‘Game over’ in China as Beijing halts approvals of video game licenses

Bloomberg

China’s regulators have frozen approvals of game licenses amid a government shake-up, according to people familiar with the matter, throwing the world’s biggest gaming market into disarray.

The halt follows a restructuring of power among departments, said the people, who asked not to be named because they don’t have approval to discuss the issue publicly. Regulators have also been concerned about violence and gambling in some games, according to one person. Online, mobile and console games have all been affected.

The whole sector has been rattled as gaming companies from online giant Tencent Holdings Ltd. to small developers await approvals. Tencent, the country’s gaming and social media goliath, has shed more than $160 billion in market value since its January peak, while smaller players complain they are struggling to survive without new titles.

Tencent confirmed there has been a temporary suspension as it reported earnings Wednesday. Its profit fell for the first time in at least a decade — results it said were due in part to its inability to profit from its most popular games including the hit “PlayerUnknown’s Battlegrounds” (PUBG).

“At this point in time, we don’t have visibility on when exactly the official approval will start yet,” said President Martin Lau on a conference call with investors. “”We do believe it’s not a matter of whether these games will be approved for monetization, but a matter of when.”

China has one of the world’s most stringent approval processes for video games, an extension of Beijing’s obsession with maintaining control over online content so it can root out dissent and other ideas it considers undesirable, from sex to graphic violence. But its massive smartphone and web population also makes it the world’s largest gaming market with an estimated $37.9 billion in revenue, according to research by Newzoo.

“For new game approvals, there will continue to be a drag,” said Alicia Yap, Citigroup Global Markets’s head of pan-Asia internet research. “If they previously didn’t get an approval, it seems that there will continue to be a hold on that.”

The ministries didn’t respond to faxed requests for comment.

While certain companies have disclosed delays in getting approval for their games, the industrywide freeze has not been made public before. Two departments oversee the process. The National Radio and Television Administration has not granted licenses for about four months, while the Ministry of Culture and Tourism has made game registration procedures more stringent, the people said. Both agencies have gone through personnel changes and restructurings of responsibilities following a shake-up earlier this year as President Xi Jinping consolidated power.

With the leadership transition, bureaucrats have been reluctant to take risks or initiate new steps that could become controversial. The gaming industry regularly draws scrutiny for addiction, violence and even violating core socialist values.

Dozens of companies may be affected. Tencent and Netease Inc. are among the biggest game distributors in China, and they license titles from some of the world’s biggest developers, including Activision Blizzard Inc. and Electronic Arts Inc. in the U.S. and Capcom Co. in Japan. Nexon Co. gets 45 percent of its revenue from Tencent, according to data compiled by Bloomberg.

“It’s quite a big mess,” said Serkan Toto, CEO of Tokyo-based game industry consultancy Kantan Games Inc. “The big message is, if it can happen to Tencent, it can happen to anyone.”

Japanese game makers fell sharply after Bloomberg reported the freeze. Nexon plunged 5.9 percent, while Capcom dropped 2.7 percent. Konami Holdings Corp. slid 4.2 percent to its lowest close in more than a year. Tencent shares fell 3.6 percent in Hong Kong trading before its New York-traded ADRs plunged as much as 10 percent.

Netease fell as much as 5.8 percent in U.S. trading, while Shanghai-based Bilibili Inc. plunged as much as 13 percent.

China’s gaming policies have global implications for the $137.9 billion market. China surpassed the U.S. to become the world’s largest game market in 2016 and many American, Japanese and Korean game publishers rely on Tencent to distribute their games in the country. Major foreign publishers lost more than $7 billion in market value since the approvals freeze was reported on Wednesday.

“China’s whole online gaming industry is having some issues — not only because of regulation but also because Chinese gamers are becoming more mature and selective,” said Shawn Yang, executive director for Blue Lotus Capital Advisors.

Even if the regulators resume approvals immediately, the typical process takes about two to three months, signaling potential weakness in the third quarter for companies like Tencent.

The halts come as China’s internet sector is undergoing a stringent crackdown ahead of an important Communist Party gathering later this year. Tencent has been forced to curb playing time for children, as regulators step up scrutiny on online gambling and gaming addiction.

Tencent still hasn’t received full approval to introduce desktop versions for PUBG and “Fortnite.” It also doesn’t have the green light to make money from the mobile version of PUBG, despite garnering a combined 169.7 million-plus installations as of August, according to data compiled by Aurora Mobile Limited. This week, it got a slap on the wrist and pulled down “Monster Hunter: World” from its PC distribution service due to a content issue.

Global publishers already sink resources into cleaning up games for China. It’s common practice to create two versions of popular titles, with the mainland China games stripping out or toning down violence, sexualized characters and spiritual or religious imagery like coffins or skeletons.

PUBG, for instance, is a competition where a hundred players fight to the death until one is left standing. For China, Tencent and developer Bluehole substitute slime-green splatterings for oozing red blood so the game appears more like monsters fighting than people killing each other.

“On its face, gaming is entertainment and doesn’t seem political,” Toto said. “But this shows us that nothing can escape politics in China.”

China has a pattern of alternating support and censure. Beijing lets innovation flourish, but when things go too far a crackdown ensues. Conglomerates like HNA Group Co., Fosun International Ltd., Anbang Insurance Group Co. were encouraged for years to buy property and other overseas assets. When their takeover sprees got out of control, regulators stepped up scrutiny. The country’s cryptocurrency and peer-to-peer lending industries also soared to become the biggest in the world — only to be squashed by government intervention.

“It’s a reminder to these companies that if the government wants to, they can hurt them,” said Steven Weber, a professor at University of California Berkeley School of Information. “These companies have to be operating in the long-term interests of the Chinese state.”

Tech darlings aren’t immune. Alibaba Group Holding affiliate Ant Financial was initially cheered for providing everyday people and small businesses with easier access to loans and other financial products. Then its money-market fund became the world’s largest and its products started to draw money from big banks. Ant suddenly had to comply with new limits set by authorities.

Tencent has been shifting its business away from the gaming industry. The company derived a third of its revenue from games in the last quarter, down from 56 percent in the second quarter of 2014. Rising in importance are payments and advertising, generated through ads in WeChat moments, its newsfeed, and other platforms. Tencent has also invested in hundreds of tech startups from food delivery to bike sharing in hopes of showing ads to and cashing in on the billion people that use its services every day.

Still, it’s rare for company officials to publicly suggest Beijing is to blame for anything, which is why it stood out that Tencent called out government actions for its profit weakness, said Asia Society senior fellow Isaac Stone Fish.

“This is such a shocking stumble Martin Lau probably felt he had to offer some explanation,” Stone Fish said, referring to Tencent’s president. “It’s a great example of the huge importance of Beijing and the Communist Party in any business story in China.”

Yang of Blue Lotus voiced confidence the company would eventually begin getting government approvals again.

“We don’t think that the regulation will impact the sector forever,” he said. “We think that Tencent is still able to break this siege and continue to publish new and popular games.”