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.

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!