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Chinese Game Manufacturers Scramble for Market Expansion in Q4

“Although Chinese game firms would get over the regulatory crackdown, going global poses a challenge for them as they have to reshape their products to add to international tastes.”

Oct 16, 2018 by Yun Nie
Chinese Game Manufacturers Scramble for Market Expansion in Q4

As we enter the fourth quarter of 2018, Chinese game manufacturers have finally started to take action after the government's crackdown on the gaming industry.

Competing for market expansion, Chinese gaming giants including Tencent (腾讯) and NetEase (网易), released a variety of new flagship products to remain competitive in Q4; Small and medium-size firms emphasized increasing the number of new releases, prioritizing simulation/strategy games (SLG), or seeking new opportunities to weather the storm.

The storm started in August when the Chinese government intervened and froze the approval of game licenses, leading to a turmoil in the gaming industry. Not only did international game developers like Activision, Blizzard, and EA lose access to the Chinese market, but also domestic companies of all sizes, from the game powerhouse Tencent to fledgeling developers, were negatively impacted.

For example, Tencent missed out about 170 million users when it failed to receive the approval to release the mobile version of PlayerUnknown's Battlegrounds (PUBG), and PC versions of PUBG and Fortnite. The company reported its first decline in quarterly profit in nearly 13 years, as Chinese regulators hampered its cash cow - hit video games - to enter the market. Shares of Tencent slumped accordingly on August 16, wiping out USD 11.9 billion in market value.

Fortunately, instead of crashing, the harsh conditions triggered Chinese game producers’ desire for survival - they eventually found solutions based on their own situations and well-prepared to rival for market expansion in Q4 2018.

Flagship products of gaming giants

Tencent and NetEase, athough reported that the number of new games released in Q4 hit a record low in the latest two years, they still had natural strengths in developing flagship products, in terms of expert teams and plentiful resources in their business ecosystem.

Tencent, for instance, released three new games in Q4, which represented a sharp decrease compared to the figure of 10 in Q3. However, Tencent increasingly focused on “quality over quantity” - the three releases, including Quan Min Zhu Gong, Jian Xia Qing Yuan 2, and Naruto OL, were either superb massively multiplayer online games (MMO) or popular card games (CG), with a label of IP (stands for “intellectual property”), showing that they were brand new original games and nobody else can make.

With those flagship products, Tencent has seen a steadily growing business since the last quarter of 2018.

Unlike Tencent, NetEase didn’t give a hoot about IP, it eyed multiple genres, like Sandbox, simulation (SLG), survival horror and shooting games, to build its powerful kingdom. The firm released five new products in Q4, and two of them - Eve Online and World of Warships Blitz - have already constructed a solid user base, 36kr reported.

No matter the IP-oriented Tencent or the genre-based NetEase, large game manufacturers in China were able to pull through relying on their flagship products, when the government’s crackdown on game industry continued in Q4.

“Quantity is the King”: 68 developers released 157 games

Small and medium-size game producers, who had fewer resources and financial support, looked to pull themselves out of the doldrums by increasing the amount of new offering and embracing more genres.

The number of such companies’ new releases was more than twice as Tencent’s. For example, Hero Entertainment (英雄互娱) offered 7 games in Q4, covering real-time strategy (RTS), action role-playing (ARPG), MMO, third-person shooter (TPS), CG, e-sports and idle games. Snail Games (蜗牛游戏) released 8, including ARPG, SLG, MMO and etc.

According to 36kr’s research, 68 Chinese developers totaling released 157 games in Q4. Look inside at the genre, more than 20 genre were included, ranging from big MMO to tiny puzzle games. (See details in Table-1).

https://cdn.thepassage.cc/filters:quality(70)/public/image/2018/10/16/Table1.jpg

Avoid crackdown by turning to SLG

It was interesting to find that while the number of MMO, CG, RPG and other games dropped steeply in Q4, SLG raised by 2 to 16, compared to the figure of Q3. (See details in Table-2).

https://cdn.thepassage.cc/filters:quality(70)/public/image/2018/10/16/table2.jpg

One of the key drivers behind the rise was the fact that a quarter of Chinese game manufacturers stepped into SLG development, such as NetEase, Youzu Interactive (游族网络), Duoyi Network (多益网络), Snail Games, NetDragon Websoft (网龙), Rastar Games (星辉游戏) and etc.

A long lifecycle, high loan-to-value (LTV) ratio, and effective monetization made SLG a safe option for ventures that scrambled to reduce regulatory risks. NetEase’s SLG game Shuaituzhibin offered an example. After its debut in 2015, Shuaituzhibin brought NetEase a daily profit of CNY 1 to 2 million (USD 144,400 to 288,800). The amount stably grew in the next two years, breaking the “profitable less than 3 months” curse on most Chinese games, Beijing-based internet company Sohu (搜狐) commented.

Hunting for new opportunities in overseas markets

Besides the domestic market, Chinese game companies never underestimated overseas market: it would help them avoid the Chinese government's scrutiny and boost game revenue in Q4. Correspondingly, international video game distribution platform, like Steam, have caught on.

36kr reported that Chinese online game developer Hangzhou Electronic Soul Network Technology would distribute its multiplayer online battle arena (MOBA) game Genesis in Steam in Q4, seeking more opportunities in the global market.

However, it also noted that overseas market was embroiled in controversy. “Although Chinese game firms would flee regulatory crackdown, going global poses a challenge for them, as they have to reshape their products to add more international tastes.”

Yun Nie

Yun Nie is a New York-based tech reporter. She focuses on India-China financial market, global IT giants and technology-centric market trends. She can be reached at Yunnie@thepassage.cc.

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