Winter “is coming” for China’s mobile gamers, but there are signs of spring in the air for game developers. After a nine-month regulatory impasse, they have started to get approvals again from a new ministry tasked with implementing more controls over gaming content.
One of the biggest beneficiaries could be Tencent, the sole distributor in China for a new game based on the final series of Game of Thrones, which is due for release in April to tie in with the final instalment of the TV series.
Tencent’s share price took a battering last year because of concerns about the prospects for its gaming division, which contributes a large share of its earnings. Until the middle of January it was still unclear whether it was back in favour, after applications from the social media giant were overlooked in the first three rounds of new approvals since the initial freeze came to an end.
Many wondered whether it was still being punished by the government, which spent much of 2017 and 2018 getting increasingly concerned about the effects of gaming addiction on children. As we wrote in WiC390, state media outlets had denounced the largest of the developers for failing to monitor who was playing their games and for how long. The People’s Liberation Army (PLA) even penned an editorial warning that gaming was undermining the nation’s “combat capabilities”.
The government’s displeasure culminated in an abrupt cessation of new game approvals in March 2018 and the creation of a new ministry under the all-powerful Propaganda Department.
The previous ministry approved 9,384 new games in 2017 and another 1,927 over the first three months of 2018. But from then until the end of the year there were just 164 approvals – and none at all for Tencent or rival NetEase.
Both firms finally earned new approvals in mid-January as part of a fourth round of applications since December, and then again this week in a fifth batch. Opinions differ on why they weren’t included in the first three. Some say approvals came back based on the order that applications were submitted and that neither Tencent nor NetEase were at the top of the list. Others think the regulator decided to prioritise smaller developers first, knowing that they were struggling to survive after the nine-month clampdown.
Either way, when Tencent did get the green light the impact on the stock price was swift and its shares have risen 8.7% in the first 29 days of 2019, compared to the Hang Seng Index’s 6.44% jump.
Tencent is now valued at its historical mean of about 28 times forward earnings and most analysts have moved back to a buy recommendation. All the same, they caution that the company might not get as many approvals for new games as it did in the past, especially for some of the formats that have proved the most popular (and addictive) with customers. They also point out that sales cycles for the most favoured titles are getting shorter.
Tencent has tried to combat this by broadening its reach into other markets. Gamma Data, a research agency in the gaming sector, says that overseas revenues from China-developed games grew 23% to $6.9 billion last year. Domestic sales grew 15.4% to $19.94 billion, compared to 41.7% growth in 2017.
Tencent is also doing more to respond to government concerns. In October it began trialling facial recognition software to stop underage players and the plan is to roll this out nationally this year. Indeed, the media is already reporting that enterprising children are fighting back at the access controls by borrowing the IDs of older relatives and scanning their faces with their smartphones while they sleep. But Tencent says it will combat this ploy by using AI to monitor usage patterns and pick out when it is more likely a minor is playing (rather than grandma).
Some netizens have credited the company for its efforts. “Tencent’s policing is not just the strictest in the country, but the world,” wrote one admirer. But others are less charitable, pointing out that it only acted when it was forced to. “Tencent is a company without a conscience,” concluded one of the less-impressed contributors.
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