Why winter is coming to China’s mobile gaming scene

Mobile gaming is the future—people have been saying that more or less since the first iPhone. Especially in the developing markets of Asia like China, where even hardcore gamers typically didn’t own their own PCs or consoles, plenty of pundits have suggested over the past five years that PC games are going the way of the dinosaur, and mobile games are the new king – and for entrepreneurs, the new cash cow.

And to be fair, there’s no denying that mobile gaming has absolutely exploded. Virtually everyone who has a smartphone spends at least a slittle time playing games, and for many of us, smartphone games have become a core feature of the device. Personally, I can barely even remember the dark days before smartphones, when I had to look out the window (ugh) while sitting on a bus instead of playing Jetpack Joyride.

But I’ve always been a bit skeptical of the notion that in the long run, mobile games are going to be a big moneymaker for game developers and publishers in the Middle Kingdom, at least directly. And increasingly, I’m seeing signs that the mobile gaming market isn’t quite as profitable as it’s often cracked up to be.

Numbers don’t lie

Actually, for most developers, the Chinese mobile gaming market isn’t profitable at all. Chinese regulatory agency SAPPRFT released a report this summer that contains some grim numbers for mobile gaming hopefuls: 92 percent of Chinese mobile games lose money. And of the remaining 8 percent, many only break even. Some reports suggest that as few as 2 percent of China’s mobile games actually turn a profit.

That makes developing a mobile game a very risky proposition for startups. Those numbers still can work for China’s tech giants, who can afford to develop 20 different mobile games with the hopes that one or two of them actually find an audience and make some money. But even the big guns seem to be having trouble making money these days. As Sina Tech blogger Xiaohaozi pointed out in a recent post, Qihoo 360 saw its revenue from mobile gaming services slide nearly 17.2 percent in the second quarter of this year, and Tencent‘s revenues from mobile gaming haven’t been growing either.

And although download numbers are crazy, mobile gaming in China has never been quite as profitable as people imagine. Consider this: at the end of 2013, China had 500 million mobile web users. That’s more than double the number of broadband PC users China has now. But despite the fact that there are way, way more smartphone owners than PC owners in China, revenues from PC gaming blew revenues from mobile gaming out of the water in 2013. It wasn’t even close. Between client-based games and online browser games, PC gaming in China generated more than US$10 billion in revenue last year. Mobile gaming generated less than US$2 billion, and that’s despite the fact that games were the most-used type of app on smartphones in China during 2013.

People are downloading mobile games in droves, and they are playing them a lot. They simply aren’t paying for them.

Are demographics to blame?

These numbers may surprise you, but they haven’t particularly surprised me. I play mobile games – including Chinese games – all the time, but I can’t remember the last time I paid actual money for an in-app purchase or anything else that would actually generate revenue for the developer beyond seeing the occasional ad. Meanwhile, between PC games on Steam and the Tencent-owned PC game League of Legends, I’ve spent enough that I probably owe Tencent CEO Pony Ma my firstborn child at this point.

Part of the problem may be unique to China’s market, which has embraced the “freemium” monetization model for mobile games with an enthusiasm that is, I suspect, unrivaled elsewhere on the globe. Gamers complain frequently that many of China’s mobile developers push things too far, instituting draconian stamina systems and other obstructions to try to squeeze money of out their users. The user response, apparently, is just not to pay at all.