This year's ChinaJoy, the largest gaming and digital entertainment exhibition held in Asia, started on July 28th. While the event still draws game enthusiasts and industry professionals, it seems to have taken a more subdued tone. The absence of extravagant parties, yacht trips, and lavish feasts after the exhibition has been noticed, and there is a sense of confusion among attendees who are accustomed to these festivities.
The decrease in attendance can be attributed to the lack of highly profitable projects. Several anticipated game releases with significant pre-registration numbers were unexpectedly canceled, and some heavily promoted projects failed to meet expectations. Additionally, there have been reports of layoffs, dismissals, and even bankruptcies within the industry. As a result, many individuals are facing job insecurity and uncertainty, affecting their enthusiasm for gathering at ChinaJoy.
The recession is not only happening in small and medium-sized gaming companies but also in large companies, which are calling for cost reduction and efficiency improvement. Rumors of reducing executive compensation or rotating positions in large companies are popular, and it is common to see a reduction in employee benefits and department downsizing.
All of this happened very quickly. One second, the gaming industry was synonymous with high income and huge profits, and the next second, mainstream media began to mildly encourage the gaming industry to "develop and overcome difficulties."
For some people, the factors of unease began to appear five years ago. In 2018, the total output value of the domestic gaming industry exceeded 210 billion CNY, with both users and revenue doubling, still appearing prosperous. However, even in such a joyful atmosphere, there were hidden signs of decline: in 2018, the growth rate of the Chinese gaming industry decreased to less than 10% for the first time, especially the growth rate of user scale slowed down significantly, and the era of rapid growth was almost coming to an end.
The stagnant user growth means that the user potential of the blue ocean market has been largely tapped, and every game to come will face the same group of users, whose demands for quality will continue to increase.
This means that the practice of relying on popular themes to replicate existing numerical systems and then forcefully promote through channels and distribution capabilities is becoming more and more difficult. Various segmented and vertical products are dividing the existing user market. Larger companies started to focus on improving the quality of their work in 2016 and 2017, while some medium-sized companies hurriedly embarked on this path around 2018.
Another problem is that there is not much experience among practitioners in improving quality. For most companies, the basic choices for improvement include art, plot content, and visual expression. The improvement of these qualities also means a significant increase in costs. Before 2018, a game with a cost of 20 million could be considered as a medium production level, but now, in 2023, costs of hundreds of millions or even billions have become increasingly common when the game is launched. Many figures were unimaginable for project managers in 2018.
Policy factors are also fueling the rise in costs. Starting in 2018, the issuance of game licenses has significantly tightened, and there have been months of suspension; even if the issuance resumes, the quantity is much less than before. For game companies, this means fewer opportunities for game launches and increased revenue pressure for individual projects. Therefore, compared to small categories and small-scale works, more companies are pinning their hopes on large projects that have the potential to make a big profit.
In 2018, there were rumors within the industry that Tencent executives claimed at the annual meeting that they were too cautious and missed many potential investment opportunities.
In the following years, game companies' investment and financing activities became particularly frequent, making it unprecedentedly easy to start a business in this industry, with new companies emerging, like cell division.
After the release of "Genshin Impact" in 2020, the Anime-style genre became mainstream. Many, if not all, game companies began to plan for a transformation towards the Anime-style genre, preparing various "Genshin Like" or "Genshin Killer" games.
During this period, investors also sought teams that appeared to be good at or had the potential to develop Anime-style games, invested in them, and encouraged them to create Genshin-like games.
In response to these numerous new projects, some companies split their experienced and stable teams into separate projects, while others began aggressively recruiting new employees. The hiring incentives and salary packages reached astonishing levels.
As a result, in order to retain their existing employees, major gaming companies also started to increase their salary levels. Many companies, including small and medium-sized gaming companies that had not yet turned a profit, benchmarked their average wages against those of top enterprises. The list of bonuses for year-end awards in gaming companies also frequently became a hot topic on social media during those years. Luxury brand handbags, high-end electronic products from Apple, and even expensive branded auto-mobiles could appear as prizes in the year-end raffles of certain gaming companies.
However, the results were not as expected by many.
Improving quality requires more manpower, and with the increase in salary expenses and team expansion, costs skyrocketed exponentially. When costs accumulated to a certain extent, the pressure to recoup them increased, leaving very few optional gameplay (and accompanying numerical structures). New teams that want to innovate in gameplay almost always face opposition from investors and experts. After all, faced with huge costs, decision-makers tend to be more conservative and prefer to choose proven approaches rather than exploring new paths.
The works produced by these companies that started to lay out and expand around the same period showed a high degree of homogeneity, with similar themes, numerical structures, and gameplay. In turn, this intensified players' aesthetic fatigue and pickiness.
By 2021, the industry's decline was quite evident. In that year, China's gaming market achieved actual sales revenue of 296.513 billion CNY, an increase of 17.826 billion CNY compared to 2020, representing a growth rate of 6.40%. Although actual sales revenue continued to grow, the growth rate was nearly 15% lower than the year-on-year growth rate in 2020, a significant drop.
Furthermore, the impact of the pandemic and game approvals should not be overlooked. The pandemic had a significant impact on the progress of development and operation, further increasing costs. The tightening of game approvals also constrained decision-making for gaming companies, forcing them to compromise on the imaginative ideas they presented to secure investments.
Managing large teams is already a laborious task, and many new companies were not adequately prepared and plunged into battles that required complex pipeline coordination. Furthermore, companies lacking experience in managing large teams found that projects were frequently overhauled at the technical level, resulting in constant delays in launch dates. Costs continued to rise.
While gaming companies were working tirelessly, their user base was also undergoing changes. The internal and external environment over the past three years has led to a significant slowdown in domestic economic growth, and its impact is becoming increasingly evident. In addition, overall social trends and changes in ideology are gradually emerging. The user base in 2018 and the user base in 2023 have significant differences in their thoughts and ideas, and their modes of expression are also vastly different.
First, affected by the economy, the overall entertainment budget in the hands of users has significantly decreased. Due to the pandemic, most people chose to reduce their outings and work from home. After the pandemic management measures were relaxed, entertainment expenses focused on the social and travel-related activities that were restricted during the pandemic, resulting in a dispersion of investment in online entertainment. In 2022, the actual sales revenue of the Chinese gaming market was 193.058 billion CNY, a year-on-year decrease of 14.40%, and the user base also decreased by 0.23%. There is a decrease in new users, and the willingness of old users to spend is also decreasing. However, research and development costs have not decreased, and promotion costs are increasing, making it difficult for many gaming companies to make decisions.
Adding to this already difficult situation is the change in user psychology. In recent years, users have been increasingly pursuing a sense of security, and they generally have a lower willingness to spend money on games that cannot provide enough security. After all, in recent years, users have seen many games that were shut down shortly after an operation or even companies going bankrupt, causing the time, energy, and money they invested in these games to go up in smoke.
This concern has spread, and after a game is launched, users will observe its performance on various platforms and channels, speculate on how much money the game company can make, and use this to judge how long the game can survive. Users will also continuously pay attention to whether an account for a product can retain its value in the secondary market and whether it can be sold. They approach game products with an attitude similar to that of financial products. This invisibly increases the difficulty of game promotion and the cost of game operation.
Ultimately, this has led to the Matthew Effect in the gaming market: more and more people recognize the saying that "one must become an absolute leader in a specific field in order to make money."
Reservations and works with costs exceeding hundreds of millions have been delayed for two to three years due to licensing. They have all burst out in the first half of this year. Alongside them are numerous imported games that have accumulated stable reputations abroad, as well as hundreds of new companies and works that have been launched in the past two to three years.
Everyone's costs have piled up to the point where they have to be recovered immediately. The high-speed iteration of the market also worries these companies. If they cannot go online immediately, their products may quickly become outdated and unable to recover costs. With this high-density release, the prospects for small and medium-sized companies' work to compete with the top products are not optimistic. Even for big productions with large investments, this year is not easy.
By ChinaJoy 2023, more than half of the year has passed, and for many gaming companies, this has been a difficult year. The most optimistic expectation in the industry is that things will get slightly better next year. The economy may rebound under policy stimulus, and the number of products will decrease, resulting in lower customer acquisition costs. However, whether this expectation can be realized is still unknown.
On the other hand, some people believe that the current situation in the Chinese gaming industry is still a result of the excessive expansion in 2018. The current period of pain is more like a natural adjustment made by the market, and the industry is just readjusting itself and returning to its rightful position in the market.