China’s government has taken a drastic step toward curbing online gaming addictions, one that will pose consequences for gaming markets in other continents. The world’s largest gaming market reported that it would be suspending the approval of all new online games.
Why Are Video Game Stocks Falling?
This doesn’t come as a total surprise. China’s government has devoted considerable time and resources of late to cracking down on technology companies, specifically those heavily involved in digital entertainment, through antitrust regulation. These initiatives have also included dealing with the growing trend of young people with addictions to digital games.
Reliance on digital gaming systems increased across the globe since the initial breakout of the Covid-19 pandemic, particularly in China, which employed very strict lockdown measures from the start. This put video game producers in a good position, particularly since gaming addiction continued even as the world began to reopen.
The suspension of new game approvals, though, is exactly what could force gamers, especially those in lower age brackets, to step away from their computers. This may sound like mostly a problem for Chinese companies, but some of China’s largest game producers trade on international exchanges. When the largest gaming market in the world faces a steep roadblock from its government, it affects all other major markets.
Why We Should Care
Stocks have reacted to this news as can be expected. NetEase (NASDAQ:NTES), Tencent Holdings (OTCMKTS:TCEHY) and Sea Limited (NYSE:SE) have all declined today, down 2.59%, 8.48% and 6.77% respectively, as of this writing.
The news of an impending regulatory squeeze led NetEase and Tencent to offload more than $60 billion in value by way of an accelerated stock selloff.
According to a statement given to Reuters by MegaTrust Investment CEO Qi Wang, the regulatory scrutiny from China’s government will likely last for “years, not months.”
If that is so, it could mean a “new normal” for China’s gaming industry, one that will significantly affect both companies with ties to the market and the investors who hold shares of video game stocks.
Companies will likely lobby against such rulings, but as of now, the industry landscape looks grim for China and particularly for its video game stocks.
Video Game Stocks Outside China
These problems within China’s gaming market mean bad news for companies based there, but they could create a potential opportunity for digital game producers in countries with less stringent policies.
The U.S. and Europe have both been notoriously less strict with regulations imposed on their gaming industries. If young people want new video games, they will seek them out elsewhere, an easy task with the convenience of the modern internet.
U.S. gaming companies such as Activision (NASDAQ:ATVI) and Roblox (NYSE:RBLX) could potentially seize on this opportunity to expand their reach. While Activision is down 2.80% today, Roblox has jumped by 0.49% as of this writing, possibly a reaction to the news out of China.
Bad news for China’s game producers could ultimately mean very good news for their international competitors.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.