Online gaming in China is subject to the same overall regulatory framework that applies to software as a service (SaaS) in China.
The regulatory framework comprises no less than a dozen key components that have developed over the past twenty years or so. The development has not evolved neatly. Earlier regulations have not been comprehensively replaced or modified by later regulations. Rather, the development has been somewhat haphazard; with an apparent tension between the various authorities competing for control of the relevant sectors. A painstaking chronological analysis is therefore required to discern those threads surviving or running consistently throughout. As is always true for China, the regulatory framework includes certain inconsistencies and loose ends, and the authorities may not always interpret the regulations in a manner consistent with a plain reading.
We explored these regulations in SaaS in China: Resistance is Futile. As we noted in that post, the lawful delivery of SaaS in China requires a platform hosted on a server located in China and operated by a Chinese-owned entity. The operating entity must have direct contact with Chinese consumers and must have the required licenses and approvals. A system is required for the proper handling of the gamers’ personal information in accordance with Chinese cyberlaw.
Foreign online gaming companies often balk at these restrictions or expect simple workarounds.
One popular but flawed workaround involves a “variable interest entity,” or “VIE.” A VIE involves Chinese partners holding assets on behalf of foreigners in sectors from which those foreigners are excluded. These structures not supported by law and our China lawyers have seen companies waste substantial time and money on illegal structures over which the foreigners have no effective control.
Another flawed workaround involves delivering online games to Chinese nationals from foreign servers. This is popular because it circumvents the requirements on what needs to be housed on Mainland servers. In taking this route, foreign gaming companies ultimately compromise their access to the Chinese gaming market. Most Chinese do not use VPNs, so the foreign servers are hard for them to locate and even harder for the foreigners to properly market. Foreign gaming companies also run the risk of having their games blocked when they are distributed this way.
For these reasons, we conclude that resistance to China’s online gaming regulations is also futile. Especially if you are a serious player.
To gain full access to the Chinese online gaming market, online gaming companies should comply with China’s gaming regulations by identifying and cooperating with the right Chinese companies. The biggest problem is usually finding an appropriate Chinese partner or licensee — one with the required licenses and approvals. We have identified and analyzed the requirements an appropriate Chinese company must satisfy; not less than six separate licenses and permits are required. As is so often the case in China, confirming whether a Chinese company has (or can get) these licenses and permits is a relatively simple matter of due diligence. Again, we see a lot of time and money wasted on deals with Chinese companies that lack the necessary capacity.
The only PRC companies with the capacity to obtain the necessary licenses and permits tend to be major internet service providers with established gaming platforms. Proper marketing to Mainland gamers will be effectively impossible without the involvement of such companies in any event. These companies will expect foreign game suppliers to provide a turnkey or pre-installed solution and give them an interest in the underlying technology and game IP. They will also take a certain share of gross receipts. So, even when you’ve found a Chinese company with the necessary capacity, you need to understand their commercial requirements so you can decide whether they even make sense for you.
