player preferences and game design. For instance, Chinese gamers often prefer free-to-play models more than their Western counterparts. They are also more open to microtransactions and pay-to-win models. Finally, mobile games reign in China, as compared to the popularity of consoles in the U.S. and other countries. 

However, these differences are becoming less stark. Quick-play and mobile games have become more popular over the years, with early pioneers like Angry Birds and Candy Crush hooking millions of new players to their phones. This has only been amplified in quarantine, as the lockdown powered a mobile gaming boom: mobile games are set to top $100 billion this year in revenue, more than triple the combined earnings of current leading console titles (Playstation, Nintendo Switch, Xbox).

Microtransactions have also become typical for these games: a quick scroll through the Games category of the App store will show that virtually every game sports the label that it features “in-app purchases.” Popular indie games like Fortnite and Hearthstone have also helped to normalize the idea of spending real money for some in-game perks.

Finally, the influence of Chinese studios in international game production has been steadily increasing, with the most prominent example being Tencent. The conglomerate holds shares in massively popular global games like Overwatch, World of Warcraft, Fortnite, PUBG, GTA, and Clash of Clans. One of its biggest holdings is League of Legends, one of the most popular desktop games in the world, which Tencent bought completely in 2011. Since then, League has introduced a loot-box system, which further incentivizes in-game purchases. It is also developing a mobile version of the game, after Tencent created its own mobile competitor when League’s developers originally refused. 

Perhaps it’s already beginning: earlier this month, Genshin Impact released on global app stores, a monetized gatcha RPG (Role-Playing Game) that has drawn comparisons to Zelda: Breath of the Wild in its world design, and to Avatar the Last Airbender in its element-based combat. It has been one of the biggest global launches for a Chinese game publisher, skyrocketing to become the 3rd most downloaded RPG in the US App Store. It is also currently among the top 20 most downloaded free games in the App Store, and has reportedly earned its publishing studio, MiHoYo, over $100 million so far. 

What’s going to happen next?

While figures have come out on Genshin Impact’s earnings, and it seems to enjoy a good amount of popularity in the global market (being the #15 most watched game on Twitch as of this writing), it remains to be seen what actual download and player number will be by the end of 2020. 

Other trends and news to keep an eye on would be the release of Black Myth: Wukong, an ambitious project that, if successful, could potentially be the first AAA title from China. 

It remains to be seen if China’s potential for game development will be fully realized, but multiple market trends seem to support the increasing success of games from the country — and consumers and investors alike should be ready to play!

Thumbnail Image of Tencent games: TheDrum.com