Six Months Without Game Licenses: What China's Game Companies Went Through

In the 163 days since China stopped issuing game licenses, 600 million players have spent a summer with no new games.

“Be ready to stretch out the lifecycle of the mobile games we launch this year, and speed up the push overseas.”

Li Ling still remembers the meeting two months ago, and the tone that told her how serious her boss was. By then China had suspended game license approvals for four months.

Li Ling handles business development at a Shenzhen mobile game developer with about 150 employees. In a normal year, by this point she would already have settled next year's development plans with several publishers.

Now everything is on hold.

“Next year we want to build a mobile game around a Chinese animation IP, but we haven't got a license, so all we can do is talk about intent. Nobody can commit. If we develop it and it can't launch, we'll never get the money back.”

The license Li Ling is talking about is the code on a mobile game's splash screen: four characters reading xin guang chu shen — roughly “approved for publication by the press, radio and television authority” — followed by a string of numbers. That unremarkable string in the corner of the screen is the lifeline of a mobile game, and of the company that made it.

In May 2016 the State Administration of Radio and Television issued the Notice on the Administration of Mobile Game Publishing Services, which requires a license to operate a game. Only a licensed game can charge players. An unlicensed one can do nothing but run a free open beta, forever.

Two years in, Li Ling's company had grown used to the approval process. Then, early this year, a notice arrived.

On March 29, the former State Administration of Press, Publication, Radio, Film and Television issued its Notice on Important Matters Concerning Game Application and Approval, saying that a government restructuring would slow the pace of game approvals.

“The notice didn't say when approvals would restart, but at the time we all assumed a month at most. We never imagined it would drag on with no end in sight.”

Li Ling's studio had never worried about licenses before. As a developer, once it had settled a project with a publisher, the publisher took care of everything. Now the publishers have no idea what to expect either, and everyone inside and outside the industry is waiting.

“It's not just us — even Tencent can't get a license. That's when it started to feel serious.” The news Li Ling was waiting for, that approvals had resumed, never came.

In all of 2017, about 9,000 mobile games were licensed in China — 4,500 in half a year.

On August 30, the Ministry of Education and seven other departments issued a notice on the Implementation Plan for the Comprehensive Prevention and Control of Myopia in Children and Adolescents. A document whose title has nothing to do with games swept through most of the industry's WeChat Moments within hours.

The notice said the National Press and Publication Administration would cap the total number of online games and limit how many new ones could go live. One line, no specifics. That day the market value of A-share gaming companies shrank by nearly 10 billion yuan at one point; counting NetEase, Tencent Holdings and Kingsoft on the US and Hong Kong markets, the sector lost about 180 billion yuan overnight. Tencent's market value had already shrunk by close to HK$1.3 trillion before that — more than the entire Hong Kong listing of Bank of China is worth.

According to Gamma Data's China Games Industry Report, January–June 2018, China's total mobile game revenue grew just 5.4% year over year, far below the nearly 30% growth in the same period of each of the previous three years.

What stopped along with Li Ling's work was a mobile game market worth 115.08 billion yuan a year, with 185 listed companies and close to 600 million paying users. China has more gamers than the United States has people (323 million), and more than 20 new games could launch here every day.

Mobile games make less money than they sound like they do, and with no license there is no next game

At the veteran Shanghai PC online game company where Wang Xin works, everything looks normal on the surface.

That is how she sees it, at least. The company employs more than 200 people, salaries are being paid as usual, mobile game projects are running, and this year is not a worry. But checking on license approvals has become a daily habit — a question she posts in the group chat every time she opens QQ.

“Licenses just aren't being issued, and privately everyone is on edge. I did hear recently that they've started issuing again, but with a cap on the number. Either way it isn't good news.”

Honor of Kings gets called required equipment for primary schoolers. Clash of Clans stayed hot for years. Battle royale — “winner winner, chicken dinner” — carried shooters from PC to phone on the back of a new mechanic. But most games are barely original at all. They are an “IP” bolted onto whatever gameplay is popular that season.

A studio picks a popular mechanic — cards, Dota-style, shooting, whatever — wraps it in popular art, and out comes a free download. Then it buys advertising to drive installs and designs the game to coax players into paying for items. That is the standard template for the entire Chinese mobile game industry.

The market pumps out games built on fashionable art and fashionable mechanics, hoping for a fast return. Among the games licensed in any given stretch, dozens might be Snake clones or fishing games. Card and board games, for instance, have always taken a sizeable share of approvals. In the second half of 2017 they made up close to a third of all mobile games, by one count.

Under a template that rewards operational skill and product experience rather than invention, no game stays hot for long. Once its revenue stops covering its marketing spend, the next game has to take over. And with no license, there is no next game.

The application process itself is slow. Assembling the paperwork alone takes an estimated three to five months. Add content revisions, or a game that falls outside the “seven major categories” the broadcasting authority allows (match-three and other plotless casual games, endless runners, flying games, card and board games, puzzle games, sports games, and music and dance games), or simply a long queue, and it takes longer still.

This was even worse in the early days of the licensing system. Plenty of developers did not know the process, and small teams had nobody to spare to chase an application.

“Our usual rhythm is that once development hits 60–70% and the core mechanics are basically settled, we start preparing the licence materials,” an independent game publisher in Shanghai told QDaily.

In fact, China's game industry was already tightening before the suspension and before the late-August policy on capping the total number of online games.

Shen Qian works at a company of roughly a hundred people that both develops and publishes games. For small and mid-sized firms like hers, mobile games are a business that looks like a lot of gross revenue on paper and earns thin margins in practice.

Shen Qian has spent four years in the industry. To her, the press coverage of mobile games taking in hundreds of millions, or of the Honor of Kings team collecting year-end bonuses worth 100 months of salary, is survivorship bias — the winners talking.

“In theory the more the game makes, the more you get. In my four years it's been a fixed salary. I've never seen a bonus.” Then she sent a smiley face.

That comes down to how the business works. Gross revenue can be high, but so are running costs. Development and marketing both cost money. In China there is also the scattered field of Android app stores, each taking its own cut, which pushes gross margins down further.

The Chinese game market has a growth problem of its own, too.

Smartphone shipments keep falling, which means the market is no longer taking in new users. Companies can only hope to extract more money from the users they already have.

Even before approvals stopped, small and mid-sized firms were being squeezed by the two giants, Tencent and NetEase.

Wang Xin often sees friends at smaller studios grumbling about Tencent in their Moments. It always comes back to the same thing: Tencent's and NetEase's many apps control where the traffic goes.

Control the traffic and you control most of the revenue. According to Gamma Data, the 20 highest-grossing mobile games in China in the first quarter of this year took 51% of the quarter's market, and most were published by Tencent or NetEase. Only four of the top 20 were not: Fate/Grand Order, Mr. Love: Queen's Choice, Happy Match (《开心消消乐》) and Angel Era (《天使纪元》).

Competitors are not the only ones taking a share. On domestic distribution channels, phone makers and Android app stores also take a steep cut.

On Tencent's Yingyongbao, a game company keeps 45% of what players pay; Yingyongbao keeps the other 55%. Apple's App Store takes only 30%, but Apple will not promote a game for nothing either, so companies still have to spend separately to get installs.

As publishing turned into a job that demands more resources, publishers gained leverage over small developers. Entertainment Capital has reported that publishers withhold royalty payments, keep exclusive publishing rights for a period, and even write in performance targets that developers must hit.

And even a game that wins a license and reaches the Apple and Android stores is losing its pull on players. Beyond the annual e-commerce shopping festivals, Singles' Day above all, the big shift of the past two years is that short-video apps have taken more of the traffic and more of players' hours.

Liu Huicheng, chairman of Ourpalm, a game company backed by Tencent, said in an interview: “This year has been hard the whole way. User traffic keeps slowing... a lot of users have started using short-video apps to pass the time.” The fiercest competitor for that attention is Douyin, the short-video app owned by Toutiao.

Attention spent there is attention not spent on mobile games.

With no new games, old games are being stretched

“We never planned to extend this game's lifecycle. Now we have no choice.”

A 19-person independent studio told us it has to keep the game it is running alive. “This game is already near the year-and-a-half lifecycle we planned for it.”

The same thing is happening at Shen Qian's company.

“If we can't ship a new game, we squeeze more out of the old one. Players do get tired of a game the longer they play, but we just have to hold on until the license comes through,” she said. Her planning team quickly drew up two expansion packs for the company's flagship title.

Packaging a game for foreign markets and then bringing it home has become another small-studio tactic. The industry calls it exporting in order to import.

The route that works technically: launch the game worldwide on Apple's App Store without ticking mainland China, then, once it is live, tick mainland China and let it into the Chinese market.

But that does not solve the revenue problem. An unlicensed game cannot carry ordinary in-app purchases; add them and someone will report it, and the game comes down.

Without in-app purchases, the only thing left is advertising.

China's Android app stores may be considering opening ad interfaces. QDaily has been told that Tencent's Yingyongbao may open one in the coming months, to help game companies make money from ads.

With licenses suspended, the app stores are losing a large chunk of revenue too. Opening an ad interface is probably an attempt to recover some of it.

But advertising — the business model that arrived with free mobile games in the first place — was shown long ago to be worth less than a paying user. An industry going back to a model it had already abandoned is not a way out.

A trade in licenses has appeared, and a hot one gains hundreds of thousands of yuan in three days

For a handful of mobile game companies, the business that has grown up around licenses is the way around the problem.

On September 2, Liu Qiang posted a screenshot in his Moments advertising licenses for sale: 67 game titles, sorted into 10 categories including action, shooting and casual.

“The one you want is gone. About half the list has sold, actually. If you want one, I can ask around.”

The logic is simple. Companies that launched mobile games in 2015 and 2016 dig out these old, abandoned titles and, through middlemen, lease them to companies that have spent the past few months desperate for a license. The usual term is two years.

With the license in hand, a buyer only has to adjust the game's content enough to match the old title's name and theme, keep the two consistent, and it can go back on the distribution channels, make money and advertise. The logic is much the same as a reverse merger on the stock market.

Liu Qiang thinks he came to this late. Trading licenses is only a sideline he picked up this year; his main business is inflating app store rankings, otherwise known as ASO. Flipping one shell earns him upwards of 10,000 yuan.

It is not an easy trade. For one thing, a new game needs a shell as close as possible to its own genre and theme. You cannot put a Three Kingdoms game inside the license of a Temple Run clone — too much would have to change. So selling a license takes a great deal of talking first.

Price matters more. By Liu Qiang's account, an old mobile game with an anime-flavoured word like “Spirit” in its name can go from 150,000 yuan to 550,000 yuan in three days. The most expensive of all are card and board games, because they bring in money fast and their players spend. “If prices keep climbing like this, even the genuinely deep-pocketed buyers won't want to pay.”

For a small studio, a mobile game's profit was never large. After the channel's cut, development and promotion, an unbudgeted leasing fee on top is not easy to swallow.

The gaming outlet GameLook reported in late July that Li Ruifeng, CEO of the developer Shengtang Games, had said publicly in his Moments that a firm called Laili Intelligent Technology, without ever contacting Shengtang, forged a contract and a company seal to produce a fake authorization agreement from Shengtang, then used the name and license of Shengtang's Little War: Arrival of the Legion (《小小战争：军团降临》) to release a game of its own.

In these six months without approvals, what happened to Shengtang Games is not an isolated case. Inside the industry, buying, selling and stealing licenses is no longer discussed in whispers.

Asked what they would do if licenses never came, several people in charge of publishing at game companies said that if it came to it, they would just buy one. That always solves the problem.

Game licenses were never worth much. With close to 10,000 approved a year, even hiring an agent to file the paperwork cost only a few thousand yuan.

But like a wealth management firm's financial license, or a listed company that can serve as a shell, these things are worth little while they are unrestricted. Once some force beyond anyone's control intervenes, a trade grows up around the restriction.

Buying a shell to go public is at least a legal way of getting around a restriction, through an acquisition. Buying and selling game licenses is bound to be an illegal, grey-market deal.

Everyone says companies stockpiled licenses before the freeze; most did not

Since buying a shell is hard, companies still holding unused licenses would rather save them for when they count. Wang Xin's company, which made its name in PC online games, moved into mobile development in 2014 and has about 150 employees. Firms like it usually develop and publish both. She runs publishing, so license approvals became the thing she watched most closely.

“We only do two or three projects a year. Luckily we stockpiled two licenses at the end of last year, so we don't have the pressure to launch fast that small teams do. Our project cycles run about a year, so we've been able to keep working this year.” Wang Xin joined the industry straight out of university and moved from operations to publishing.

As she puts it, at an established company everyone does their own job and that is that. “We don't worry much about revenue anyway. Worst case, we've still got PC games that have been running for years.”

Still, she has been asking around these past few months, and what she hears is not good. Halfway through 2018 the company has not settled on a new game for next year; the only confirmed plan is a version update to an old product. That is much the same answer Li Ling's boss reached: stretch a product out.

Most companies never got the chance to stockpile. The broadcasting authority's approval figures for the first three months of 2018 show 716 licenses in January, 484 in February and 727 in March — fewer than in the same period of 2017.

Few companies saw at once that licenses would become a serious problem. Even Wang Xin's company had a few in reserve only because its project cycles are long.

“Right now I just want approvals to reopen. Everyone's Moments said they'd resume before ChinaJoy, and that turned out to be false too. But in August the Shanghai cultural authority seems to have launched a platform for game publishing applications — does that mean things are opening up?”

The platform Wang Xin means went live on August 17, and it exists only to let companies check the status of an application in real time. Even so, this piece of news, which has nothing to do with approvals resuming, was something she reposted to her Moments the moment she saw it.

“I'd heard from Tencent's side that there was still a green channel, and I wanted to try it, get in touch. But when I asked, the paperwork turned out to be a lot of trouble, and it isn't really my job anyway, so I dropped it.”

Even Tencent and NetEase can only wait

The green channel is the remedy Tencent brought up on its second-quarter earnings call, explaining the effect of the suspension.

On August 15, Bank of America Merrill Lynch analyst Eddie Leung asked how Tencent's Chinese mobile game license applications were progressing. Tencent president Martin Lau said the broadcasting authority had set up a green channel, which he said eased the problem of games being kept off app stores by letting games that went through it run a one-month commercial trial.

That is probably the best treatment a Chinese game company can expect from regulators. But the green channel is not as smooth as Tencent implied.

What Tencent disclosed at the time was that the PC version of Fortnite was applying for a one-month commercial trial, and that releasing the mobile version would require a separate application.

Since the suspension, growth in Tencent's game business has stopped.

In the second quarter, Tencent's online game revenue grew 6% year over year, against double-digit growth before that. The Wall Street Journal cited analysts' estimates that the licensing freeze cost Tencent as much as US$1.5 billion in second-quarter sales. Tencent's market value then fell by a third.

Tencent is not alone. Securities Daily went through listed game companies' half-year results and found that nearly half saw net profit fall sharply. NetEase's dropped 58.54% year over year, to 2.858 billion yuan.

Listed game companies now avoid discussing what the suspension will do to them. The reply Youzu Interactive gave QDaily stands for the public position of a good many of them:

“Many of the games the company plans to launch already hold licenses, and we will continue long-term operations and push into international markets.”

The companies that could go overseas already have; starting now is hard

At the beginning of this year, Li Ling's boss asked her to put together more business material on Taiwan. Talks on taking games abroad became the articles he shared most often in his Moments.

The companies that went out early, IGG and FunPlus among them, have posted striking numbers. The China Games Industry Report, January–June 2018 puts Chinese online games' overseas sales at US$4.63 billion in the first half of the year.

Games sold abroad face no censorship review, a far lower bar than a home market bound by licenses. A company can develop entirely in China and list on a foreign App Store or Google Play; as long as the game stays clear of gambling, pornography and the like, it will generally go live.

“But that's the advantage on the surface. Going abroad shouldn't be treated as the best way out for Chinese game companies facing the license freeze,” said Zhang Guowei, head of Greater China business at the data provider App Annie. App Annie now serves dozens of Chinese companies expanding overseas, supplying industry data on their target markets.

To succeed abroad, Zhang said, a Chinese company has to throw out everything it knows about the Chinese mobile game market and build a genuinely native, successful game from scratch. Success in China cannot be copied and pasted elsewhere.

Promotion works differently, for a start. Foreign channels are more formal — social platforms like Facebook, Twitter and Line, plus the two app stores, App Store and Google Play — and there all you can really do is buy ads. The traffic games played at home do not transfer.

Southeast Asia, Europe and America, and the Middle East also differ almost completely in what players want from gameplay, art style, even privacy. Japanese players, for one, take the use of GPS location seriously, something players in China never used to notice. One App Annie client collected a flood of one-star reviews on the Japanese store because of it.

In fact, the companies with the means to go abroad started thinking about foreign markets last year, when global smartphone growth stalled.

“In the data, the rise in companies going overseas didn't begin with the license suspension in March. The bottleneck for Chinese mobile games showed up in June last year. That's when more companies started coming to ask about our overseas services or buy them — small and mid-sized companies in the south especially.”

And even a company growing fast abroad cannot avoid China in the end. It is where the world's largest population of gamers lives.

The publisher FunPlus was among the first Chinese companies to go abroad, finding its early success on Facebook and in markets like the Middle East with crop-stealing games in the mould of FarmVille, and climbing to the top of the revenue rankings for Chinese games overseas.

But with growth slowing, FunPlus has turned back toward China this year, announcing a strategic partnership with NetEase to run esports competitions together.

What comes next, nobody knows

Even if approvals resumed tomorrow, with roughly 700 new applications piling up every month, the broadcasting and press authorities have close to 5,000 applications backed up. Clearing them would take until the fourth quarter at the earliest.

Nobody knows what will change, or when licenses will start flowing again.

Small teams can absorb far less risk than the big companies running a dozen projects at once in the hope of hatching the next Honor of Kings. Small teams tend to want to build games around an inventive mechanic, and the failure of a single project — or simply not being able to launch it and get the money back — can finish them.

Li Ling's boss is pressing her for the Taiwan report. The wuxia mobile game they had planned for the second half of the year was moved up to mid-year for release in Taiwan. “At least we've found something to do this year. But what do we do next year? Nobody knows.”

Liu Qiang, the license dealer, has posted again in his Moments — an article from Southern Metropolis Daily. The headline: “Chinese Games May Face a 35% Tax, and Licenses Will Stay Hard to Get This Year”.

(At the interviewees' request, Li Ling, Shen Qian, Wang Xin and Liu Qiang are pseudonyms.)

Graphics: Feng Xiuxia

Cover image: Pixabay