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Playing to Win in China’s Gaming Industry

Teenage boy playing the mobile games on his phone in the train
(Photo credit): Blanquart

How to successfully break into China's $22 billion gaming market.

China now houses the largest number of gamers in the world, according to CCTV, and that means a lot of downloads, screen-time engagement and business opportunities for gaming companies.

Enter any subway train in China and there will be at least a handful of people feverishly tapping away at their cellphones, playing mobile games.

With the addition of Nintendo’s newest hit Pokemon Go sweeping the world with augmented reality monsters through a smartphone app, the phenomenon of gamers immersed in their mobile game trying to “catch ‘em all” will be no exception once it becomes available in China.

China’s World of Game Craft

From “Crossfire” to the “League of Legends,” the use of digital games in China has skyrocketed and gaming has become one of the largest and fastest-growing Internet business sectors in the world. In 2015, the Chinese gaming market enjoyed almost $22 billion in revenue generated from 534 million players, according to China Internet Watch, and the numbers continue to grow. While revenue is currently neck and neck between the U.S. and China, by 2018 the two countries together will account for 50 percent of the global gaming market, with China achieving $32.8 billion in revenue and the United States amassing $24 billion.

In addition, China Internet Watch says close to 750 games were approved by the State Administration of Press, Publication, Radio, Film and Television of the People’s Republic of China in 2015, with more than 80 percent of those games being developed for PC and mobile platforms.

The biggest winners in this market are still local companies like Tencent Holdings Ltd. and Shanda Interactive Entertainment Ltd., according to China Daily, based on popularity, measured by number of Chinese users and market performance. So what will China’s gaming industry look like in the future and how can Western companies increase their share of the market?

“As a foreign game company, it’s a tough market to penetrate,” says Randy Lee, head of business development for Tencent America LLC, which is based in Redwood City, Calif. “Content is the most important factor in the U.S., but in China, distribution is king. Of course, you have to have a good game, but if you don’t have a good distribution system, it becomes a really tough market.”

Call of Duty to Enter the Chinese Market

“If you’re a Western game company trying to do business in China, you have to partner,” says Lee. “Distribution is becoming more difficult to access, and the only successful cases you see coming from Western companies in China are the ones that have partnered.”

"If you’re a Western game company trying to do business in China, you have to partner."

- Randy Lee

 Su Mon Smash, a mobile game developed by Metal Rabbit Games Co. in Changzhou
(Photo credit): Rabbx Inc.

Despite an increasing appetite for games, government regulation, fragmented business processes and higher competition make it difficult for foreign companies to navigate the industry on a solo mission.

“In the U.S., the top 10 games are very sticky and they stay there for a while,” says Hany Nada, cofounder and managing partner of GGV Capital, which has offices in China and in Silicon Valley. “In China, it’s extremely little time, with games moving and refreshing very quickly among tons of competition. Once you build a hit, it’s really hard to keep it a hit.” With 15 years of venture capital experience in the U.S. and China, GGV Capital focuses heavily on multi-stage and manages more than $3.8 billion across eight funds.

The story of Tencent and Riot Games Inc. is an example of a successful partnership, since their flagship game, “League of Legends,” has more than 100 million monthly players and generates about $1.5 billion annually.

Weather Rabbit, a mobile weather app developed by Metal Rabbit Games Co.
(Photo credit): Rabbx Inc.
"In China, once you build a hit, it’s really hard to keep it a hit."

- Hany Nada

Brandon Beck, cofounder and CEO of Riot Games headquartered in Los Angeles, stated in a press release that, “Tencent has proven itself to be a leader in the Chinese online gaming market with an unparalleled ability to drive customers to new products.”

Western companies looking to crack the Chinese market must find a reliable partner to implement strategies, map out logistics and mitigate the loss of time and money. So how do you find these partners?

For Rabbx Inc. CEO Aaron Pulkka, it was a matter of combining passion, research and seizing the right market opportunity. As a game production company developing IP and distributing VR and AR games across all entertainment platforms, Pulkka made the decision to go global and enter the Chinese market in 2012 by opening Metal Rabbit Games Co. in Changzhou. “I always knew it would be difficult to break into the Chinese market unless you were working in the country or had boots on the ground,” says Pulkka. “We started off with a core design and production team in Changzhou, but struggled to find funding in Los Angeles.” Through contacts from his previous jobs, Pulkka found an opportunity to form a joint venture with a local art studio in Changzhou, which eventually led to Metal Rabbit Games receiving funding from the local government. “They were looking for foreign experts to help expand the gaming industry in the area, so we took advantage of a program that helped us with a bit of funding, office space and an accelerated business license,” says Pulkka.

For those who don’t already have an established network or contacts in China, the next best alternative is to network. Attending events and conferences geared toward game development and learning from industry peers is the best way to gather reliable intelligence and reach a good source. Upon identifying potential partners and investors, actually going to China and connecting in person is a crucial business step.

Mobile Crossfire

Mobile gaming is the new frontier. Despite its humble beginnings, with only 5.4 percent of the market share in China in 2012, according to Forbes, it mushroomed to account for almost 40 percent of the market in 2015.

"The entertainment industry is undergoing a tremendous amount of change," says Everardo Gomez, Vice President of Corporate Banking, Entertainment and Media at East West Bank. "One aspect is that with the app stores, game developers can release a game and cultivate a large audience without going through the established game publishers. Examples are Angry Birds, Clash of Clans, Farmville etc. These franchises have created and developed intellectual property that has a large and very engaged following outside of traditional studios."

With the mobile market in China exploding, game developers and bigger companies are bombarding consumers, urging them to download games onto their cellphones. How can Western companies avoid being part of a blind mobile crossfire that results in minimal returns?

In this space, Nada recommends focusing on game content in order to stand out. “Certain genres do really well in China over others. If they can clone your game in two months, why would they want to work with you? Think of it from that perspective. You really have to have something special about your game.” According to Lee and Nada, hard-core and mid-core games are well received and casual games are a lot more dynamic in the mobile market.

“Before you go to China, study the charts,” stresses Lee. “See where your game stacks up and what genres are doing well in the U.S. and compare [that] to China.” According to Lee, 67 percent of the 100 top-grossing games in the United States were simulation games or SLGs like “Clash of the Titans” and the “SIMS.” However, role-playing games or RPGs like “Final Fantasy” and “DotA Legend” only made up 6 percent. Flip those numbers around, and you get China’s gaming market.

What further complicates the process of entering the Chinese market is the fact that there are a plethora of Android app stores in China. “There are hundreds of stores out there,” says Nada, “but you’ve got nine stores that you have to be on, including iOS, or else you’re missing out on the market.” The nine are all local Chinese apps and, as confirmed by Tech in Asia, are:

    • Baidu App Store
    • Tencent App Gem
    • Xiaomi App Store
    • Huawei App Store
    • Qihoo 360 Mobile Assistant
    • Wandoujia
    • 91 Mobile Assistant
    • HiMarket

“Nobody knows the real size of the market, since there’s so much overlap,” says Lee. Extensive research of the fragmented app market, consumer behavior and game performance statistics must be made in order to reach the largest demographic on mobile. As the market matures and bigger companies enter the space, demand for high-quality games will rise and smaller, foreign, game-developing companies will have to compete by bringing a unique value proposition.

Learning from the “League of Legends

The Tencent and Riot Games alliance is only one of the success stories proving the power of partnerships between U.S. and Chinese companies. As the experts have already emphasized, tapping into China’s gaming market is difficult without a knowledgeable and resourceful partner. While China Topix says online PC games currently dwarf mobile games with revenue of $18 billion versus $5.5 billion, the mobile gaming industry has grown immensely during the last few years. The landscape is almost a 180-degree difference from the United States and bigger gaming firms’ interest in the mobile market also accelerates the level of maturity.

China’s gaming industry comes with many subtle barriers that foreign companies would otherwise be oblivious to. “You can’t have zombies in China, but you can turn them into cyborgs to make your game work,” says Lee. “The approval process takes time, but there are ways around these barriers, and you have to work very closely with your partner.”

Companies brave enough to jump into the labyrinthine Chinese market will only be successful if they are well equipped and well informed. While it’s a difficult market to enter, once infiltrated, the Chinese gaming industry can yield great returns.

As Pulkka so accurately puts it, “Nothing worthwhile is ever easy.”

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