The bat­tle to own videogam­ing’s largest and fastest-chang­ing PC games mar­ket


On Novem­ber 27, 2016, on a hazy evening in Shang­hai, China, at a glit­ter­ing event to cel­e­brate the launch of Fi­nal Fan­tasy XV Jian Wu struck up a con­ver­sa­tion with a stranger at the bar. The man in­tro­duced him­self to Wu, a videogame de­vel­oper who lives in the city whose name has been changed to pro­tect his iden­tity, as a se­nior man­ager from Ten­cent, the gi­gan­tic Chi­nese in­vest­ment com­pany which owns ma­jor hold­ings in ma­jor game stu­dios around the globe, from Su­per­cell to Ac­tivi­sion, Epic to Riot. Af­ter some small talk, dur­ing which the man­ager boasted about Ten­cent’s grand plans to in­te­grate VR into its dig­i­tal store, he smiled, leaned in and told Wu: “We are work­ing with the gov­ern­ment and, when the time is right, Steam will not ex­ist in China any­more.”

For the past two years Steam and Ten­cent have been locked in a bat­tle to es­tab­lish the pre-em­i­nent dig­i­tal PC game store in China. Since 2015 the num­ber of Chi­nese Steam users has in­creased from six mil­lion to an es­ti­mated 17 mil­lion, many of whom were re­port­edly lured onto the plat­form in or­der to down­load Counter

Strike: Global Of­fen­sive. Valve’s store, which re­cently added the op­tion to pay for games in Chi­nese cur­ren­cies, how­ever, op­er­ates in a le­gal grey area. Ev­ery videogame that’s sold in China is sup­posed to be signed off by SAPPRFT, the State Ad­min­is­tra­tion of Press, Pub­li­ca­tion, Ra­dio, Film and Tele­vi­sion of the Peo­ple’s Repub­lic of China. Steam, which does not have ap­proval to op­er­ate in China, of­fers mil­lions of Chi­nese PC own­ers a back door through which they can ac­cess tens of thou­sands of for­eign games that haven’t been sub­ject to the coun­try’s strict ap­proval pro­ce­dures. It could be, at any mo­ment, shut down.

The re­la­tion­ship be­tween Ten­cent, which on April 20 an­nounced the re­brand of its dig­i­tal PC games store to WeGame, and the Chi­nese gov­ern­ment is markedly dif­fer­ent, al­legedly char­ac­terised, as the man at the bar put it, by con­spir­a­to­rial col­lab­o­ra­tion. “Ten­cent is not a busi­ness as you know busi­nesses in the west,” Wu told me. “It is es­sen­tially an ex­ten­sion of the of­fi­cial Party. They are be­holden to stake­hold­ers but the line be­tween the board and gov­ern­ment is thin. Some of Ten­cent’s stake­hold­ers are high-rank­ing of­fi­cials in the party.” ( Nei­ther Valve nor Ten­cent re­sponded to re­peated re­quests to take part in this ar­ti­cle.)

The com­pe­ti­tion be­tween Ten­cent and Steam is strato­spher­i­cally high stakes. Ac­cord­ing to the au­thors of the Global Games Mar­ket Re­port, a bench­mark piece of re­search pub­lished an­nu­ally, the Chi­nese videogames mar­ket is now worth an es­ti­mated $27.5 bil­lion. China is the largest videogame mar­ket in the world, ac­count­ing for a quar­ter of all global rev­enue gen­er­ated by the in­dus­try. It com­fort­ably out­strips North Amer­ica, the sec­ond largest, by more than two bil­lion dol­lars. Ac­cord­ing to the re­port’s au­thors, China will re­main the most sig­nif­i­cant game mar­ket for the fore­see­able fu­ture. While its growth is slow­ing, the value of the Chi­nese games in­dus­try is set to con­tinue ris­ing, to an es­ti­mated $28.9 bil­lion by 2019.

De­spite these num­bers, the Chi­nese videogame mar­ket re­mains, in the west, some­what enig­matic. Few Chi­nese games have found wide­spread main­stream suc­cess out­side of Asia. The seem­ingly in­deli­ble cliché is that Chi­nese game-play­ing habits are fo­cused al­most en­tirely on free-to-play ti­tles built quickly and cheaply. It’s a per­spec­tive, in part, rooted in fact (China, for ex­am­ple, is alone in hav­ing its own free-to-play ver­sion of Call Of Duty). While the cel­e­brated au­teurs and di­rec­tors at Ja­panese stu­dios are rou­tinely praised for their artis­tic vi­sion, their near East­ern coun­ter­parts are broadly name­less and face­less (those whose names are fa­mil­iar, such as Jen­ova Chen, em­i­grated to Amer­ica to make their for­tunes). Chi­nese tal­ent is per­ceived to be found in the craft­ing of ruth­less mon­eti­sa­tion tech­niques de­signed to make a quick Yuan, rather than nee­dle-nudg­ing artistry.

This per­spec­tive seems in­creas­ingly out­dated. Free-to-play games still rep­re­sent the most pop­u­lar and prof­itable videogames in China, but the mo­bile-game sec­tor makes up just half of the Chi­nese game mar­ket. Since the lift­ing of a na­tion­wide con­sole ban in 2015, and the rise of a bur­geon­ing mid­dle class with plen­ti­ful dis­pos­able in­come, the con­sole mar­ket is grow­ing. Wide­spread PC own­er­ship is tak­ing a gen­er­a­tion of young play­ers out of the in­ter­net cafés where for the past decade most games have been played, and into the home, where tastes are, thanks to Steam, seem­ingly ex­pand­ing to for­eign games. Piracy, long seen as the scourge of the Chi­nese mar­ket, may still be ram­pant, but sales of full-price, le­git­i­mate games are in­creas­ing. A re­cent re­port from NetEase, Bliz­zard’s long-time part­ner in China, states that more than five mil­lion copies of

Over­watch were sold in main­land China alone, a record for a so-called buy-to-play game in the coun­try. What’s chang­ing?

Yuli Zhao is vice-pres­i­dent of Youzu, a Shang­hai com­pany founded in 2009 that has grown steadily to be­come one of the top three Chi­nese pub­lish­ers of mo­bile phone games. Zhao, who is 35, was born in the south­ern Chi­nese prov­ince of Fu­jian. Her ex­pe­ri­ence of videogames grow­ing up was typ­i­cal of peo­ple of her gen­er­a­tion. Zhao’s fam­ily did not own a con­sole, so she’d play games with her broth­ers ex­clu­sively in lo­cal ar­cades or cy­ber cafés. “When I was grow­ing up play­ing games was a so­cial hobby, al­most like a fam­ily event,” she says. “I still re­mem­ber the joy I felt when we’d play Age

Of Em­pires, Red Alert and He­roes Of Might And Magic.” That no­to­ri­ous ban on videogame con­soles, which was in place for 15 years, shaped not only Zhao’s ex­pe­ri­ence, but also the en­tire Chi­nese videogame in­dus­try – in pro­found ways. In June 2000 the Chi­nese Min­istry of Cul­ture is­sued a no­tice that for­bade any com­pany or in­di­vid­ual from pro­duc­ing and sell­ing elec­tronic game equip­ment and ac­ces­sories in China. The leg­is­la­tion was writ­ten, ac­cord­ing to Zhao, in re­sponse to the “fast growth of the cy­ber café” and its per­ceived neg­a­tive in­flu­ence upon young peo­ple. “The Chi­nese gov­ern­ment claimed that game con­soles were af­fect­ing the men­tal health of chil­dren,” says Daniel Ahmed, an an­a­lyst for Niko Part­ners, a com­pany that has stud­ied the Chi­nese videogame mar­ket for 15 years.

In re­al­ity the ban was in­ef­fec­tual and weakly en­forced. “In Shen­zhen, we al­ways had lots of smug­gled con­soles and cor­re­spond­ing games,” Wensen Zeng, an em­ployee at Riot Games who was ten years old when the ban was im­ple­mented, tells us. “Even though we didn’t own a PlayS­ta­tion 2 at home, I could

al­ways find one to play on in the lo­cal mall or cy­ber café.” Some con­sole man­u­fac­tur­ers pur­sued cre­ative ways around the re­stric­tion. In 2003 Nin­tendo re­leased the iQue Player, a $60 con­sole de­vel­oped in con­junc­tion with soft­ware de­vel­oper Wei Yen, that al­lowed play­ers to down­load games pur­chased at lo­cal re­tail­ers onto a 64MB flash mem­ory card. The iQue’s de­sign may have helped it slip the at­ten­tion of the Chi­nese author­i­ties, but for Nin­tendo the greater point was to pro­vide a cheap en­try point to China’s pop­u­lace. “To reach a wide range of peo­ple in China, es­pe­cially those in­land who are not as rich as those in coastal ar­eas, we thought we needed to de­liver a cheaper con­sole,” said the late Nin­tendo pres­i­dent Sa­toru Iwata in 2003.

Iwata’s ploy was, broadly, a fail­ure. Piracy of both games and con­soles proved to be a far greater chal­lenge than the ban. Nin­tendo’s Wii, which was never sold in China, was copied by a Chi­nese com­pany and re­leased un­der the name Vii, a game sys­tem that ran pre­loaded mo­tion-con­trolled games. A coun­ter­feit ver­sion of Sony’s PlayS­ta­tion 3 was sold un­der the be­wil­der­ing name The Win­ner. Ac­cord­ing to Niko Part­ners, around 50 per cent of time spent play­ing videogames in China be­tween 2002 and 2005 was on stand­alone games that were ei­ther down­loaded for free, or bought from pi­rate stores.

In­ex­pli­ca­bly, the ban of 2000 did not ex­tend to PC or mo­bile gam­ing. As such, its ef­fects on the mar­ket were im­me­di­ate and trans­for­ma­tive, to both busi­ness and artistry. Within 12 months the value of the Chi­nese on­line videogame mar­ket­place had grown to $100 mil­lion. “The Chi­nese game in­dus­try ba­si­cally skipped the con­sole-game phase,” says Zhao. “This al­lowed PC, web and mo­bile games to flour­ish and evolve, to a far greater de­gree than else­where in the world. Re­stricted ac­cess to west­ern videogames af­ter the 1980s meant that a gen­er­a­tion of play­ers and de­sign­ers were most heav­ily in­flu­enced by the de­sign of Asian MMOs. As a re­sult, PVP game­play is more pop­u­lar than nar­ra­tive-led games.”

Leg­isla­tive con­di­tions com­bined with so­cioe­co­nomic fac­tors to es­tab­lish free-to-play as the dom­i­nant model. “China is still a de­vel­op­ing coun­try so not every­one has $60 to spend on a game, or pay a monthly subscription to one,” Ahmed ex­plains. “As the ma­jor­ity of PC games were played in in­ter­net cafés, peo­ple couldn’t save their game progress with­out dif­fi­culty, so free-to-play games, where your progress was stored on servers re­motely, flour­ished.” The mon­eti­sa­tion model duly ma­tured much more quickly in China than else­where. “There’s no sense here that free-to-play is a scam, be­cause it’s the rea­son that most peo­ple were able to play games at all,” he says.

The con­sole ban was lifted in July 2015, but its ef­fects linger. The most pop­u­lar mo­bile phone games tend to be based on clas­sic PC game IPs. “PC games have tran­si­tioned over to mo­bile fairly suc­cess­fully,” says Ahmed. “They haven’t been dumbed down to be match-three games. One of the most pop­u­lar games, Hon­our Of

Kings, is a League Of Leg­ends- type game that has been adapted from PC for mo­bile.” Hon­our Of Kings at­tracts more than 50 mil­lion play­ers a day. “What’s pretty cool is that com­pa­nies have made mo­bile ver­sions that in­ter­act with the PC game,” Ahmed says, “so you can save progress on one sys­tem and con­tinue with the next. This method of de­sign has proved ex­tremely pop­u­lar, driv­ing sales on both plat­forms.”

Con­soles re­main some­thing of a niche be­cause of the ma­jor his­tor­i­cal bar­ri­ers to en­try. A gen­er­a­tion was brought up play­ing pi­rated games, of­ten on knock­off ma­chines. It’s a cul­ture that Sony and Mi­crosoft have strug­gled to break since both com­pa­nies en­tered the Chi­nese mar­ket in 2014. By the end of 2015, le­gal sales of the Xbox One and PS4 amounted to just half a mil­lion units com­bined, a tiny frac­tion of the 45 mil­lion global sales of both ma­chines. The times, how­ever, are chang­ing.

Brad­ford Hin­kle joined the videogame in­dus­try as a de­signer af­ter work­ing as an ab­strac­tor for frack­ing com­pa­nies in the UK. He now lives in Shang­hai, where he works as a de­signer on Call Of

Duty: Siege, Ac­tivi­sion’s free-to-play iOS game based on the com­pany’s mar­quee IP. When Hin­kle ar­rived in China, he im­me­di­ately saw that the mind­set sur­round­ing game de­vel­op­ment was wildly dif­fer­ent to the west. “Many of the peo­ple I have worked with in China have never played a con­sole be­fore,” he says. “Some didn’t know who Mario was un­til Su­per Mario Run came out last year.” As well as the Chi­nese-English lan­guage bar­rier, Hin­kle dis­cov­ered a rift in game vo­cab­u­lary be­tween the two cul­tures. “There sim­ply isn’t a com­mon lan­guage for dis­cussing games be­cause our per­sonal ex­pe­ri­ences tend to be so vastly dif­fer­ent,” he says. “This means con­ver­sa­tions in de­vel­op­ment of­ten boil down to the low­est com­mon de­nom­i­na­tor: what makes money?”

In the past two years, how­ever, Hin­kle has no­ticed a ma­jor shift. “Count­less stu­dios are go­ing un­der and many are start­ing to re­alise that you can­not just make a game that mon­e­tises well; you also need to find an au­di­ence that ac­tu­ally wants to play your game,” he says. “I think a lot of Chi­nese gamers are burnt out by the same old heavy­handed free-to-play me­chan­ics. They’re look­ing for some­thing new that doesn’t pun­ish them for not spend­ing mid-game ses­sion. It makes sense that games like Rocket League and Over­watch are do­ing so well here. They scratch a com­pet­i­tive itch that many Chi­nese gamers are used to, but also en­cap­su­late all the highs and lows of a com­pet­i­tive match into a sin­gle game ses­sion with­out ask­ing the users to spend money to be num­ber one.”

The rise of dig­i­tal stores has led to sur­prise, break­out hits for west­ern de­vel­op­ers who have seen their games be­come cult hits in the re­gion. When Ten­cent put the Cana­dian de­vel­oper Klei En­ter­tain­ment’s sur­vival game Don’t Starve on its dig­i­tal store, the game sold more than a mil­lion copies in one month. Steam’s un­cer­tain fu­ture may, how­ever, present an in­sur­mount­able bar­rier to west­ern de­vel­op­ers hop­ing to repli­cate this kind of suc­cess sim­ply by trans­lat­ing their game into Man­darin. “Steam does not have ap­proval to op­er­ate in China,” Ahmed says. “The games don’t have ap­proval. China man­dates that all games must be ap­proved by a gov­ern­ment body be­fore they’re al­lowed to be sold.”

These guide­lines are fairly loose, but en­able the gov­ern­ment to ban any­thing SAPPRFT deems to be of­fen­sive, counter to ‘fam­ily val­ues’, to in­cite ha­tred, or pro­mote vi­o­lence or drug use. There is no equiv­a­lent to the ESRB or PEGI rat­ing sys­tem for games in China.

When it comes to whether or not a videogame is cleared for launch, SAPPRFT is­sues a bi­nary ‘yes’ or ‘no’. Ac­cord­ing to Ahmed a game like GTAV would not pass ap­proval with­out sig­nif­i­cant changes. Yet Rock­star’s block­buster is freely avail­able in China via Steam. “It’s not easy to get ap­proval of PC games into China,” says Zhao. “The process can be te­dious.” Still, this may be the only op­tion for for­eign de­vel­op­ers who do not want to sign deals with Ten­cent, which is ru­moured to of­fer rev­enue share deals as low as 20 per cent to game de­vel­op­ers. “We should ex­pect the Chi­nese gov­ern­ment to reg­u­late or even block the plat­form soon,” Ahmed says. “Any de­vel­oper hop­ing to find suc­cess out­side of Steam should se­ri­ously in­ves­ti­gate whether or not their game will be ap­proved for sale.”

It’s not the reg­u­la­tions that have hin­dered the in­die game scene in China, how­ever, which re­mains small and nascent. Zhao be­lieves it’s an area that is likely to ex­pe­ri­ence growth in com­ing years. “More pub­lish­ers and chan­nels are look­ing for cre­ative con­tent from in­die de­vel­op­ers,” she says. “Two years ago, you could find very few in­die de­vel­op­ers in China. No­body paid them much at­ten­tion as the po­ten­tial prof­its from in­die games were seen as much lower than with big-bud­get games. But now pub­lish­ers are turn­ing to indies to find cre­ative work at a rel­a­tively low cost.”

Few share Zhao’s op­ti­mism. If Ten­cent is able to so­lid­ify its mo­nop­oly it will likely sti­fle indies. With 800 mil­lion in­stalled users on its WeChat plat­form, a su­per-app which al­lows Ten­cent to di­rectly ad­ver­tise to an au­di­ence of a size un­ri­valled any­where out­side of Face­book, the com­pany is able to make its own ver­sion of any up­start in­die hit and mar­ket it in vast bulk. In 2012, one in­die RPG de­vel­oper took to Red­dit to com­plain that their game had been cloned and up­loaded to Ten­cent’s store. Who­ever was re­spon­si­ble, the de­vel­oper wrote, “took our files, re­verse-en­gi­neered the server, and hosted the game them­selves with Chi­nese trans­la­tions. They stole years of our hard work. We have no idea how many users they have or how much money they’re mak­ing, but they have a high rat­ing on that site and they might be prof­it­ing off the stolen game more than we are.” (Ten­cent’s in­ter­na­tional head of PR re­sponded at the time, say­ing: “Our le­gal depart­ment is mon­i­tor­ing the sit­u­a­tion and, if found to be a case of in­fringe­ment, will act on it.”)

“The risk for any in­die de­vel­oper is that a huge com­pany will straight copy your idea and use way bet­ter chan­nels to dis­trib­ute the game,” Riot’s Zeng says. Even aside from the is­sue of cloning, which has also plagued west­ern dig­i­tal stores, there are struc­tural hur­dles to over­come for any Chi­nese in­die. “It’s tough for in­die devs to find huge suc­cess in China be­cause of the way in which reg­u­la­tions are run,” Ahmed says. “There’s lots of pa­per­work to get games ap­proved even be­fore you face mar­ket­ing and dis­tri­bu­tion.”

Un­til Steam is banned or reg­u­lated, the store is, ac­cord­ing to Hin­kle, chang­ing Chi­nese tastes. “The gulf be­tween Chi­nese gam­ing pref­er­ences and the rest of the world is clearly shrink­ing,” he says. “Steam has ex­posed mil­lions of Chi­nese to games which would oth­er­wise been banned by cen­sors.” Ac­cord­ing to the an­a­lyt­ics tool Steam­spy, six of the same top ten games on the plat­form are shared in both the US and China. “Once Steam is of­fi­cially banned in China, we will once again see only what is le­gal and cu­rated for the pop­u­la­tion al­lowed to be suc­cess­ful,” Hin­kle says. “Tan­gi­bly, if a de­vel­oper is re­ally try­ing to find suc­cess in the PC mar­ket in China, as long as your game is lo­calised prop­erly and op­ti­mised for a gen­er­ally lower tar­get PC spec, you can ex­pect to see sales in China.

“I think it is easy to look at the mo­bile-play statis­tics in China and cor­re­late that to a gen­uine user pref­er­ence for mo­bile gam­ing,” con­tin­ues Hin­kle. “But it’s a bit like say­ing Amer­i­cans pre­fer Ham and Cheese over a plough­man’s lunch. In re­al­ity most Amer­i­cans have just never had a plough­man’s, and most Chi­nese have never had enough spare room, dis­pos­able in­come, and lack of parental over­sight to buy a PC gam­ing rig. So at present in China, games are still syn­ony­mous with mo­bile phones. But this is chang­ing. With 1.4 bil­lion peo­ple, even small de­mo­graph­ics, by gross per­cent­age, can con­sti­tute a mas­sive mar­ket.”

If Ten­cent suc­cess­fully lob­bies the Chi­nese gov­ern­ment to ban Steam in the coun­try, it will, as of to­day, have an al­most un­chal­lenged mo­nop­oly in the Chi­nese mar­ket, one that could be lever­aged to at­tract de­vel­op­ers, ex­pand the com­pany’s port­fo­lio, mar­ket test its own sales struc­tures, and roll out prod­ucts which can be in­ter­na­tion­ally suc­cess­ful. “Ten­cent is very good at play­ing the long game,” Hin­kle said, who is crit­i­cal of what he sees as a Stateaf­fil­i­ated com­pany’s pri­ori­ti­sa­tion of profit over craft and artis­tic in­vest­ment. “Its growth tra­jec­tory has al­ways been de­ter­mined by where users can be ab­sorbed, not mak­ing games and cer­tainly not by em­pow­er­ing de­vel­op­ers to reach play­ers.”

If Steam is banned in China, Ten­cent will have the fund­ing and gov­ern­ment back­ing to sur­vive for years, re­gard­less of whether or not the ven­ture proves im­me­di­ately prof­itable. Its pock­ets are un­fath­omably deep: in Septem­ber 2016 the com­pany sur­passed China Mo­bile Ltd to be­come China’s most valu­able cor­po­ra­tion, with a mar­ket value of HK$1.99 tril­lion (£197 bil­lion). Dur­ing this time, Ten­cent will be able to steadily grow its user­base, in much the same way it has done with WeChat. Ahmed is un­con­vinced that Ten­cent will be left to mo­nop­o­lise the Chi­nese PC games mar­ket un­chal­lenged; it is by no means the only big suc­cess story in China, and its com­peti­tors have not failed to no­tice the op­por­tu­ni­ties games present. “Even if Ten­cent is able to shut down Steam there are plenty of huge en­trants to the mar­ket com­ing,” he says. Alibaba, the Chi­nese equiv­a­lent to Ama­zon which re­cently be­came the most valu­able com­pany in Asia, is due to sell PC games via a dig­i­tal store, for ex­am­ple, while Won­der Cin­e­mas, which is owned by the ma­jor Amer­i­can cinema chain AMC (it­self owned by AMC En­ter­tain­ment Hold­ings, Inc, a com­pany ma­jor­ity-owned by Chi­nese con­glom­er­ate Dalian Wanda Group) is ru­moured to be en­ter­ing the videogame mar­ket soon. “What­ever hap­pens I be­lieve there will be lots of healthy com­pe­ti­tion and room for growth,” says Ahmed.

For Hin­kle, how­ever, the fu­ture looks wor­ry­ing. “Steam is not with­out its flaws,” he says. “But the al­ter­na­tive creep­ing over the hori­zon is an im­pas­sive, non-trans­par­ent jug­ger­naut with a deeply au­thor­i­tar­ian regime back­ing it fi­nan­cially and lead­ing it by proxy. The po­ten­tial of a fu­ture where Bei­jing’s cen­sors in­flu­ence what games we play is very real.”

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