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The Covid-19 pandemic has deeply affected the development of China's gaming industry — and a new report underlines the financial toll.

The video game market saw sales revenue and user numbers plummet in the first half of 2022, compared to the same period last year, by the China Audio and Digital Association's Game Working Committee.

Specifically, the industry’s revenue dropped 1.8% to RMB 147.8 billion ($21.9 billion USD) year-over-year, marking the first drop in China’s gaming revenues in seven years. Meanwhile, the number of game users also fell by 0.13% to 666 million.

The report largely blamed a decrease in consumer incomes and willingness to spend during the pandemic, alongside rising operating costs for game companies strained by supply chain woes. According to released by China's National Bureau of Statistics, from January to May 2022, China’s total retail sales of consumer goods dropped by 1.5% compared to last year.

Tighter budgets spilled over to the gaming industry, too. Although the game time of players has not fallen significantly, the payment rate and average revenue per user (ARPU) have decreased. There was also a lack of influential new game products launched in the first half of 2022, which amplified the consumption decrease.

After the game industry report was released, reviewed the performance of 10 leading game companies and found that overall weak growth has become a major trend. Only two gaming companies saw positive growth in revenue and net profit, the report said. Among them, Tencent's game local market revenue was 33 billion RMB (around $4 billion), a 1% decrease from last year.

A lack of innovation could be behind this downward trend. A handful of leading large companies like Tencent and NetEase have long dominated China’s gaming market — against a tough geopolitical backdrop including a faltering global economy and a crackdown on Big Tech by Chinese regulators. At the same time, video game developers have also become less efficient, thanks to. factors such as working from home and limited production materials. Some gaming companies have reacted by pulling back on projects and o adjusting teams and spending.

Gaming investors close their wallets

Xiao Zhao, a software developer on the gaming platform Steam who helps design games and find investors for his startup team, told The Org he now has no choice but to update his gaming model to adjust to this situation. “It has become more and more difficult to find investors and I have cut our project sizes to almost half since we don’t have enough budget to hire more people,” he said.

Experts echo this sentiment, and they emphasize that the investment and financing of gaming companies have tightened.

“The pace of investment and mergers and acquisitions in China’s domestic game industry has slowed down, and there are no particularly significant large-scale investment and financing cases,” Xuhua Liao, a senior cultural consumption industry analyst, told The Org.

Liao also said the market value of publicly traded Chinese game companies has plunged alongside China’s domestic stock market.

The report also shows that from January to June 2022, more than half of revenue came from overseas. The U.S. market led sales revenue, accounting for 31.72%, while the Japanese market accounted for 17.52% and the South Korean market accounted for 6.29%. However, the gap between the income share of Germany, the United Kingdom and other regions and that of South Korea is gradually narrowing.

"In our opinion, this is a worse result than our previous pessimistic expectations," Liao said, adding that the game market should not continue to decline year-over-year. "But we were not optimistic about the next three to five years, and it is difficult to see a growth of more than 5% based on the current product supply situation. The second half of the year is also not optimistic."

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