Lawful Neutral: What’s China really worth to the Western gaming industry?

    
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You know what we never talk about these days? China and video games! We should do that more. For example, did you know that as far back as 2011, Chinese “Re-education through Labor” prisons included 12-hour shifts for prisoners grinding gold in various online video games — and that it was actually more profitable than the manufactured goods?

This little tidbit is only tangentially related to our discussion today, but it’s just one more reason to avoid buying gold from a third party – you might just be supporting an oppressive regime that forces prisoners to grind out gold or helping someone launder stolen money.

Anyway, in the wake of all the last few weeks of Blizzard stomping around in a cow-pie like a kid in a mud puddle, I was curious as to what the financial opportunity in the Chinese market actually looks like. People keep citing “all the money” in China as justification for Blizzard’s actions as if the value there were self-evident, so it seemed like a good topic to dig into. With Blizzard doing its best to stay on Beijing’s good side, what exactly is it that it’s hoping to tap into — and will it work?

Welcome to this week’s Lawful Neutral and yet another Blizzard-focused China article because I’m pretty sure I saw the horse’s leg twitch. Can’t be too sure with these things.

What Activision-Blizzard expects

I want to start by adding on to the list of things I’m not, which currently contains things like “witty,” “charming,” and “lawyer.” I need to add “economist.” Everything presented here is my opinion backed by evidence, but my interpretations shouldn’t be treated as stock advice.

We’ve known for a while that there’s a metric ton of money being made on video games in China, which is why Activision-Blizzard is willing to burn bridges with non-Chinese audiences for a just a chance at some of the money. But what does a “metric ton” look like?

In 2018, China generated $37.9 billion in revenue from video games, making it the single biggest video game market in the world. China also has more than 619.5 million players. $23B of that revenue was spent on mobile games, $14.4B on PC games, and a measly $600M on console games. Across the entire Chinese market, the average revenue per user (ARPU) was $61.18.

Compare that with the US gaming market in 2018: The US generated $30.4B in revenue across 178.7M players. Across the US gaming market, the ARPU was $170.12. Europe, Africa, and the Middle East generated a combined revenue of $28.7B.

Mobile outpaced PC game revenue and players in 2018 in both the US and China (by more than double – $70B worldwide for mobile compared to $32.9B for PC), and it’s expected to continue to outpace PC gaming revenue for the forecast-able future. So from a purely monetary perspective, investing in a mobile game – say, like Diablo: Immortal – makes good financial sense because it will appeal to the largest segment of the gaming market and the one that is expected to grow.

It’s also worth noting that at this point, console revenue also outpaced PC revenue; console games generated $34.6B worldwide.

What companies like Activision-Blizzard are counting on is getting greater access to that Chinese market of players and and to raise their ARPU a bit in the process, thereby making money hand over fist. As we’ve covered before, currently Blizzard counts 12% of its total revenue from Asia and Oceania, with only a portion of that from mainland China, so it sees this market as having a lot of potential revenue.

Another reason that Activision-Blizzard is all hot and bothered by China? The company’s made huge investments into esports, and esports — both player and watching — are huge. It’s even possible now to major in esports at some universities in China. If Activision-Blizzard can crack the esports nut over there (and if the bubble doesn’t burst before that happens), it could also be huge for the company.

How much money is really there?

But how much money is there left to grab? Likely not as much as companies like Blizzard-Activision hope. Of that $37.9B in revenue mentioned above, only about 25% heads to international companies, and only about 5% of the 37.9B in revenue goes to American companies. That means the overwhelming majority of the revenue generated in China, stays in China.

So while it looks like there’s revenue a-plenty available, it’s actually proved incredibly difficult to make any headway into the country to actually get at any of that revenue. The fact that the Chinese gaming market is so insular, combined with the fact that there’s never been a purely Chinese game that’s seen worldwide success, suggests that gaming cultures are very different between China and the rest of the world. Continually trying to adapt Western/Japanese/Korean games to the Chinese market is likely to continue to generate modest profits without ever “cracking the nut” that China represents.

As it turns out, developing games with a “China First” mentality and then adapting to the rest of the world is also a losing proposition. Chinese gamers seem to be much more forgiving of pay-to-win mechanics and microtransactions (though unsurprisingly tough on gambleboxes), making ports outside of China challenging. We’ve seen this time and time again ourselves with Korean MMORPG ports that come over with pay-to-win mechanics and really suffer in the western markets as a result. Even outside of MMOs, it’s not gone over well. Hey, remember Tencent’s Arena of Valor? Yeah, exactly.

Now consider the fact that Chinese gamers tend to be relatively transient with their games – not staying with a particular title for very long. As a market, they follow the “locust” tendency of flitting from game to game pretty quickly. It would make developing something like Diablo: Immortal risky if the gamers move on quicker than expected.

We should also take a moment to consider that the Chinese government is also heavily regulating it domestic game industry; it’s put age restrictions on the amount of time children of certain ages can play games and instituted a curfew such that children under 18 are prevented from playing games after 9 p.m. Additionally, “excessive play time” can have a negative impact on the Chinese gamer’s social credit score. Given its political obsession with “gaming addiction,” its legendarily strict games approval process, and the requirement that Western companies have Chinese partners before publishing, China poses regulatory problems that make breaching the market a tricky proposition.

Money

Will it pay off?

Clearly Blizzard thinks it will as it’s currently doubling down on alienating the rest of the world in order to audition for Beijing’s favor. My assessment is that it could pay off in the end, but it’s unlikely. China as a whole is very insular and moving more that way, not less. Any attempts by Blizzard to create “China First” will likely cause more problems for it with the rest of the world, and even that wouldn’t provide any guarantees of middle-term success in China (or even short-term success, for that matter).

Further regulation of the games in China will in all likelihood cause an eventual slowdown in overall revenue generation (though it will still probably be substantial – just witness Tencent’s budget changes following the big freeze last year), and further censorship from Beijing will make it harder and harder for non-Chinese games to secure much of a foothold in the country. My assessment is that pandering to China is assuming a lot of risk set against changing rules for potential, but not probable, gains.

I’ll leave you with one last note: The US gaming market is now expected to beat Chinese market revenue in 2019.

Every other week, Andy McAdams braves the swarms of buzzwords and esoteric legalese of the genre to bring you Massively OP’s Lawful Neutral column, an in-depth analysis of the legal and business issues facing MMOs. Have a topic you want to see covered? Shoot him an email!

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kajidourden
Reader
kajidourden

The problem with China in general; as it applies to absolutely everything, is that you cannot beat them unless you are willing to stoop to their level.

The US cannot compete with China and will never be able to in any way other than militarily. When the CCP can do things like manipulate their currency in order to twist the knife in the trade war it makes it impossible to beat them unless you’re willing to do something of equal or greater impact. By the very nature of our government, that won’t happen though.

Reader
Aiun Tanks

Nevermind that the Chinese government could – overnight – decide to flick the killswitch on any company it chooses, for whatever arbitrary reasons it chooses (up to and including reacting to a tweet from the orange-idiot-in-chief), and there would be literally ZERO legal recourse for the banished company. Overnight. On a whim. Blizzard are bending over backwards, pissing off the rest of us, to attempt to please a fickle master who neither has any love for them, nor has promised it.

The other frustrating part of the note about mobile revenue to PC revenue is market share. Chinese players aren’t the only migratory locusts in that space. There might be more money in that market, but how much of it can ever really be held in one hand?

Reader
Khrome

It’s only been mentioned in passing, and only very lightly implied in the article, but i think people need to remember that the Chinese market and the Western market are completely different demographics.

Trying to make games for both is like trying to make tampons for both women and men and expecting to make the same amount of money from both groups. I hope i don’t have to explain how ridiculous that is, but it’s exactly what’s happening with video games.

Another issue is the ownership of the games. When developing a game which will work in China, you have two choices:

1) You submit to the rule of law in China and indirectly open the door to a hell of a lot of investment from there. It means more revenue, but over time you will lose the company to a majority of Chinese investors.

2) You don’t get Chinese investment and don’t accept Chinese control. Copyright law over there is viewed as one big joke, so those same investors will simply copy your product instead.

Either way, you lose control of your product, and eventually you lose control of Chinese revenue. In both cases, well, investing in China from the outside in is simply pointless.

Until Chinese regulations change or they take international copyright more seriously, doing anything with the Chinese market while pretending that you can still serve the Western one is an exercise in frustration and futility.

kjempff
Reader
kjempff

Pretty much sums up what a lot of western pc gamers think when it comes to pc game developers changing focus to mobile.
It goes like this.. So you might make a short but high return on a mobile title, but on a quality pc title you will get a steady return for years. And in that chain of thought, why ? why why ? Logically it would be just as profitable to keep making good pc games.
From an outsider/gamer perspective it looks like only those hit mobile games (aka those first with something new, not the 1000 bandwagon clones) will have those high return numbers they try to get…and only 1 in 1000 get that hit title.
Well, from an observers perspective….

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Adam Russell

People typically have short memories when it comes to boycotts.

Reader
Fervor Bliss

When you do business with a group that will sell prisoners organs, do not expect sympathy when the deal goes awry.

Reader
G0dl355

Comments like these got me banned from many a sub reddit. Nothing pisses people off more than the truth.

Reader
Arktouros

Again this topic is pretty simple when you get down to it.

Not everyone in the United States is some unified front where if you upset us you lose our business. Some people exercise their freedom and choose to do that. Other people exercise their freedom and will continue to do business with those companies regardless. That’s the inherent thing about freedom, people are free to choose. Yea it’s pretty great, but people are free to choose things you might not like.

When you compare this to a totalitarian government who can unilaterally deny access to their entire country there is no possibility for choice in that matter. They have all the power by design and their people have none.

Yes people are going to be upset at Blizzard in the US. Liberty Prime memes and such and such. However will enough be upset to actually hurt their bottom line when push comes to shove? That’s something we’re not going to see for a while (mostly because WOW Classic is going to boost their numbers even through this controversy in the Quarterly). Meanwhile if they go against China they lose all of their investment into titles (Look how we received Diablo Immortal) and any potential revenue from there current or projected in the future.

Reader
Bannex

I’m really hoping that at the end of all this we’ll stop seeing Wukong in every fucking video game ever.

Staff
Mia DeSanzo

–Checks the horse for a pulse–
–Gets out a bigger stick to make sure this time–

I think it is a sign of the world’s sickness that money means so much and principles mean so little.

Reader
Raimo Kangasniemi

It’s also the existing and possible future investments from China to ‘Western’ companies that drive ‘money before morals’ behaviour, not just the existing market in China.

Some of which might not be that transparent, but via shell companies etc.