China's potential new gambling rules will hit smaller developers harder, analyst says

Mobile games in China range from League of Legends-like Honor of Kings to

Source: Apple Inc.

BEIJING – China’s proposed gambling rules would hit smaller developers more than large ones while reducing overall online advertising revenue, according to UBS.

Shares of Tencent, NetEase and Bilibili plunged to their lowest levels in more than a year on Friday after China’s National Press and Publication Administration released draft rules that would ban incentivizing daily game logins, among other revenue-generating practices.

The comment period runs until January 24th. Hong Kong markets are closed on Mondays and Tuesdays for Christmas.

“Big game developers or big DAU.” [daily active user] “Social games are likely to do better: This is because they have other ways to increase player engagement, reach users and have stronger research and development capabilities to attract and retain players,” said Kenneth Fong, Head of China Internet research at UBS, in a statement.

“If online gaming revenue falls, the advertising industry would also be affected,” he said. UBS estimates that online gaming accounts for about 20% of the online advertising industry’s revenue.

Gaming accounts for the majority of NetEase’s revenue, with Tencent and Bilibili accounting for about a fifth or less, according to third-quarter releases.

Many other companies develop and publish games in China, although Beijing has made clear in recent years that it wants to restrict gaming, particularly for minors.

It’s “very common” for online games to encourage daily logins and offer rewards for the first in-app purchase, UBS’s Fong said. He noted that incentivizing users to log in every day increases engagement and enables the collection of user statistics that can help developers customize games in real time.

However, Fong said it was difficult to quantify the financial impact of the proposed regulation because it was unclear whether it would apply only to new games or to existing games as well.

The National Press and Publication Administration, which controls the release of new games, said Monday that it had approved more than 100 new domestic games, after saying Friday that it had approved 40 imported games.

In general, Fong assumes that new games will be more affected than old ones. “Because online gaming is a very creative industry,” he said, “we believe game developers would likely develop other means to attract and retain users.”