New Regulations Aimed at Chinese Gaming Industry
In early to mid-2021, Chinese regulators unleashed a series of regulations targeting the country’s lucrative for-profit education sector. These measures were implemented due to concerns regarding excessive spending by families in an educational contest to secure admission into top schools. The government restricted the sale of online educational services for young children, regulated advertising in this domain, limited tutoring hours, and even controlled pricing.
As a result, Gaotu suffered a staggering 98% loss in value within six months.
According to The Wall Street Journal, regulators are now concerned about excessive time and monetary investments in gaming by Chinese youth. In response, China’s National Press and Publication Administration, responsible for regulating media and video games, has released draft rules designed to curtail companies’ use of incentives that encourage gamers to spend more time and money online.
Potential restrictions may include banning minors’ participation in lotteries, prohibiting tipping of livestream game hosts by minors, eliminating volume discounts for in-game purchases, and terminating rewards for maintaining daily log-ins or “streaks.”
In 2021, regulators also introduced rules to limit the amount of time children could spend gaming during the school week.
Implications for Investors in China
China currently stands as the second-largest global market for video gaming, trailing only the United States. However, this ranking might soon change. The proposed regulations have the potential to reduce players’ gaming hours, in-game spending, and subsequently, the revenue and profits generated by game developers. These impacts are likely to be witnessed without a significant reduction in costs.
Furthermore, gaming companies have not fared excellently even in the aftermath of the previous wave of regulations. NetEase’s revenue has seen minimal growth of less than 1% over the past two years, while Huya’s revenue has plummeted by over 40%, according to data from S&P Global Market Intelligence. Gaotu, directly affected by the prior regulatory actions, experienced a revenue decline of approximately 62%.
Considering that we are only at the beginning of what appears to be a fresh set of regulations, the consequences this time around may prove even more dire. To put it plainly, investors in China’s gaming industry have valid reasons to be deeply concerned.