The Impact of COVID-19 on China’s Video Game Market in Q1 2020

May, 2020 ASIA SPOTLIGHT REPORT The Impact of COVID-19 on China’s Video Game Market in Q1 2020

2 Asia Games Market Intelligence: Asia Spotlight Report ASIA SPOTLIGHT REPORT The Impact of COVID-19 on China’s Video Game Market in Q1 2020 Published May 2020 Niko Partners took a close look at the impact on gaming during the time of the COVID-19 quarantine during Q1 2020 in China. The terrible outbreak of COVID-19 had a significant impact on the lives of Chinese citizens with more than 84,000 cases and 4,500 deaths in the country. Wuhan was the epicentre of it all, and was under quarantine for 77 days, with only some easing of restrictions after that. Most of China was under quarantine for 2 months. The Lunar New Year holiday falls in Q1, a time when gaming usage is typically higher than average during a year, but 2020 took that boost to a whole new level. Niko Partners estimates that revenue for games on all platforms was roughly 30% higher in Q1 2020 than Q1 2019. Not everything is rosy for the video games market however, and this article explains the positive and negative impact by game sector, the results of our April 2020 online survey of 1,057 Chinese gamers on the topic of the impact of COVID-19 on gaming, and offers a personal perspective of Niko’s Vice President, who had been quarantined in Wuhan.

3 Asia Games Market Intelligence: Asia Spotlight Report Mobile Gaming Positive Home-based mobile gaming increased, there was record high for in app purchases (IAP), sharp increase in mobile game downloads, and a far higher value for the number of times per month a gamer would revisit a game. An example of this is that some casual games that may typically have 5 visits per gamer per month had more like 15-20 visits. Gamers became more discerning about their spending. 97.2% of the survey respondents reported spending more hours on mobile games than prior to the pandemic. 88.8% of respondents said that they stuck to playing legacy titles or games that they had played before, opting for familiarity. 81.6% reported spending more money on gaming in that time. Gamers spent more on weekends, because developers were pushing promos and sales on weekends. Sensor Tower data shows average weekly downloads of iOS games during Lunar New Year were 153% higher than in December 2019, and March 2020 still 67% higher than in December. Negative Ad views were down, ad revenue was down, and fewer ad spaces were filled because advertisers were either out of business, closed, or spending less. There was a gravitational pull to more popular games via word of mouth, as social behaviour encouraged gamers to play what their friends were playing. This may have been detrimental to smaller titles. We believe most casual game developers will look to hybrid monetisation options to offset some of this impact. While we expect revenue from ad supported games to be down this year, we note that the increase from IAP spending will more than offset any impact here.

4 Asia Games Market Intelligence: Asia Spotlight Report Rank China – Top iOS games by revenue (Q1 2020) Genre Publisher 1 Honor of Kings MOBA Tencent 2 Peacekeeper Elite Battle Royale Tencent 3 AFK Arena Idle RPG Lilith Games 4 Three Kingdoms – Strategy Strategy Alibaba 5 Fantasy Westward Journey Mobile MMORPG NetEase 6 New Swordsman MMORPG Perfect World 7 QQ Speed Racing Tencent 8 CrossFire Mobile Shooter Tencent 9 Onmyoji RPG / ACG NetEase 10 Immortal Conquest Strategy NetEase Source: Sensor Tower (Note: Sensor Tower captures iOS data only, but there is a strong correlation to the hit titles on Android)

5 Asia Games Market Intelligence: Asia Spotlight Report PC Gaming & Internet Cafes Positive Increase in home-based gaming. 94.6% of respondents claim to have spent more time on PC games during the quarantine than before. 61.5% of respondents said that they returned to a game that they had dropped previously. 76.3% of PC gamers surveyed said that they spent more on PC games during the lockdown. In-game Lunar New Year events and promotions were key drivers of engagement and spend across top PC games, with publishers extending these events as the lockdown dragged on. PC game publishers also offered free content in game, opened new servers and ran in game charity events. Steam hit an all-time peak concurrent user record of 18.8 million (globally) on February 2nd, the final day before the intended end of the holiday period across most of the country. The higher usage in China is a likely contributor to the PCU level. On January 26th, the day after the actual Lunar New Year celebration, Steam had 18.4 million PCU, which was the highest of the month. Innovation happened by Tencent licensed icafes launching a virtual cloud icafe service, at least in Shenzhen, according to the owner of 20 such cafes. Negative Internet cafes were shut (all 133,000 in the country), eliminating the gameplay from there by the 115,000,000 gamers who typically frequent them. 57% of respondents that use icafes said that they do not intend to return once they have reopened.

6 Asia Games Market Intelligence: Asia Spotlight Report Rank China – Most played PC games during quarantine Genre Publisher 1 League of Legends MOBA Tencent 2 PUBG (Unlicensed via Steam) Battle Royale Bluehole 3 CrossFire Shooter Tencent 4 Moonlight Blade OL MMORPG Tencent 5 Fantasy Westward Journey OL MMORPG NetEase 6 Dungeon & Fighter RPG / Fighting Tencent 7 Hearthstone CCG NetEase 8 Dream of Three Ancient Kingdoms MOBA Electronic Soul 9 QQ Speed Racing Tencent 10 JX Online 3 MMORPG Seasun Source: Niko Partners 2020

7 Asia Games Market Intelligence: Asia Spotlight Report Esports Positive Shanghai, Beijing, Chengdu, Guangzhou, and other municipal governments partnered with esports operators to help support the growing industry by lessening red tape and enabling online competitions. 61.7% of respondents said that they spent more time watching esports during the COVID-19 outbreak than prior. Negative Tournaments migrated online, or were cancelled or postponed at least until the end of April 2020. There is concern for the integrity of the event and cheating that could take place. The remote nature of the online format also brings its own additional challenges in terms of bandwidth and latency, especially with players in different locations. It took Tencent around one month to go from delaying offline esports events to starting online format esports. Tencent rebroadcast classic esports matches or scrims matches during the transition. The League of Legends Pro League restarted with an online format on March 9, the King Pro League (Honor of Kings) restarted on March 18 and the Peacekeeper Elite League restarted on March 19th.

8 Asia Games Market Intelligence: Asia Spotlight Report Game Live Streaming Niko Partners recently launched our China Games Streaming Tracker, which produces weekly data and analysis ranking the top 100 games on 5 metrics found on streaming platforms. We examine the largest three platforms in China: Douyu, Huya and Bilibili. In March our data showed that streaming video traffic is strong. Positive 65.5% of respondents said that they spent more time watching video game livestreams since the COVID-19 outbreak with 39.7% saying that they streamed themselves for the first time. One trend we noticed is how non-gaming celebrities have joined game livestreaming platforms to broadcast themselves to fans. It is one way that that gaming has been able to bridge the gap between other entertainment industries where production has stopped. Negative Only 27.1% of respondents said that they received more tips/gifts than prior to the outbreak. Notable trends • Tencent and NetEase dominate the charts • Honor of Kings is #1 • MOBA games are the most popular • Battle Royale and Shooter games are boosted by new launches COD: Warzone and Escape from Tarkov • Esports is a key driver for game livestreaming • RPG games continue to perform well • PC games remain the most popular

9 Asia Games Market Intelligence: Asia Spotlight Report Here are Douyu’s top 20 streaming games for March 2020, ranked by Niko’s heat index Source: Niko Partners China Game Streaming Tracker

10 Asia Games Market Intelligence: Asia Spotlight Report Console Gaming and Manufacturing Positive As with mobile gaming, console gaming has seen a surge with 95% of console gamers surveyed stating that they spent more time playing console games since the COVID-19 outbreak. Grey market titles such as Animal Crossing: New Horizons and Ring Fit Adventure (already in short supply prior to COVID-19, then sold out online and tripled in price on Taobao.com) were very popular, in fact causing a big boost in Nintendo Switch sales. Negative In 2019, nearly 90% of video game consoles imported into the US were manufactured in China. There was little to no manufacturing in February with production capacity ramping up again through March and April. This primarily impacted Nintendo who saw unprecedented demand for their Switch console. We expect supply of Switch to recover by the end of Q2 2020. Next generation consoles from Sony and Microsoft are also scheduled to launch by the end of this year. Component scarcity, logistics issues and software delays now pose a bigger threat to a limited launch or even a delayed launch. Component scarcity and logistics issues will increase the build price of next generation consoles, whilst logistics issues may lead to shortages at launch, even with air shipments. Software delays could also make the launch line up less attractive to potential buyers. These factors, along with a recession, could lower the incentive for consumers to purchase or upgrade to a next gen console this year.

11 Asia Games Market Intelligence: Asia Spotlight Report Game development and marketing Negative One of the biggest challenges for game developers, service providers and outsourcing firms in China was to maintain productivity during the COVID-19 lockdowns. Domestic development studios were impacted, unless able to shift to work from home. Outsourcing art studios were also impacted with companies unable to deliver projects or losing new projects during the lockdown. Overseas game companies moved some projects or awarded new contracts to studios outside China. This disruption has caused some global AAA titles to see delays.

12 Asia Games Market Intelligence: Asia Spotlight Report A personal account of gaming and life in Wuhan during the COVID-19 Outbreak Zeng Xiaofeng, Vice President, Niko Partners (This is an excerpt. You can find a more complete account of Xiaofeng’s experience in Wuhan here.) The personal impact of gaming in quarantine is remarkable, and Niko Partners has a first-hand account of that. Our staff and sources in China convey that during quarantine most people engaged heavily in video games, on mobile, console and PC – whatever they have at home. Grandparents played, adult females increased their game time and children were allowed far more time to play than in normal circumstances. Adult males returned to games that they had played in their youth, connected with friends in WeChat groups and started up new games as well as continuing to play the current favorites. The first few weeks of quarantine were not as gaming heavy, as many adults were trying to watch and listen to news and make sense of the situation as it was unfolding. Gaming started in earnest when it became apparent that the crisis would not subside quickly. Xiaofeng lives and works in Shanghai, but travels frequently to Wuhan because his family lives there. Xiaofeng was home with his family in January ahead of Chinese New Year, intending to stay home with them through the New Year holiday period. He is married with one daughter age 11 and one daughter who was born in September 2019, and his mother in law also lives with them. Xiaofeng says that he played Starcraft with some of his college classmates, most of whom had not had time to play before the lockdown due to work and family life. Blizzard’s Battle.net and Starcraft games became popular again. Honor of Kings was a common game to play together, even if it meant downloading it anew. He also downloaded some new games on my phone and from Steam on my notebook. His daughter downloaded a lot of games on her iPad, while my wife spent around 3-4 hours per day playing the mobile game AniPop from Happy Elements. His wife increased her time playing video games by around 3-4 times compared to before the pandemic, and she also taught her mother how to play.

13 Asia Games Market Intelligence: Asia Spotlight Report Results of Niko’s April 2020 online survey of 1,057 Chinese gamers on the impact of COVID-19 on gaming While we find certain points of data to be particularly interesting, such as 75% of respondents played on a platform that they previously did not play on, we invite you to read each of our questions to discover for yourself some of the points that are most interesting to you and your business. Have you played more than 60 minutes of games in the past week? Yes No Yes No PC 853 204 80.70% 19.30% Mobile 959 98 90.70% 9.30% Console 161 896 15.20% 84.80% Age Response Ratio <18 29 2.70% 18-24 412 39% 25-30 399 37.70% 31-36 171 16.20% 36+ 46 4.40%14 Asia Games Market Intelligence: Asia Spotlight Report Gender Response Ratio Male 841 79.60% Female 216 20.40% Do you spend more hours on gaming during the COVID-19 outbreak compared with before COVID-19 outbreak ? Male Female Male Female More Less More Less More Less More Less More Less More Less PC 807 46 94.60% 5.40% 673 31 134 15 95.60% 4.40% 89.90% 10.10% Mobile 932 27 97.20% 2.80% 752 21 180 6 97.30% 2.70% 96.80% 3.20% Console 153 8 95% 5% 106 7 47 1 93.80% 6.20% 97.90% 2.10% Do you spend more money on gaming during the COVID-19 outbreak compared with before the COVID-19 outbreak? Male Female Male Female More Less More Less More Less More Less More Less More Less PC 651 202 76.30% 23.70% 556 148 95 54 79% 21% 63.80% 36.20% Mobile 783 176 81.60% 18.40% 638 135 145 41 82.50% 17.50% 78% 22% Console 114 47 70.80% 29.20% 87 35 27 12 71.30% 28.70% 69.20% 30.80%15 Asia Games Market Intelligence: Asia Spotlight Report What is your gaming experience during the COVID-19 outbreak? Yes No Yes No I have started to play on a new platform (mobile or PC, if only mobile before or PC before) 793 264 75% 25% I have tried more new games 118 939 11.20% 88.80% I have grown tired of my favorite games 778 279 73.60% 26.40% I returned to play the game that I drop for a long time 650 407 61.50% 38.50% My household members playing more during COVID-19 outbreak 670 387 63.40% 36.60% My household members spending more during COVID-19 outbreak 506 551 47.90% 52.10% Most of my friends playing more during COVID-19 outbreak 788 269 74.60% 25.40% Most of my friends spending more during COVID-19 outbreak 694 363 65.70% 34.30% Gaming help me to ease the anxiety during COVID-19 outbreak 770 287 72.80% 27.20% I use a VPN/Game accelerator to play game 551 506 52.10% 47.90% I chat often with friends during playing game 725 332 68.60% 31.40% I have watched much more streaming video for games 692 365 65.50% 34.50% I have watched much more online esports 652 405 61.70% 38.30% I have streamed myself for the first time 420 637 39.70% 60.30% I have streamed much more than before 270 787 25.50% 74.50% If a streamer I have gotten more tips than before 286 771 27.10% 72.90%16 Asia Games Market Intelligence: Asia Spotlight Report Please choose 1-3 PC games that you played often during the COVID-19 outbreak. Ranked with 1-3, 1 is played most often Response top 1 top 2 top 3 League of Legends 216 317 70 44 PUBG 123 105 181 57 Cross Fire 74 64 81 116 Moonlight Blade 49 53 45 38 Call of Duty 42 39 48 42 Fantasy Westward Journey 39 36 47 33 Dungeon-Fighter 32 23 49 31 Hearthstone 30 29 29 35 Dream of Three Ancient Kingdoms 27 30 26 13 QQ Speed 27 18 36 51 JX 3 23 23 22 26 Gujianqitan 21 15 30 32 FIFA Online 20 19 23 21 Guild Wars 2 17 13 23 21 World of Warcraft 16 9 27 28 Overwatch 13 7 20 30 FF14 13 6 22 28 Nizhan 12 9 14 19 QQ Dancer 10 7 12 2117 Asia Games Market Intelligence: Asia Spotlight Report Conqueror’s Blade 7 5 10 10 Freestyle Basketball 7 4 10 14 Steam games 6 5 3 16 World of Tank 5 4 4 16 Dota 2 5 3 5 14 APEX 4 4 4 2 Fortnite 4 1 7 8 Counter Strike 3 1 4 12 Path of exile 3 2 1 13 Justice 2 1 2 5 NBA2KOL 1 2 Other (Fill in text) 5 8 1 218 Asia Games Market Intelligence: Asia Spotlight Report Please choose 1-3 Mobile games that you played often during the COVID-19 outbreak? Ranked with 1-3, 1 is played most often Response top 1 top 2 top 3 Honor of Kings (Arena of Valor) 278 419 75 37 Peace Elite 87 63 130 100 QQ Speed 62 57 74 59 Fantasy Westward Journey 59 60 67 32 Onmyoji 47 34 75 39 Knives Out 42 31 66 37 New Ghost 39 41 36 32 Poker & Majong 39 31 57 29 Day After Tomorrow 38 38 38 34 Westward Journey Online 34 32 38 30 Happy Elements 29 23 27 66 Cross Fire 26 17 39 41 TLBB New 25 23 29 27 KartRider 17 14 19 30 Fishing Joy 16 10 26 26 Hearthstone 15 9 24 28 Legend of Mir2 12 9 15 24 Three Kingdoms Strategy 11 11 7 21 Ask Tao 11 8 12 2219 Asia Games Market Intelligence: Asia Spotlight Report COC 10 7 11 25 Naruto Mobile 9 5 13 24 Immortal Conquest 9 6 13 18 Battle of Balls 8 5 9 20 Honkai Impact 3 7 6 6 20 Clash Royale 6 1 12 22 Arknights 5 2 6 15 MU 3 1 5 13 AFK Arena 2 1 1 7 Other (Fill in text) 3 4 2 2 Will you return to play PC games in an icafe? Response Ratio Yes, I cannot wait to return 238 22.50% No, I used to go there but now I am used to playing at home, no need to return 317 30% No, I never went there and I do not want to start now 468 44.30% Yes, I have not played at an icafe but I want to start now. 34 3.20%20 Asia Games Market Intelligence: Asia Spotlight Report What members of your household played games during COVID-19? More Less Started Quit More Less Started Quit Spouse/partner 668 160 153 76 63.20% 15.10% 14.50% 7.20% Children 517 276 143 121 48.90% 26.10% 13.50% 11.40% Parents 338 224 264 231 32% 21.20% 25% 21.90% Do you agree with these statements? No Slightly Somewhat Mostly Extremely No Slightly Somewhat Mostly Extremely I will spend more time on gaming after the COVID-19 outbreak 111 207 220 353 166 10.50% 19.60% 20.80% 33.40% 15.70% I will reduce the gaming hours after COVID-19 outbreak, as I need spend more time to work or study 156 395 78 275 153 14.80% 37.40% 7.40% 26% 14.50% Gaming would add more social element and become a great channel of social 44 90 217 451 255 4.20% 8.50% 20.50% 42.70% 24.10% Government would promote game 60 153 285 328 231 5.70% 14.50% 27% 31% 21.90%21 Asia Games Market Intelligence: Asia Spotlight Report industry after the COVID-19 outbreak Gamer would reduce the gaming hours in icafe, as it maybe have high risk of COVID-19 than play at home 42 135 221 408 251 4% 12.80% 20.90% 38.60% 23.70% Console game would be popular 29 119 291 408 210 2.70% 11.30% 27.50% 38.60% 19.90% Parents would allow kids to play a little more game than before COVID-19 outbreak 230 280 281 177 89 21.80% 26.50% 26.60% 16.70% 8.40% The attitude of my household members on gaming is changing and more acceptable 55 367 311 232 92 5.20% 34.70% 29.40% 21.90% 8.70% The attitude of society on gaming is changing and more acceptable 60 142 474 283 98 5.70% 13.40% 44.80% 26.80% 9.30%