China recently released a draft containing 64 rules on online gaming right before Christmas, shocking the market as the two largest online gaming stocks in China dropped significantly. NetEase Inc. fell over 23%, and Tencent declined over 14%. Let's examine how these new rules affect League of Legends and Genshin Impact!

How the New Rules Affect League of Legends and Tencent Games?

Let's be honest, no one knows how these rules affect the global gaming industry. However, we are pretty sure this will affect one of the most popular online gaming, League of Legends. League is owned by Tencent and majority of the new rules are set to limit the profitability. Here are the 4 main points that will affect League and app games.

1. Reward Restrictions: Prohibit the setting of incentivizing rewards such as daily logins, first-time recharges, and consecutive recharges to avoid excessive consumption by players. Most likely daily win bonus and skin shards will be removed. 
2. Virtual Item Standards: Prohibit gaming entities from offering or condoning high-priced transactions of virtual items through speculation, auctions, or similar means. This will affect studios selling exclusive content and skins.
3. Recharge Limit: All online games must set a recharge limit for users and publicize it in the service rules to prevent excessive recharging.
4. Consumption Reminders: Establish a pop-up reminder mechanism to timely alert users of irrational consumption behaviors, ensuring rationality and control of spending. This greatly reduces retention, which is a key metric for a successful game.

Thankfully, Weibo Gaming didn't become the World Champions this year, or else skin sales would definitely have been impacted. Jokes aside, Game studios in Tencent will be busy adjusting to these new requirements and seeking alternative revenue sources. I predict that these companies will invest more and try to increase sales in foreign markets.

Tencent After 2021 Crackdown

The regulatory crackdown in 2021 led to an eight month-long freeze in licenses for new games and more restrictions on playing time for minors. Tencent had the first annual revenue decline and stock had kept falling till the end of 2022. Tencent's domestic games revenue for the quarter grew 5%, driven by titles such as the multi-player role-playing game "Lost Ark" and shooting game "Valorant", developed by Riot Games. Tencent highlighted nine games, including "Honor of Kings World", "Valorant Mobile", "Monster Hunter Mobile" and "Assassin's Creed Mobile", that are pending to be released. The company's president, Martin Lau, announced that they have built a pipeline of new games, expanding their own game IP. The new 2023 restrictions are certainly not great news for their strategy. Unless they can produce something as successful as Genshin Impact, which penetrated foreign markets with a Chinese IP, Tencent can only rely on the success of North American IPs.

How this affects Gacha Games and Genshin Impact?

Two particular rules stab games like Genshin Impact the hardest. Article 39.5 states that random draw services must not be provided to minors. Based on what I can find is that 27% are under the age of 25 in Genshin Impact. Article 27 stipulates that when online gaming companies offer services involving random draws, they must set reasonable limits on the number of draws and the probability of winning, to prevent inducing excessive spending by players. It also requires companies to provide alternative methods for obtaining the same virtual items and value-added services, such as direct purchase using in-game currency or exchange with other virtual items.

Gacha and loot box systems, which essentially involved gambling, didn’t have a spending cap before. Without a guaranteed minimum, aka pity system, players could end up in a bottomless pit of spending. With the new rule, the pricing of gacha characters becomes transparent. Taking Genshin Impact as an example, an expected number of pulls for a limited character is 95, equating to 95*160=15,200 primogems. Considering the 648 RMB ( $90.85 USD ) recharge tier gives 8080 primogems, the equivalent cost in RMB for such a character would be 15,200/8080*648=1,219 RMB ( $170.90 ). Many Chinese players, who casually spend 648 RMB per transaction without much thought, might be deterred if they see a limited five-star character explicitly priced at 1,200 RMB in the store.

Overall a win for gamers and a big negative impact for gaming industry. Hopefully this will lead to a positive development for monetizing online gaming and not focusing on exclusive content, moving away from F2P.

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