Inside Social Games

Bad news for Chinese entrepreneurs and the international investors who want to support them: The Chinese government has “banned foreign investors from operating online games ‘in any form’ in the country,” according to state-run media.

The rationale is being vaguely described as bringing games in line that were offering somehow illegal content. “The new rule is a good beginning in approving the online games in accordance with laws and will be conducive to the regulation of online gaming businesses,” said Kou Xiaowei, vice director of China’s General Administration of Press and Publication’s technological and digital department.

That statement seems like a circular argument to us, but hey, it’s not like we have a say, either.

Among the things international entities cannot do: Set up “wholly owned enterprises, joint ventures and cooperatives,” or contract “relevant agreements” or offer “technological support.”

We had been hearing rumors from sources in China about American investors looking at some Chinese social gaming companies.

[Update: In fact, one of those sources pinged us from Beijing to say that there's a lot more to the story:

This is actually not a new policy. It is a reiteration of something that has been on the books, and appears to be part of a major bureaucratic battle between GAPP and the Ministry of Culture. The MOC has recently claimed that, with backing of the central government, it is now the main regulator of the game industry. The GAPP issued a flurry of announcements in last 2 days; no coincidence that they came while the MOC-backed China GDC conference is underway

As for foreign investment, all of China's listed game firms are technically foreign invested. (investors are buying shares issued by offshore firms, which in turn have contractual relationships w the domestic firms that actually run the games) So this "rule" is either unenforceable, it will have to be applied against Shanda, Changyou et al, or it will be selectively enforced to discriminate against foreign investment, which would be blatant protectionism and likely a major WTO violation.

You might also add that at USD 3.5b in 2009 the online game business is by far the biggest Internet market in china, and is several times bigger than China's film market. The only reason Hollywood issues have taken prominence in US-China relations is that the MPAA is a very effective lobbyist, while so far the ESA has not made China protectionism an issue in DC. But given that the major chinese game firms are not just investing in US game companies but also setting up their own operations in the US (perfect world had USD 3m US revenue in Q2, Netdragon, Kingsoft, Tencent etc), the discriminatory nature of China's policies are even more clearly contrasted against the wide open US market. It is total BS.

Wow.]

Domestic companies were also affected: “[The new rule] stated that no organizations or individuals could run online gaming business without permits from the GAPP and online games without a prior approval from the administration would not be allowed to go online,” according to the Chinese media report. The result, it seems, is a pounding for publicly-traded Chinese gaming companies like Changyou and Shanda. Both took massive hits from Wall Street this morning, as the news got out.

Shanda, which IPOed just last month, had already been struggling. Today did not help:

Meanwhile, Changyou — a much stronger stock — also got hit. However, it seems to have recovered much of its losses since this morning: