002555.SHE

Companies are enhancing their development capabilities and accelerating their moves into foreign markets to offset slowing growth at home

  

By Research-Select

In a bid to standardize regulation of the game sector and promote its high-quality and sustainable development, China’s National Press and Publication Administration released a “Draft Regulation to Re-establish a Regulatory Framework for the Video Game Industry” at the end of last year. In the draft document, the industry’s main overseer clarified issues such as regulations involving market access for online game operators.

We’ve reached out to top-tier game operators through various channels and, so far, they are still reviewing the proposed measures but have yet to definitively assess their impact, largely because many of these measures are not yet finalized and how they will be implemented remains to be seen.

One important point observed by industry leaders is the measure’s apparent intent to encourage better gaming products, which might herald a more centralized and concentrated supply side and greater eagerness by companies to expand overseas.

A case in point is 37 Interactive Entertainment (002555.SH), which has the advantage of being able to cost-effectively add new users and analyze market demand. The company has also strengthened its own game development capabilities in recent years and invested more in overseas expansion to offset a slowdown in the domestic game market.

Even before the release of this government draft document, domestic game operators were already looking for ways to transition. Two main paths stand out in the short-term: designing games for WeChat mini-games, and seeking overseas ventures. Over the longer term, many are also starting to explore how AI could transform the sector.

Tough times in mini-games

However, the mini-game market is likely to quickly become crowded, and such games tend to have limited shelf lives. Investors also worry such games will eat into time that players spend on traditional mobile games. But such concerns are largely moot, as these new games are more likely to attract players to gaming companies. Instead, short videos look more likely to see their share of people’s screen time reduced.

The mini-game segment has low barriers to entry, but the bar for making profits is quite high. Small teams hoping for big hits could easily fail. What’s more, such games require companies to invest more in user acquisition through promotions, even though players may not spend much within the games. Such mini-games also underperform traditional mobile games in player retention and conversion rates. As attracting new players gets more expensive, companies require a wide range of strong capabilities, from game development to operation and marketing, to turn a profit.

That’s why industry leaders think this business is beneath them, while laggards see it as beyond them. But it seems that 37 Interactive has been doing quite well in this field. In the first quarter of last year, such games contributed over 1 billion yuan ($141 million) to the company’s revenue with a profit margin higher than that for traditional mobile games.

Meanwhile, AI games were all the rage last year. 37 Interactive has developed an AI-enabled user acquisition system that now works automatically and can adjust its strategies based on results. And its production of traffic ads can be accomplished with AI as well.

AI can create more than 90% of the 2D images and can also assist in developing 3D animation, considerably reducing costs for game developers. Unfortunately, the rising cost of traffic generation offsets those savings somewhat. The market is eager to see such new innovative business strategies, but has so far been underwhelmed by what’s been achieved. But the New Year has just begun, and investors are still closely watching for what may lie ahead for the game industry in 2024.

This article was originally published by Research-Select, a research sharing platform for buy-side investors.

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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