Chinese Game Stocks Tumble on Virtual Currency Regulation

In the three-day period since the announcement of China's new laws regulating virtual currency, stock prices for major Chinese online game operators have crumbled, plunging by as much as 10% according to a report from Seeking Alpha. Affected companies are all traded in U.S. markets and include Shanda Online, Changyou, The9, NetEase, Perfect World, and Giant Interactive. This is a dramatic turnaround after months of share prices generally trending higher. 

The depressed stock prices come from investor perception that the new Chinese regulations are going to have a significant negative impact on the revenues generated by Chinese online game operators. Multiple aspects of the new regulations could potentially affect relatively common gameplay mechanics and business models used by major Chinese game operators. Coping will the requirements of the new regulations could require significant changes from some of the biggest players in the space.

One of the most fundamental problems introduced by the new regulations involve the requirement that virtual currency cannot be used for any form of gambling. As it happens, most Chinese MMORPGs use a mechanic where a player has to buy a "virtual key" with their virtual currency in order to open certain special treasure chests in the game. These chests are usually produced by achieving a major in-game goal like defeating a boss or finishing a major quest. The contents of the chest will be randomized, with the virtual item inside potentially very valuable or very cheap, but the user gets to keep whatever is in inside.

Since the virtual item in the chest has real value, the new Chinese regulations appear to consider this mechanic a form of gambling involving virtual currency. Mechanics like this appear in over 90% of Chinese online MMORPGs and the new regulations essentially force publishers to remove the mechanic. Chinese online game operators are expected to lose from 5-7% of their annual revenue as a result, according to reports in the Chinese-language Beijing Business Today.

Additionally, the regulations require that a virtual currency may only be used to purchase virtual goods and services from the company that issued the virtual currency is also hurting Chinese game companies. This flies in the face of a common practice in the Chinese game industry, where smaller companies will enter deals that let larger companies handle payment issues like billing and customer support for their games. Chinese gaming giant Shanda, for example, provides such services for numerous smaller companies, but as a term of the contract insists that clients use Shanda's own Shanda Points virtual currency in their games. These contracts appear to have been rendered illegal by the new regulations.

Finally, there's a serious issue raised by one of the new regulations not discussed in many of the earliest stories about the legislation. It is now illegal for Chinese game operators that issue virtual currency to provide any in-game secondary market that would allow players to trade virtual currency with each other. This particularly applies to MMORPGs that use two different types of in-game virtual currency, usually "game points" purchased with real money and "game coins" players earn by killing monsters and finishing quests.

It was very typical for users, particularly users of NetEase titles, to exchange game coins for game points and vice versa. NetEase's games were not freemium in a traditional sense but instead used time cards to charge players based on how long they played. Players could keep costs of playing the games low by earning game coins, trading them for game points with other players, then redeeming their game points with NetEase for more hours of play.

 As a result, NetEase's games were perceived as cheaper to play than even true freemium titles and drew very large pools of users (with 1.76 million peak concurrent users in the company's Fantasy Westward Journey MMO alone in Q1 2009). Thanks to the new laws, NetEase is very likely going to be forced to disable trades of game coins for game points and as a result could lose very significant portions of its playerbase.

While it seems likely that the robust Chinese online gaming ecosystem will eventually work itself out, the days of soaring stock prices and dramatic IPOs like Changyou's are probably over (in the short term, at least). The havoc wreaked by the new regulation also suggests that any future Chinese government regulation of virtual currency or virtual goods will not necessarily be made in a way that's sensitive to protecting the business interests of the companies involved. Shanda and NetEase were leaders in the space and thus far their stock prices are suffering from the steepest drops. 

[This story originally appeared in our sister site VirtualGoodsNews.com]

One of the most fundamental problems introduced by the new regulations involve the requirement that virtual currency cannot be used for any form of gambling. As it happens, most Chinese MMORPGs use a mechanic where a player has to buy a "virtual key" with their virtual currency in order to open certain special treasure chests in the game. These chests are usually produced by achieving a major in-game goal like defeating a boss or finishing a major quest. The contents of the chest will be randomized, with the virtual item inside potentially very valuable or very cheap, but the user gets to keep whatever is in inside.

Since the virtual item in the chest has real value, the new Chinese regulations appear to consider this mechanic a form of gambling involving virtual currency. Mechanics like this appear in over 90% of Chinese online MMORPGs and the new regulations essentially force publishers to remove the mechanic. Chinese online game operators are expected to lose from 5-7% of their annual revenue as a result, according to reports in the Chinese-language Beijing Business Today.

Additionally, the regulations require that a virtual currency may only be used to purchase virtual goods and services from the company that issued the virtual currency is also hurting Chinese game companies. This flies in the face of a common practice in the Chinese game industry, where smaller companies will enter deals that let larger companies handle payment issues like billing and customer support for their games. Chinese gaming giant Shanda, for example, provides such services for numerous smaller companies, but as a term of the contract insists that clients use Shanda's own Shanda Points virtual currency in their games. These contracts appear to have been rendered illegal by the new regulations.

Finally, there's a serious issue raised by one of the new regulations not discussed in many of the earliest stories about the legislation. It is now illegal for Chinese game operators that issue virtual currency to provide any in-game secondary market that would allow players to trade virtual currency with each other. This particularly applies to MMORPGs that use two different types of in-game virtual currency, usually "game points" purchased with real money and "game coins" players earn by killing monsters and finishing quests.

It was very typical for users, particularly users of NetEase titles, to exchange game coins for game points and vice versa. NetEase's games were not freemium in a traditional sense but instead used time cards to charge players based on how long they played. Players could keep costs of playing the games low by earning game coins, trading them for game points with other players, then redeeming their game points with NetEase for more hours of play.

 As a result, NetEase's games were perceived as cheaper to play than even true freemium titles and drew very large pools of users (with 1.76 million peak concurrent users in the company's Fantasy Westward Journey MMO alone in Q1 2009). Thanks to the new laws, NetEase is very likely going to be forced to disable trades of game coins for game points and as a result could lose very significant portions of its playerbase.

While it seems likely that the robust Chinese online gaming ecosystem will eventually work itself out, the days of soaring stock prices and dramatic IPOs like Changyou's are probably over (in the short term, at least). The havoc wreaked by the new regulation also suggests that any future Chinese government regulation of virtual currency or virtual goods will not necessarily be made in a way that's sensitive to protecting the business interests of the companies involved. Shanda and NetEase were leaders in the space and thus far their stock prices are suffering from the steepest drops. 

[This story originally appeared in our sister site VirtualGoodsNews.com]

Comments

[Maidenn]

This news didn't failed to make the gamers concern when it comes to farming currency on the MMO's they are playing specially for those who played WoW. I just want to share an article that enlightened me about the real score about the banning of gold farming in China : http://www.wowgoldfacts.com/2009/07/06/the-story-behind-the-chinese-brouhaha-lost-in-translation-indeed

[PlayNoEvil]

However, the company that should have been affected the most, Tencent, the maker of the only named currency in the regulation, QQ coins, has its stock sitting at record highs.

Giant Interactive has withdrawn its "treasure boxes" even though they did not seem to be explicitly part of the regulation. Gambling is one of the key concerns, but it has more to do with real gambling style games that many casual portals are/were hosting.

I wrote about the core issues, not the stock price at:

http://playnoevil.com/serendipity/index.php?/archives/2599-Chinese-Government-DOES-NOT-ban-Gold-Farming-Puts-Free-to-Play-in-Jeopardy-Instead.html