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China’s Video Game Restrictions Unlikely To Slow Down Booming Industry

China’s Video Game Restrictions Unlikely To Slow Down Booming Industry

Last month, China's Economic Information Daily published an editorial that compared video games to "spiritual opium." Beijing followed through shortly thereafter with sweeping video game restrictions, with the rules published by the National Press and Publication Administration stipulating that users under the age of 18 will only be able to play games from 8 p.m. to 9 p.m. local time on Fridays, weekends and holidays.

Gaming addiction has affected studies and normal life…and many parents have become miserable,” the National Press and Publication Administration said in a statement.

China's new playtime rules are now considered among the world’s most restrictive gaming policies for children. Predictably, the restrictions have dealt a heavy blow to Chinese gaming stocks with shares of Tencent (OTCPK:TCEHY), NetEase (NASDAQ:NTES) and Bilibili (NASDAQ:BILI) among the worst hit.

But the latest curbs might only act as mere speed bumps to China’s booming video game industry, the largest in the world. China is home to over 720 million gamers, with roughly 110 million of them being under the age of 18.

Booming industry

To be fair, the draconian measures can be partly justified as a desperate attempt to rein in a serious social problem as Chinese children have been logging inordinately long hours playing online games.

 According to a recent survey of 4,000 video gamers over the age of 18 in eight countries by cloud services firm Limelight Networks, Chinese gamers play an average of 12.4 hours per week, way higher than their U.S.  peers who average 7.7 hours of gaming time per week and even the global average of 8.5 hours per week.

The latest restrictions were by no means not the first time that Beijing has tried to clamp down on online gaming ostensibly in a bid to protect minors’ physical and mental health.

In 2000, Beijing banned the sale of video game consoles like Sony’s (NYSE:SNE) PlayStation and Microsoft’s (NASDAQ:MSFT) Xbox, with the ban staying in place until 2015 due to fears that gaming would be a negative influence for children.  In 2019, Beijing introduced rules restricting citizens under the age of 18 to playing games for 1.5 hours per day on weekdays; three hours during weekends and holidays, and only during the daytime.

Indeed, the ubiquity and addictive nature of Chinese online games is partly the government’s own doing. 

Beijing’s lengthy ban helped create the world’s largest smartphone-driven gaming industry, with the ban coinciding with a rise of Internet giants like Tencent and Alibaba (NYSE:BABA). In just over a decade, China’s mobile phone users surfing the Internet tripled from 303 million in 2010 to the current figure of 911 million people. The 15-year ban and the mobile revolution forced Chinese game developers to channel their efforts into developing highly engrossing games that anyone with a smartphone could access. They have also become highly creative, with the Chinese gaming market among the first to lean into free-to-play games as well as controversial but addictive tools like loot boxes. Chinese developers have also become adept at deploying a wide array of tactics that integrate social networks into games. 

The result: China’s gaming industry has been showing no signs of slowing down despite concerted efforts by the government to wean its citizens off their love affair with online games.

In fact, China’s gaming industry recorded its most successful year in 2020 at the height of the health crisis, with the mobile gaming market growing to $29.2 billion in annual revenues, good for 30.9% year-over-year growth.

Limited effect

Wall Street appears to concur.

According to Jeffries analysts, China’s latest gaming restrictions are a "non-event" for most U.S. gaming stocks, and will have a limited effect on larger companies such as Tencent.

China makes up 5% or less of the net bookings for U.S. game publishers like Electronic Arts (NASDAQ:EA), Activision (NASDAQ:ATVI) and Take-Two (NASDAQ:TTWO). On the other hand, Tencent receives less than 3% of its sales from Chinese players under 16.

That said, gaming companies which mostly cater to minors such as Roblox (NYSE:RBLX) are bound to be hurt by the new rules.

Further, Chinese gamers can probably expect more developers to start employing more privacy encroaching tools such as facial recognition. In 2018, amid heightened scrutiny from Beijing, Tencent rolled out the feature on more than 60 games in order to track the age of users, late night users and those with high spending habits. Tencent's measures have largely been effective, with only 2.6% of the company’s gamers currently being under the age of 16.

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