A significant number of smaller game developers could put themselves up for sale in 2019 due to regulatory changes, leading to greater industry consolidation, according to a research report from equity firm Tonghai Securities.

Developers will probably see a much slower game approval process and lower number of approvals in the rest of 2019, the report says. While 9,000 games were approved in 2017, potentially only around 3,000 will receive monetization approvals in 2019, analyst Esme Pau, who co-authored the report, told TechNode.

This could be the result of an ideology shift within the government, according to Pau. “They disprove of minors spending more time on games, and they think that there should be restrictions on the number of approvals this year.”

Smaller developers will be hit the hardest, since they relied on “short development cycles and quick game releases to generate cash” when approvals were easy to come by, the report said. Current conditions will pressure smaller developers, which are unable to release new games quickly and lack the resources to lengthen existing game life cycles.

This trend is echoed by Daniel Ahmad, an analyst at game research firm Niko Partners, who told TechNode in February that many small and medium-sized companies will go out of business or be acquired in 2019.

Steam, the world’s largest digital PC game distribution platform, could seem like a natural alternative for small developers since it faces no oversight in China at present. But, Pau said, most smaller developers are unable to add their games to the platform as they are highly localized for the Chinese market and tend to release mobile games, which are faster to develop.

While major developers like Tencent and NetEase could also be hit in the first half of 2019 as a result of lower revenues from legacy titles and the absence of newly approved games, they will fare better than small developers, according to the report. Large companies enjoy diversified portfolios, which include overseas game titles not affected by Chinese government regulations, helping to mitigate risks and further consolidate their leading positions.

Tony Xu is Shanghai-based tech reporter. Connect with him via e-mail: tony.xu@technode.com

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