In December 2023, China's National Press and Publication Administration introduced draft regulations with potentially significant implications for the online gaming industry. The proposed regulations, aimed at curbing in-game spending, could substantially affect games that rely on high spenders for their revenue, particularly "free to play" games. This initiative is part of China's broader strategy to regulate the country's leading gaming industry, which rebounded to generate approximately $42 billion in 2023, following a decline in revenue in the previous year due to China's previous regulatory crackdown which included a temporary suspension of new game approvals and restrictions on the amount of time children can spend on gaming.
Among the key proposed restrictions is the introduction of mandated caps on how much players can add to their digital wallets. Rewards for frequent logins, consecutive transactions, first time in-game spending, and other common revenue generating practices, would be prohibited. Minors would also be restricted from loot boxes and other probability based draws, and games would be entirely prohibited from offering or condoning auctions for high-priced virtual items. Gaming companies that use these incentive mechanisms may need to rethink their monetization strategies if these regulations and policies are implemented. Lower revenue for online games could impact ancillary industries such as advertising (online games reportedly account for about 20% of the online ad industry's revenue).
These regulations would represent only a segment of the challenges facing gaming companies wishing to expand to China. Games must undergo a stringent review and approval process and adhere to content restrictions and operational requirements, such as hosting servers within China.
The announcement of the regulations had a notable impact on the market, particularly affecting the major gaming companies in China. This reaction prompted the National Press and Publication Administration to indicate a review and feedback period from the industry, potentially leading to revisions. The final form of these regulations could shape the future of the online gaming landscape in China, particularly affecting games reliant on in-game spending for user engagement.
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