In this article, Doug Young takes a look at online games, which seem to have a closer spot to the hearts of many Chinese youth than their Western contemporaries.
The topic has been on prominent display these last few weeks here in China, as industry leader Tencent Holdings Ltd. casts a spell on many of the nation’s youth with its title “Honour of Kings.” The story casts a light on the socially destructive phenomenon of game addiction, which forced Tencent to limit play by all minors to two hours a day or less.
But lurking quietly behind the headlines was a subject of intense interest to businesses — namely, just how profitable these games can be. Tencent earned a staggering 71 billion yuan ($10.5 billion) from online games last year, helping to make it China’s most valuable internet company. The broader industry was worth 183 billion yuan in 2016, and is expected to grow more than 20% this year, according to data tracking firm Statistica.
From my reporter’s chair, I’ve watched the industry develop from its infancy over the last decade, mostly writing about the many listed companies it has spawned like Tencent, NetEase Inc. and Shanda Interactive Entertainment Ltd., just to name a few. But the more-nuanced and behind-the-scenes process for bringing games into the country gets far less ink.
I got a glimpse into that world in 2009, when a turf war between the Ministry of Culture and the predecessor of today’s State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) briefly took down the globally popular “World of Warcraft” game, which was being operated in China by NetEase at that time. That tussle highlighted a common issue you see for emerging industries; namely, that multiple regulators often have some form of jurisdiction, with the result that such power struggles can break out as different players try to assert themselves.
That “World of Warcraft” tale nicely takes us into our main tale of just who regulates new games coming into China, and the different roles they plan. In a nutshell, it’s the very same Ministry of Culture and SAPPRFT that are now the sector’s main overseers, each playing an important but different role that I’ll describe shortly.
To get the playbook on the subject, I turned to a foreign-industry source who imports such games in the southern city of Shenzhen, but whose name I’ll keep out of print due to potential political sensitivities. I’ll take this opportunity to call for any others out there who might be interested in sharing their similar experiences from other industries to contact me at the email at the end of this column, and promise similar anonymity if requested.
We should note here the two major types of players in this space; namely, game owners and operators, which are sometimes one and the same. I’ve noticed over the years that such operators, known in the industry as publishers, always seem to come from the domestic realm. Sure enough, my contact confirmed that’s because foreigners are forbidden from operating games in China. So it appears that if big money is going to be made by getting impressionable youngsters addicted, that money should go to domestic companies.
But humor aside, there’s still plenty to be made by foreign companies as intellectual property owners who license their titles to domestic operators. We’ll start this part of the discussion with the tired but crucial chorus about the importance of choosing partners wisely when bringing games into a complex market like China. Such partners are important not only for getting you through the complex import and approval process, but also for running a smooth and reputable shop once the game launches.
Physically getting the game into China is a mundane matter, often involving someone bringing over a disk or putting one in the mail. Surprisingly, there don’t seem to be any import duties on such materials, perhaps because of their intangible nature. But once they’re up and operating, income from such games is taxed like anything else, ultimately averaging about 17% of sales. Arrangements typically see game owners and publishers take a 30-70 split of those revenues.
In terms of regulators, the most important is the Ministry of Culture, which reviews all games for content. Here it seems that knowing the ropes is critical, including what will kill you outright. Localization is one of the most cumbersome elements, requiring all language elements to be translated into Chinese, even sounds that appear on the screen with words like “boom.” The same also goes for the game’s actual name, which must be translated into Chinese.
Excessive violence is also a game-killer, as is anything politically sensitive like shooting police or other authority figures. I was slightly surprised to hear that blood, if colored anything besides red, is more tolerated. Maps can also be sensitive due to competing territorial claims over islands and other land boundaries between China and some of its neighbors.
Once a game gets Culture Ministry approval, the SAPPRFT steps in with an official license number, which again is required for any operator. Here again, it’s important to have the right partner since not all operators have direct access to SAPPRFT, my contact said. Once you’ve obtained these two official chops, a process that usually takes three to six months, you’re essentially off to the races, and you and your partner can start raking in the bucks.
When all is said and done, the business does seem a bit peppered with minefields that could sink the best of gamers, even though the process is logistically quite simple. But a strong title and good partner could help to navigate through that battlefield, and the rewards do look quite big for anyone who ultimately makes it to market.
Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com.
–This article originally appeared on Caixin Global.