China hasn’t approved any new games for release since March 28. That’s slowing down the growth of country’s biggest publisher, Tencent, and just about every other gaming company in the region. But that doesn’t mean no new games are finding their way into that massive market.
Chinese gamers are on pace to spend $37.9 billion on their hobby this year. So consumer-side demand hasn’t withered. With that much money on the line, developers are taking advantage of alternative methods like Steam to reach players.
The PC gaming platform Steam operates in China, but it does not go through the licensing process. As Niko Partners points out, Steam is technically operating illegally. But regulators have not shut the service down. That makes Steam something of a “gray market.” And for certain studios, it’s their best chance to earn revenue.
“The temporary game approval freeze has led to Chinese indie developers launching their games on the platform to target the large domestic gaming audience using Steam,” reads a Niko Partners blog post. “The Scrolls of Taiwu, an indie Wuxia game, sold over 800,000 units in less than a month while Chinese Parents, a life simulation game, became a viral hit overnight.”
Importantly, Steam works on unmodified domestic Chinese internet. You do not need a VPN or other tools to purchase or play its games. But it’s not sustainable to operate a business in the gray. The government could decide to shut down Steam at any moment. Valve, which owns and operates Steam, recognizes that threat. So it is working with Tencent competitor Perfect World to build a version of Steam that is localized and compliant with regulations and licensing.
The game-approval freeze will end eventually. It came as the result of restructuring among different government agencies. Once those groups get up and running, however, they should begin issuing new licenses at a steady pace.
For now, the hold is hurting every game company in the country — although its effect on Tencent is the most dramatic. That company has lost $200 billion in market capitalization.
Despite the panic, Tencent does have games that are approved for release in China right now. Prior to the freeze, regulators issued licenses for many games that have not yet launched in the region.
For example, Tencent has worked with developer Psyonix to bring car-soccer simulator Rocket League to the country. That game already has an approval and can launch whenever Tencent thinks it’s ready. But not every company has a similar backlog.
“To compensate for being unable to publish new games in China, they have turned their sights overseas,” reads the Niko blog. “According to App Annie, Chinese game developers grossed $600 million in the U.S. market alone — let alone other markets — during the first half of 2018.”
When will new game approvals begin?
The timeline on spooling up new licenses is fuzzy. A major problem is that one of the two major agencies responsible for the approval process still does not have a director.
“China’s State Administration of Press and Publication is the newly minted regulator tasked with game licensing — among other things,” reads the Niko blog. “Zhuang Rongwen was appointed director of SAPP in May, and departed in August 2018. The vacancy appears to be one of the primary roadblocks to resuming game licensing.”
So it’s unlikely that the government will begin approving new games until it fills that role. But it is also indicating to video game businesses that it wants to improve the process in the future. China’s State Council is planning to rework the licensing procedure for a variety of industries by November.
“The reforms promote new internet cafés, arcades, and gaming entities by centralizing and cutting the approval process time by a third,” reads the Niko blog. “The State Council also released a notice on how it plans to promote the online games industry and standardize the approval process as well as improve the approval process for game hardware.”
Essentially, the government recognizes that it seems complacent of China’s explosive gaming market, so it’s trying to do what it can to show that it wants that business to remain strong. And maybe Tencent can earn some of that $200 billion back shortly after approvals restart.