Delayed wages, lower profits: Chinese gaming firms fret as approval freeze bites

BEIJING/SHANGHAI (Reuters) - As the maker of family-friendly games like “Gardenscapes” and “Toy Blast”, iDreamSky Technology never expected to get caught up in a tangle with Chinese regulators.

People play online games at an internet cafe in Fuyang, Anhui province, China August 20, 2018. Picture taken August 20, 2018. REUTERS/Stringer

But the Shenzhen-based gaming company is enduring an unprecedented wait for over a dozen of its games to be approved for release in China, a situation it fears could impact profits this year.

iDreamSky is one of many Chinese gaming firms fretting over the implications of a regulatory hold-up that began in March and prompted Tencent (0700.HK), China’s largest social media and gaming company, to warn of slower revenue growth.

The reason for the approval slowdown appears to be the result of a bureaucratic reshuffle this year as China tightened its grip on content for entertainment ranging from video games to television reality shows.

Those changes have bogged down the approval process as the purview of each regulatory office is refined, industry insiders say.

While analysts expect Tencent to bounce back thanks to its many business streams, they say many smaller companies that rely on a few game releases a year are at risk.

“It’s hurt us a lot,” said one iDreamSky employee, referring to the approval situation. “This will have an impact on our business in the second half of this year and next year.” The employee spoke on condition of anonymity, citing market sensitivities.

iDreamSky, which is planning to list on the Hong Kong stock exchange, said in May it expected to launch 13 licensed and self-developed games in 2018 and 2019, in genres ranging from sports to puzzles.

The company was previously listed on the United States’ Nasdaq board and is backed by Tencent, which is its second-largest shareholder with a 20.65 percent stake.

iDreamSky did not respond to requests for comment.

China overtook the United States as the largest single gaming market by revenue in 2016, and is expected to rake in $37.9 billion this year, up 17 percent from last year, according to the research firm Newzoo.

The Chinese gaming industry comprises over 200 companies, 188 of which are publicly listed and earn 90 percent of total revenue, Newzoo said.

These companies are subject to complicated game approval procedures in China, with executives saying that it can take six months or more for a game to be approved for sale.

Games have to be approved by the government watchdogs for media publication, cyberspace and intellectual property, as well as the ministries for culture and information technology, who scrutinize things like content and copyrights. Additional approvals are required for imported games.

“You need licenses for everything in China,” said David Hanson, co-chief executive of the gaming distribution platform Ultra. “But in the West it’s instant - you work in a basement and then release your game.”

Tencent last week said a government restructuring had caused a temporary suspension of approvals that would have allowed it to monetize its most popular game.

The Chinese government in March split the industry’s main regulator into two units, while transferring some power to the Communist Party propaganda department, in a step aimed at strengthening its grip over content and ideology.

Government data shows that the reorganization coincided with a halt in approvals.

China gave the green light to 1,982 domestic and foreign online games between January and March this year before suddenly stopping approvals, according to government data. In 2017, it approved a total of 9,651 domestic and foreign online games.

China’s Ministry of Culture and Tourism did not respond to requests for comment.

A founder of a gaming studio in the northern province of Hebei, who would only agree to use his surname, Cang, said he been forced to delay salary payments and use his own money to keep his business going.

“The approval freeze hits small game companies like mine the hardest, it makes it hard for us to go on,” said Cang, whose company has seven employees. “My goal for this year is not to go bankrupt.”

Fuchun Technology Co Ltd (300299.SZ), which makes mobile, console and online games, said in July that it would likely report a loss for the first half as it was unable to release new games as scheduled.

Some reprieve has been given in the form of a “green channel” which allows new games to obtain one-month temporary licenses for new games, but only ten have so far been granted this, industry executives said.

The government is still assessing games despite the halt in approvals, said a censor at a publishing house in the eastern city of Hangzhou who examines games before they go to the central regulator for further checks. He said that there had been a tightening this year on what types of content were acceptable.

Content seen as being at odds with China’s “socialist core values” is being scrubbed, while games that are too violent and gory - for example those involving zombies - are being rejected, said the censor, who only gave his surname as Zhang.

For now, companies can only keep applying for approvals and hope things change, said the iDreamSky employee.

“We’re still filling out all the applications,” she said. “Maybe things will get back to business by October or end of the year. We all hope so.”

Additional Reporting by SHANGHAI Newsroom and Holly Chik in HONG KONG; Editing by Philip McClellan

(Original source)