Chinese gaming companies are increasingly cutting off projects and employees. Despite the response to regulatory conditions, it is in line with a strategic shift to overseas markets.
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Summary
Chinese gaming companies are increasingly cutting off projects and employees as license approval for new games is difficult to obtain, and existing games are losing traction.
Regulatory conditions
China’s National Press and Publication Administration (NPPA) stopped issuing new game licenses in July 2021, meaning gaming publishers had to rely on legacy games to maintain revenue streams, in turn leading to user fatigue and complaints about aggressive monetization. Although license approvals resumed in April 2022, hardcore games with complex gameplay, as well as foreign games, are unlikely to obtain licenses, while casual games face challenges in terms of bringing in significant revenue.
When the 20th CPC National Congress ended on October 22, 2022, it signaled some new strategic directions for gaming companies. The government is emphasizing the importance of advanced technology development and encouraging the application of such tech in the real economy. This might accelerate the strategic shift of some big companies from gaming publishers to becoming technology giants: namely Tencent, ByteDance, and NetEase. They are likely to leverage their gaming tech to extend to other businesses, such as AI and cloud. What’s more, gaming as an entertainment form might see further regulations on content, which would force publishers and developers to find opportunities in overseas markets.
As a result, we are likely to see overseas revenue account for half of the total revenue in the future, in line with a more frequent game release for overseas markets. This partly explains the current consistent downsizing of major gaming companies in China as they attempt to direct more financial resources to overseas markets.
Strategic shift toward overseas markets
Considering the decreasing profit from the domestic Chinese market and increasing policy hurdles, promising overseas markets with relatively low traffic acquisition costs and less competitive hardcore mobile games have become highly attractive to Chinese markets. Starting from a niche genre, Chinese gaming companies (particularly those with rich cashflow) have shown ambition in mainstream sectors. The well-received Genshin Impact and Naraka: Bladepoint on PC and console have also enhanced Chinese gaming companies’ confidence to extend to multiple platforms.
Besides investing in and acquiring foreign companies, establishing independent studios in different countries has been another step for China’s gaming publishers. This action allows them to acquire talents from well-known foreign studios to work on their own game projects. It also enables them to get involved in the local gaming supply chain directly. As such, we are likely to see more of such actions by Chinese gaming companies in overseas markets, particularly in the West and Japan.
Comparison of recent actions in China and overseas
The following are the layoffs and closures in the domestic market:
- Tencent laid off 5,000 staff in 3Q22 and will continue to make cuts throughout the rest of 2022.
- Tencent stopped 32 game titles in 2022, including Candy Crush and one Final Fantasy IP-adapted mobile game.
- Tencent reorganized studios under TiMi to redirect resources to profitable projects.
- ByteDance cut hundreds of jobs in its gaming units in 3Q22 and closed two studios under Nuverse.
- NetEase is downsizing its gaming business, which will result in the loss of 10% of its employees.
- Lilith, IGG, and 37Game are also cutting nonprofitable projects and transferring staff to other positions internally.
The following are the new establishments overseas:
- Besides investment and acquisition, Tencent has started to set up its own studios in the West to support its publishing business. The company recently opened development studios in the UK.
- NetEase established three studios in Japan and the US in 2022 to work on AAA titles for overseas console markets.
- Additionally, miHoYo is recruiting hundreds of people for its new HoYoverse headquarters in Singapore.
Appendix
Further reading
Games Market & Publisher Report Series: China – 2Q22 and 3Q22 (September 2022)
Author
Chenyu Cui, Senior Analyst, Games
