China’s Digital Game Sector

Access to China’s digital game market is heavily restricted to U.S. and foreign game companies. Legally, the only way for U.S. personal computer (PC) and mobile game companies to enter the Chinese market is by licensing their games to Chinese operators who use their protected position to obtain a larger revenue share from U.S. games—in some cases, the majority of what a U.S. game earns in China. Within this protected market, China’s digital game firms have emerged as some of the largest in the world and have begun acquiring foreign game companies. China’s Tencent is the world’s largest gaming firm and owns the world’s top mobile and PC games by revenue. Since 2015, Chinese companies accounted for 70 percent of all digital game company acquisitions. These acquisitions are likely facilitated by the high revenue shares Chinese firms earn from foreign games and their protection from foreign competition. Chinese acquisitions of foreign game companies raise privacy concerns given the power of the Chinese government to obtain information from Chinese firms and the broad array of data collected from gaming devices (including mobile phones) such as geolocation, camera, contact, and audio recording data. Chinese game companies such as Tencent conduct a broad array of business operations (including social media, online shopping, online video content, and artificial intelligence research) incentivizing them to collect more information than U.S. game firms. The Chinese government’s restrictions result in lost opportunities for an important U.S. industry. The United States’ digital game industry exceeds both the U.S. box office and the music industry by revenue. China’s digital game market has become the largest in the world, accounting for 26 percent of global digital game revenue, but due to China’s market restrictions, U.S. games account for only 5 percent of China’s market. It is likely U.S. games would enjoy greater success in the absence of such discriminatory regulations. Currently, the most popular PC game in China is League of Legends, a U.S. game acquired by a Chinese company, and the most popular mobile game is Honor of Kings, an adaptation of League of Legends. * Intellectual property (IP) rights conditions in China further restrict access to China’s market and undermine the IP environment in other markets. Foreign producers do not release games and gaming platforms (such as single-player PC and console games) in China because widespread piracy destroys any prospect of profits. China is also the world’s top exporter of circumvention devices that allow game consoles to play pirated games. The shipment of these devices to other countries allows piracy to thrive there. Chinese companies also frequently copy U.S. games, creating unauthorized “clones,” or steal U.S. IP assets. While U.S. companies have had greater success in combatting cloned games, the sheer number of such copies suggests U.S. companies are engaged in a legal game of “whack-a-mole.”