The mobile game market in China is becoming more and more attractive every year. According to data from Statista, mobile gaming segment revenue is expected to reach $47.13 billion in 2022, with an annual revenue growth rate (CAGR 2022-2026) of 8.44%, giving a size of predicted market of $65.18 billion by 2026. The number of potential users (which in China is predicted to be 678.3 million by 2026) makes developers and publishers see this market as a potential direction for their products.
However, the Chinese market has a number of specific regulatory particularities. The first thing that teams planning to enter a new market encounter is the current legal regulations, which do not allow foreign companies to distribute their products in Chinese territory independently. Foreign companies (including foreign publishers) must either set up their own office in China or seek a local partner (a Chinese publisher) and enter the market through that entity.
As a rule, foreign companies choose the second option by signing contracts to publish mobile games with local publishers. Below we will consider a number of conditions that should be paid attention to when signing a contract with a Chinese publisher.
What can a Chinese publisher do with a mobile game?
As a rule, the developer grants permission to use the mobile game on the basis of an exclusive license. An exclusive license implies that only a Chinese publisher can use the mobile game as long as it is contractually granted.
A case example from practice: the rights holder has given a local publisher the opportunity to distribute, advertise, promote, publish and otherwise use the mobile game in the territory of mainland China for 1 year (under an exclusive license). Due to this unlimited list of uses, the rights holder has completely denied the opportunity to do anything with the mobile game in mainland China territory and has to work with only one publisher for 1 year.
In practice, when such contracts are negotiated, it turns out that developers and publishers are not always willing to work under such broad and restrictive conditions. In this case, it is important to define what the Chinese publisher can not do with the mobile game. For example, you want to keep only the ability to localize the game, but without any other changes or modifications. In such a case, it is important to limit the right to modify the mobile game only to the possibility of localizing the game.
If you are a foreign publisher who has obtained the rights to an exclusively licensed mobile game from a developer and you operate in the Chinese market through a Chinese publishing partner, it is important that the terms and conditions use of your local partner’s game are contractual. are no wider than what the developer has contractually provided to you.
Where will the partner publish the mobile game?
As part of entering the Chinese market, it is important to understand that the country has specific territorial features. In practice, it is possible to encounter such variations in the definition of the game’s publishing territory in a contract:
- People’s Republic of China, China. The official name of the state is the People’s Republic of China, which includes all of China, plus the special administrative regions of Hong Kong and Macau (Taiwan, which is a partially recognized state, is a disputed territory). The official name or simply “China” is quite rare in contracts.
- Mainland China or Greater China. The most common variant is mainland China. This is mainland China, which does not include the territories of Hong Kong, Macao and Taiwan, often referred to as “…the territory of mainland China (Hong Kong, Macao and Taiwan are not included). …”. If the game’s distribution territory includes Hong Kong, Macao and Taiwan, the term Greater China may be used.
Defining the publishing territory is important in terms of where mobile gaming revenue will come from. If the contract defines the whole of China, discuss with the local publisher its plans for publishing in special administrative regions (if there are no such plans, explicitly exclude such regions).
For foreign publishers entering the Chinese market who have obtained the rights to a mobile game from a developer on the basis of a license, you must ensure that the territory in which you authorize the Chinese partner to publish the mobile game does not extend beyond the territory specified in the contract with the promoter.
Now let’s count the money. How are we going to share it with our partner?
So that the calculation of your share does not surprise you, we recommend that you pay attention to the following aspects:
- The basis for calculating the fee, i.e. on what basis the rights holder’s share is calculated. There are two possible options here:
- a royalty percentage is counted on all revenues (rare and applicable if the Chinese publisher has chosen this model by itself),
- the royalty percentage is counted on the net income (income less expenses).
In China, revenue tends to be easier to generate from advertising. Gross income can be generated from any unrestricted income or only from a certain category of income. If revenue is solely from advertising, it is important to discuss with the publisher whether other types of revenue (eg revenue from in-game purchases) can be included.
- Expenses deducted from gross income. Expenses reduce the basis for calculation on the part of the rights holder; thus, the more expenses deducted from the gross income, the lower the amount of money received by the promoter.
It should be borne in mind that the list of expenses can be either closed (with a fixed list) or open (generated monthly at the discretion of the editor). In the latter case, the expenses will be unlimited, which may lead to an uncontrolled decrease in the basis for calculating royalties.
A case example from practice: the publishing contract specifies that the advertising costs and other operating expenses incurred by the publisher in connection with the game are deducted from the gross receipts. This broad wording allows the publisher to include anything they deem to be an operating expense at their discretion.
We recommend either explicitly stipulating in the contract a specific list of costs that reduce the basis for calculating royalties, or that the publisher first agrees with the rights holder on these costs.
Can I control the financial flows?
In order to ensure the transparency of the publisher’s actions, various reporting and monitoring mechanisms may be provided for in the contract, for example:
- Provision of access to advertising indicators.Access to advertising and marketing information (various indicators and metrics) allows timely conclusions to be drawn about prospects and, if necessary, to react and change something. This information can be communicated either in the form of a report or by giving access to different accounts.
- Provide reports with all income and expense information. Reporting with all the information on income, expenses incurred and the calculation of the net result is the main mechanism for controlling the generation of financial flows. Along with outlining the publisher’s reporting obligation, it is also important to establish clear timelines for reporting and objection, particularly if the ability to make a payment is tied to the time of acceptance of the report. Also, remember the language of the reports, so you don’t have to resort to machine translation or an interpreter.
- Performing an audit. Another control mechanism is the possibility of carrying out an audit of the documentation on the generation and registration of financial flows. Audits usually involve professional auditors and can be quite expensive. Where such terms and conditions are agreed, it is recommended to define the frequency of audits as well as the consequences of the discovery of discrepancies (e.g. reimbursement of the discrepancy by the publisher, if it was caused by the ‘editor).
How long have we been cooperating and can I terminate the contract?
In practice, long-term contracts for mobile game publishing in China are quite rare. The publication can last from 3-6 months to 1 year. It is important when agreeing on the duration of a mobile game publication:
- assess the willingness to work with a local partner for a fixed period. If this is your first interaction with a Chinese publisher, it’s best to avoid lengthy publication times if possible.
- for a foreign publisher to limit the duration of publication on the Chinese market so that it does not exceed the duration of the license obtained from the developer.
Along with the duration of the partnership comes the possibility for the parties to withdraw from the contract before the expiry of the duration of the partnership.
A case example from practice: the parties stipulated that the publication of the mobile game on the territory of China would continue for 3 years. At the same time, the rights holder did not have the possibility to withdraw from the contract before this agreed date, unless mutually agreed by the parties. At one point, the rights holder was no longer satisfied with the income he was receiving on the Chinese market, so he proposed to his partner to stop publishing and terminate the contract. The Chinese publisher, meanwhile, did not want to terminate the contract by mutual agreement between the parties, forcing the rights holder to enter into difficult negotiations with him.
The situation described above might not have occurred if the rights holder had been free to terminate the contract. In practice, Chinese publishers are reluctant to make concessions in terms of negotiating such terms. An option for a compromise condition is to impose additional objective restrictions on the termination of the contract: such as notice with a certain period, the impossibility of withdrawal during the first months, etc.
In general, when entering the Chinese market, it is important to be careful when choosing a local partner, as it is a highly competitive environment with its own rules and peculiarities. Not all publishers are willing to compromise on contractual changes, but we recommend that you try to negotiate acceptable solutions. If a publisher is unwilling to cooperate, it is necessary to weigh the pros and cons and decide whether to continue working with such a partner.
Russian original of this article on the App2Top.ru portal.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.