The Event

It’s December 22, 2023. In China, outrage and panic have taken hold. Some of the country’s flagship corporations find their stock plummeting as much as 16 to 25%. Citizens and companies alike express unified outrage in response to new rules proposed by CCP officials. The outrage is so severe that by January 2, 2024–not even 10 days after officials opened the floor for public comment on these new rules–the CCP scraps the rules entirely. Only after a top party official is fired and the rules fade out of mainstream coverage does public outrage subside and most Chinese stocks stabilize.

What prompted such swift outrage from the public and equally swift acquiescence from the government? What line did the CCP cross? You might expect public outrage over a crackdown on free speech or civil liberties, a continuation of Zero COVID, or maybe even a bold military attack on a dangerous foe. In reality, the government crossed none of these lines. Rather, Chinese citizens and corporations drew the line at regulations on online gaming. In attempting to restrict video game purchases and the log-in bonuses of countless mobile users, officials quickly found themselves the ire of the entire country.

The intense response over something seemingly so innocent as online gaming warrants an explanation. What rules did these officials propose? Why did they propose them? Why did they send some Chinese stocks tumbling? And what are the implications for other nations like America and the future of online gaming regulation?

The Context – Online Gaming’s “Whales”

To understand what’s happening within China, we first need to understand how much of the online gaming industry currently makes its money.

As a consumer, video games provide some of the highest return on investment of any product on the market. For $20 to $60, you can have a fun experience that typically lasts anywhere from 6 to 100+ hours. When thinking about cost-per-hour playing, these games can be the cheapest form of entertainment a consumer could purchase. Even for small game developers, a few years developing a fun game loop for players at a low price can yield record sales and set the game’s creators up with generational wealth.

For a large business, though, selling the game itself provides little value. Instead, the primary revenue stream comes from the implementation of what is known as the “Whale Model” of online gaming. This model relies heavily on a small fraction of players, often referred to as “whales,” who are willing to spend significant amounts of money on in-game purchases, far beyond the initial cost of the game. These purchases can range from cosmetic items, such as character skins and decorations, to gameplay advantages, like special weapons or abilities that can give players an edge over others. This strategy allows gaming companies to generate continuous revenue from their titles, turning what might otherwise be a one-time purchase into a steady stream of income. Historically, whales have produced 50% to 70% of mobile game revenue despite being 1-2% of the user base.

The effectiveness of the Whale Model hinges on creating engaging content that encourages players to invest in their in-game experience. This often involves developing a game environment that promotes regular engagement and incentivizes spending through competitive play or social interaction. As such, games designed around this model are frequently updated with new content and features to maintain and grow their player base. In the context of China, this business model has seen widespread adoption and success, thanks in part to the country’s vast online population and a cultural propensity towards mobile gaming.

However, the reliance on the Whale Model has also sparked debates around gaming ethics and regulation, especially concerning issues like addiction and financial exploitation. In response, Chinese regulators have implemented stricter controls on online gaming for minors and have begun scrutinizing the monetization practices of gaming companies more closely. These measures aim to balance the economic benefits of the gaming industry with the need to protect vulnerable players and promote a healthy gaming environment.

The Rules

The draft rules proposed by Chinese officials aimed to limit the harms of online gaming by imposing the following restrictions:

• Microtransaction Restrictions – Games cannot offer certain rewards that incentivize repeated addictive behavior. This would not ban all microtransactions, but if you’ve ever played a mobile game like Candy Crush or Subway Surfers, you’d recognize the proposal’s primary targets. They include daily login rewards, bonuses for a first-time purchase, or repeated nudges to make a consecutive purchase of a digital item, all of which make a very subtle and deliberate push to take a few extra dollars out of a consumer’s wallet.
• In-game Prop Restrictions – The proposal prohibited companies from allowing or supporting high-value auctions for their digital props. Despite having no physical value outside of the game’s code, games like Roblox and Counter Strike: Global Offensive have investment-like markets in which cosmetic items like virtual hats or certain paint jobs have sold for as much as $400,000.
• Spending/Recharge Limits – After users breach a certain spending limit (yet to be determined by officials before removal), online games would have to bar users from spending more money beyond this for a set period of time. 
• Irrational Consumption Warning – Games would be required to issue warnings and pop-ups to users who might be spending too much too quickly. This would be similar to the Wii’s efforts to prompt users to “take a break” after playing for an extended time. If 
• Forced Battle Restrictions – Games can’t artificially pit new or free players against paying players in online matches or interactions.

The Backlash

If enacted, it’s certainly possible these rules could have forced Chinese practices to move beyond their current whale-based, predatory models. But the effectiveness of such proposals might be why so many groups in China saw it as an attack worthy of pushback.

For gamers, the rules attack a way of life and freedom of choice in how they spend their time and money. Chinese citizens–especially young adults–feel mounting pressure to work longer hours (9-9-6) with increasingly worse job prospects (X) in a tumbling domestic economy (X). Burning money and time on online games, however foolish and self-destructive it may be, can at least seem to provide some sense of agency during stressful times–agency which these rules threaten.

For developers, the rules attack a lucrative business model generating much of their revenue. Whale-based models may be unpopular among consumers aware of the practice, but raising the price of the base game would be universally hated. Moreover, this all comes at a time when the Chinese economy faces a significant downturn, placing families and businesses under personal and financial pressure.

The Implications

So companies target a few susceptible individuals using manipulative incentives and practices, obtaining the majority of their profits as a result. China’s attempt at regulation failed. However, while taken to a draconian extreme, these efforts attempt to accomplish a good thing and protect citizens from exploitation.

Compare this to America’s laissez-faire relationship with online gaming and, more specifically, gambling. The companies in question might differ–DraftKings instead of Tencent or FanDuel instead of NetEase–but the basic issue is the same. Companies reap immense profits off of the susceptibility of a few users to make personally devastating financial decisions. They continue to evade attempts at regulation. In fact, the regulations are only loosening within America, and could very soon see the final barrier to creating online casinos destroyed.

The answer doesn’t lie in wholly mimicking the Chinese model. But taking some form of effort to limit such practices would do more than just protect consumers. It would force businesses to innovate beyond what has become a lazy, outdated business model. It would force them to innovate in some substantial way that might free the industry from a stalling of ideas from larger companies. It has to start somewhere.