Impact of new Government regulations on Chinese gaming companies

Chinese government came out with a few new regulations yesterday for the online gaming market. In this article, I will try to list these regulations and their impact to various gaming companies in China.

First, it is going to forbid the exchange of in-game currency to the real currency. This has to be a bad news to Tencents game and SNDA. Both of these companies have very active in-game currency.

But there is a silver lining. This regulation might help to crack down on pirate servers and bots.
http://news.sina.com.cn/c/2009-06-27/153915860437s.shtml
I will describe the main point of the above article. Many bots companies use in-game bots to get in-game items and experience points. It then converts them to in-game currency. They then convert the in-game currency to the real money.

I don’t know how effective this regulation will help cracking down on the pirate servers and bots. But if it can largely eliminate the bots, it will help out many games greatly. Many games are destroyed because of the proliferation of the bots. Many games are barely surviving because of the infestation of the bots.

Another important new regulation is that the lottery box might be outlawed.
http://tech.sina.com.cn/i/2009-06-29/04113217976.shtml

The lottery box might be considered as a form of gambling and gambling is illegal in China. I will describe the working of lottery box using an example. Player A wants a very precious sword. He can buy that sword with $100 through the in-game store. Or he can spend $1 to buy a lottery box. When he opens that lottery box, there is a 1% chance that the precious sword is in the box.

Therefore, the theory behind it is very similar to lottery in the US. I have no idea if this shall be considered as a form of gambling or not. But I do know this effect can’t be neglected.

GA is the first company that uses this concept. It caught fire right away. Now everybody does it.

This regulation will affect every company that use free-to-play item-based model. That means every company except NTES.

It is a good thing that this regulation comes at this time. If it comes 1 year ago, it could really devastate a lot of companies. But as players get more and more used to the concept of lottery box, they are being used less and less. It is becoming less of a feature for the game companies. As a matter of fact, GA just announced that they will stop using lottery box altogether (to meet this regulation):
http://tech.163.com/09/0630/03/5D1BUHQO000915BF.html

Now, I will summarize the effects of these regulations. The stoppage of in-game currency to real currency will negatively affect Tencent and SNDA games. Outlawing the lottery box will negatively affect all item-based games. Therefore, all Chinese gaming companies (except NTES) will be negatively affected. Most of NTES’s games revenues come from time-based games that are not affected. Finally, if the regulation can contribute to the elimination of the bots and pirate servers, it will greatly benefit all game companies.