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China’s potential new gaming rules will hit smaller developers more, analyst says

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China’s National Press and Publication Administration has proposed new gaming regulations that could significantly impact the gaming industry, particularly smaller game developers. The draft rules, open for public comment until January 24, are aimed at prohibiting practices like incentivizing daily sign-ins for games, which could cause a ripple effect, potentially reducing overall online advertising revenue. Larger developers such as Tencent, NetEase, and Bilibili may fare better than smaller developers. The impact on the ad industry is also expected to be significant, with UBS estimating that online games account for about 20% of the online ad industry’s revenue.

Impact on Small Developers

According to UBS analyst Kenneth Fong, these regulations are likely to have a significant impact on smaller developers. Daily sign-ins and initial in-app purchase rewards are common strategies employed by these companies, and the proposed changes could, therefore, affect the financial performance of these companies.

Impact on Larger Developers

The impact on larger game developers such as Tencent and NetEase is predicted to be less severe due to their well-established engagement strategies and resources. For instance, while the majority of NetEase’s revenue stems from gaming, it constitutes a smaller portion of Tencent and Bilibili’s income.

Impact on the Ad Industry

The ad industry is also expected to be impacted, with UBS estimating that online games account for about 20% of the online ad industry’s revenue. The proposed regulations could result in a reduction in online advertising revenue.

Beijing’s Broader Initiative

The proposed regulations are part of a larger initiative by Beijing to restrict gameplay, especially among minors. China has become increasingly tough on video games over the years. Its first major move against the gaming sector came in 2021, when Beijing set strict playtime limits for under-18s and suspended approvals of new video games for citing gaming addiction concerns. As a result of the crackdown, 2021 and 2022 were the most difficult years on record for the Chinese gaming industry as total revenue fell.

Continued Approval of New Games

Simultaneously, the administration has announced the approval of over 100 new domestic games and 40 imported games, indicating a continued release of new titles. Analysts expect that newer games will be more impacted than older ones.It is currently challenging to estimate the full financial implications of the proposed regulations, as it is still uncertain whether they will apply only to new games or also extend to existing ones. The gaming industry and the world will be watching closely how these new regulations unfold and whether they will be revised after public comment.

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