China’s biggest opportunities in online gaming may be outside China

China’s online gaming market is the biggest in the world, but the most compelling opportunity for its native game developers and publishers might be capturing more users outside its borders, according to Goldman Sachs Research.

China’s online games industry is now the largest in terms of both number of users (about 650 million) and revenue ($45 billion in 2022). It retained its industry leadership even after Chinese regulators stopped approving “banhao” game monetization licenses for nearly eight months, before resuming approvals in April 2022. The resumption of license issuance is likely to spur a rebound in the domestic games market this year and next, by an estimated 5% and 7%, respectively, according to a report by the GS equity research team.

And there is substantial overseas potential for the country’s mobile game developers and publishers. Chinese online gaming companies have methodically entered international markets, moving from development- and publishing-only strategies to co-development with international companies. More recently, they have expanded their playbook to mergers and acquisitions promising new revenues and talent, and they have looked to develop more games with a global audience in mind.

These moves have helped China-domiciled mobile game makers raise their aggregate market share in the overseas mobile games market from less than 10% in 2017 to 22% by the end of 2022. GS Research forecasts that share could rise to as high as 30% by 2025. Last year, international markets represented an estimated 31% of China’s total online games revenue, and the team expects that to rise to 35% by 2025.

“Chinese players are already at the forefront of globalization,” analysts Lincoln Kong, Ronald Keung and Steve Qiu wrote in the report. “The overseas market still represents ample opportunity for Chinese games companies.”

Mobile games represent a huge opportunity for games developers and publishers, as they were the main driver in quadrupling the global gamer community from 800 million users in 2008 to 3.2 billion by the close of last year, according to Newzoo. One reason for this growth has been the rising number of titles that support crossplay on consoles, PCs and mobile phones. GS researchers expect global mobile and tablet game revenues, which were on par with console and PC game revenues combined as recently as 2016, to eclipse those platforms by more than one-and-a-half times over the next few years.

Chinese companies have five advantages in capturing an expanding share of the growing mobiles games market, according to GS Research:

1. Talent management and capital strength: Top Chinese publishers continue to invest in gaming talent, seeing it as the most viable option for systematically creating new games with blockbuster potential.
2. Focus on freemium games: Chinese developers have centered their attention on games that generate revenue from in-game micro transactions, which have greater revenue growth potential than conventional PC/console games that have had a tough time implementing price hikes. 
3. Pipeline execution: Compared with their global peers, Chinese developers have launched new games and new content for existing games more frequently.
4. Localization: Chinese game developers have learned to tailor gameplay and in-game purchase options to local markets, which resonates more with local users.
5. Precision marketing: Chinese game companies allocate a hefty portion of their generous marketing budgets on channels that provide direct access to specific gamer cohorts, such as popular streaming platforms and app stores.

The short-term outlook for gaming revenues continues to be clouded by the global economic recovery from the pandemic, according to GS Research. Examining the impact of China’s reopening on discretionary gaming dollars, experience from other markets suggests that game spending will slow but not necessarily decline.

Longer term, though, China’s relatively low average revenue per user (APRU), compared against other big game-producing countries such as Japan and Korea, suggests room to grow, according to our analysts. And international markets will play a big role in closing that gap.
 

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