China's potential new gaming rules will hit smaller developers more, analyst says

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

Tencent, NetEase and Bilibili shares plunged to their lowest in more than a year Friday after China’s National Press and Publication Administration published draft rules that would prohibit incentivizing daily sign-ins for games, among other revenue-generating practices.

The comment period is open until Jan. 24. Hong Kong markets are closed Monday and Tuesday for Christmas.

“Big game developers or big DAU [daily active user] social games should fare better: This is because they have other means to boost gamers engagement, reach out to users and have stronger R&D capabilities to attract and retain gamers,” Kenneth Fong, head of China internet research, UBS, said in a note.

“With a lower revenue for online games, the ad industry would be impacted too,” he said. UBS estimates online games account for about 20% of the online ad industry’s revenue.

Gaming accounts for the majority of NetEase’s revenue, and about one-fifth or less at Tencent and Bilibili, third-quarter releases show.

Many other companies develop and publish games in China, although Beijing has in recent years made clear it would like to restrict game play, especially among minors.

It’s “very common” for online games to encourage daily sign-in and offer rewards for the initial in-app purchase, UBS’s Fong said. He pointed out that incentivizing users to sign in every day boosts engagement and allows for collection of user statistics, which can help developers adjust games in real time.

However, Fong said it is hard to quantify the financial impact of the proposed regulation since it’s unclear whether it would apply only to new games or also existing ones.

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

Generally, Fong expects new games to be affected more than old ones. “As the online game is a very creative industry,” he said, “we believe the game developers would likely design other means to attract and retain users.”