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Online game market: The trend toward higher quality; leading game companies boost R&D

January 26, 2021

Online game market: The trend toward higher quality; leading game companies boost R&D


China’s game market saw a boom last year as people spent more time at home amid the COVID-19 pandemic.

Revenue generated by China’s game market grew 20.1% YoY to Rmb208.02bn over 1–3Q20, with revenue from mobile games accounting for a 75% share. There was a rise in both the number of active gamers and the amount of time spent on playing games.


Figure 1: Revenue generated by China’s game market (2010–3Q20)
Source: CNG, China Audio-video and Digital Publishing Association, IDC, CICC Research

Figure 2: Breakdown of China’s game market (2016–3Q20)
Source: CNG, China Audio-video and Digital Publishing Association, IDC, CICC Research


Overview

The number of people playing mobile games has reached 651mn, after having risen 0.94% QoQ in 1Q20, 0.25% QoQ in 2Q20 and 0.51% QoQ in 3Q20.

While this number could gradually slow and stabilize, it is worth noting that even after average revenue per user (ARPU) generated by mobile games grew 36.4% QoQ in 1Q20, it still rose 2.6% QoQ to Rmb78 in 3Q20, which could indicate strong growth potential.


Going forward, ARPU generated by mobile games could continue to grow and the mobile game market may further expand. This is as users are increasingly willing to pay for games and the quality of games is improving.


Regulatory approval of licenses for online games normalized; policies to encourage quality games

Over January 1–December 2, 2020, National Press and Publication Administration (NPPA) issued 21 batches of licenses for domestic online games (1,227 licenses in total) and four batches of licenses for imported online games (98 licenses in total). On average, NPPA issued one to two batches of licenses (about 50–70 licenses per batch) for domestic online games per month, even during the COVID-19 pandemic.

In addition to issuing new licenses for games, NPPA has also revoked licenses for 19 existing games that violated related rules since September, in an effort to strictly control the quality of games. Meanwhile, NPPA released information about changes of operators, publishers and names of some games that gained regulatory licenses over 2015–2020.


The trend toward higher quality games

The number of regulatory licenses for online games has declined as gamers pay greater attention to the quality of games.


The emphasis on quality could mean a trend toward higher R&D spending by game developers. Average R&D spending of leading game development companies in the A-share market grew at a CAGR of 24.4% from Rmb0.28bn in 2017 to Rmb0.44bn in 2019, and rose 29.2% YoY over 1–3Q20.


Furthermore, their average number of R&D employees grew at a CAGR of 16.4% from 766 in 2017 to 1,037 in 2019. Their R&D spending per R&D employee rose from Rmb397,154 in 2017 to Rmb443,036 in 2019.


Figure 3: The number of R&D employees has risen at most leading listed game companies

Note: Companies in the above figure are top 5 companies by market cap in the CITIC game sector index as of November 6, 2020; R&D employees of Century Huatong increased markedly in 2019 due to the acquisition of a game company; R&D employees of Sanqi Interactive decreased in 2018 due to the disposal of auto parts business
Source: Corporate filings, CICC Research


Competitive landscape

Data from Analysys shows that the combined market share of Tencent and NetEase stood at 69.8% in 1H20, slightly higher than in 1H19. It is worth noting that revenues and recurring net profits of some leading game companies have achieved higher-than-average growth.

Going forward, leading game companies could potentially see their market share rise further, as they continue to increase R&D spending and improve the quality of their titles.


For more details, please see our report 2021 outlook: Content, platforms, technology innovation to fuel growth published in January 2021.

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