China’s new law on publishing online games “Draw Probability”, it’s not the end of F2P monetization

Mobile game developers, publishers, marketers, all of these have to workaround the laws outlined by the government and any new changes introduced into the legal system. On December 6, the Ministry of Culture announced on its official website "The specification of online game operators to strengthen systems in the post-regulatory work notice", and for the first time clearly defined online game virtual currency, virtual props and asserted that it cannot be converted to legal tender. Which is the case for most online games anyway.

In the notice however, there was an unexpected new provision (approx translation from Chinese):

This is expected to be implemented by May 1st 2017.

China's mobile game industry has largely relied on 'lucky draw' type features for a notable portion of its income. With the implementation of this regulation, the first knee-jerk reaction is that by displaying the draw rates, players can make a more informed decision when drawing for items in-game, thus opportunity to earn from the players is decreased. I believe this is right to a certain degree, but not in the long term. Let’s take a look at some of the potential effects of this new regulation.

It will decrease in-game spending, but only in the short term - Japan actually released an essentially same law a while ago (Gacha Display Law). Before this law was implemented, company stocks plummeted, people were afraid that this would be the end of the the online gaming era of monetizing through a F2P model. Well, revenue did slow down initially but recovered so quickly that it was essentially negligible, and Japan remains one of the top markets for mobile games

Few reasons why it had little effect:

Draw rates/cost become more consistent between games - Gamers are great at basic mathematics, once games release the drop rates, players are going to be punching numbers into their calculators trying to figure out how much money they need to spend to get the item they want, compare this cost with other similar games and some may even just opt to spend money in a game where the average cost of drawing a similar (perceived) value item is cheaper, assuming that both games offer a relatively similar level of entertainment to the player. Game developers can simply say that the items between different games are different and that item X drawn here is worth more than item X drawn in another game. However, a digital items value can only be set by the players themselves, game developers are purely just consultants that provide a rough foundation in determining an item’s value. What I view as $10 may be perceived as $0 in my parent’s eyes, actually they may even view it as a cost, because they have to download the game to claim it, which takes up space on their phones. Anyway, If this does happen and players do switch to other games as a result of the higher costs, the obvious choice for game developers is to lower the average draw cost by increasing draw probability or cost per draw, but this would hurt its own income and potentially start a price war. Thus in the end, I believe that game developers will naturally align their draw chances and the average cost to acquire draw items.

Increase in Complaints --> Change in draw rate models - In a game of chance, majority of the players will be centered around the average cost, but there will also be huge winners that draw the item they want on the first few tries, which will not be an issue for the players, but for the biggest losers who drew dozens of times and still not get an item that has a 10% draw rate, an increase in complaints is essentially guaranteed. To prevent such situations from happening, game developers are likely to implement several different models (there are probably more, but these are 2 that came to mind):

Potentially increased revenue - For those that have drawn say 10 times for an item with a 10% chance and still haven’t gotten the item they want, well they have already invested so much resources and must keep drawing to ensure that the resources spent has not been completely wasted, which may actually even increase the spending, because they know that they are getting close. But if they did not know the odds to begin with, some people would just have assume that the odds are impossible and give up before even reaching the 10 draws, particularly the small to medium spenders.

In summary, although it seems on the surface that this regulation could hinder the online games market growth, but I believe that it is just a small bump that game developers will quickly ride over.

Sources: GameLook, Venture Beat, Serkantoto and various other google searches

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