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.”