U.S. technology companies once hoped for Big Things out of China as a market. As of the end of last year, 89.9% of Chinese households are wired for broadband Internet. The country's 1.4 billion population is digitally native and highly active in terms of buying products and services online.
Those hopes are gone. Just this week, Epic Games has decided to shut down its local version of the superpopular game "Fortnite." And Yahoo, an early and highly successful foreign entrant into the Chinese ether, is pulling the plug on its suite of products.
Fortnite publisher Epic Games has given it every shot. It is 40% owned by Chinese videogame maker Tencent Holdings (TCTZF) , which bought into it in 2012. But even that local connection failed to help Epic Games get formal approval of the game.
The Chinese version of Fortnite rolled out in 2018 and has been tailored to cater to the tastes of Chinese censors, reducing violence and making sure there's nothing politically sensitive. Fortnite as of Nov. 1 stopped accepting new players in China or allowing downloads, and its servers will shut down altogether on Nov. 15, meaning Chinese players no longer can access their data or the game.
The exits of Yahoo and Epic Games follow the decision by Microsoft (MSFT) last month to shut down its localized version of LinkedIn. LinkedIn simply wasn't lucrative enough, as I explained when the parent company made that call on Oct. 15. It will launch a stripped-down job search site, InJobs, with no social media functions.
It's the added burdens of compliance costs, restrictions on what content foreign companies can offer, and in the case of Epic Games curbs on videogame playing, that are causing these companies to leave a market with almost 1 billion Internet users. A recent law change allows minors to access videogames only for three hours per week, on weekends.
China's 'challenging' environment
Yahoo said it stopped offering its suite of services in China, including a Chinese-language version of Yahoo.com, as of Nov. 1. It cites "the increasingly challenging business and legal environment in China," where the administration of Chinese President Xi Jinping has taken Big Tech to task while tightening the government's censorship of all kinds of content, criminalizing any questioning of the Communist Party's version of Chinese history.
Perhaps more costly is China's passage of tough data privacy protections in August in the form of the Personal Information Protection Law, which I noted at the time sent tech stocks sharply south. That law went into effect on Nov. 1.
It requires online companies to obtain consent from consumers to gather sensitive information, particularly location, financial and health data, with companies told to collect the minimum necessary to process transactions in the least-intrusive method. There are stringent requirements on data storage and transmission. Compliance costs will rise, with companies mandated to publish regular updates on "social responsibility" and personal information protection and submit to "social supervision" by the government or third-party assessors it appoints.
Yahoo stopped offering its mail service and Yahoo News in 2013. It now will shutter services such as Chinese access to AOL.com, TechCrunch and Yahoo Weather.
Yahoo China launched in 1999 and was quickly one of the early U.S. tech successes in the country, with website in Chinese, email, messaging and translations of U.S. news. China had around 4.5 million Internet users at the time, a figure that now stands at 989 million, according to Statista.
But Yahoo's biggest coup in China was its early investment in Alibaba Group Holding (BABA) . It spent US$1 billion for a 40% stake, which shrank to 15% over time; however, the Alibaba holding far surpassed the value of Yahoo as it dwindled in the face of competition from the likes of Google. Yahoo spun out the Alibaba holding coupled with its 35.5% stake in Yahoo Japan into a separate entity, Altaba, that netted shareholders around US$40 billion when it dissolved in 2019.
No fun in video game land
Epic's exit shows how video game companies face pressure in just about all jurisdictions.
Tencent is fighting to maintain its trans-Pacific gaming scope. At the same time that it faces pressure in its home market, it also has been negotiating with the Committee on Foreign Investment in the United States, which could block its ownership of U.S. digital companies over their storage of data.
The committee sent letters to Riot Games and Epic Games to ask about their data security protocols around the time that Tencent was contending with U.S. sanctions against its operation of the superapp WeChat in the United States. U.S. President Joe Biden undid the Trump-era executive orders against WeChat and TikTok to shut down their U.S. operations, with Biden instead ordering a U.S. Commerce Department review of security concerns for all foreign-owned apps.
Besides the 40% stake in Cary, N.C.-based Epic Games, Tencent also owns Los Angeles-based "League of Legends" developer Riot Games outright as of 2015 and has 5% stakes in both Santa Monica, California-based "Call of Duty" and "Candy Crush Saga" creator Activision Blizzard (ATVI) and the French creator of the "Assassin's Creed" series, Ubisoft (UBSFY).
Epic Games was open to the idea of selling a stake to Tencent because it wanted to develop expertise in monetizing free-to-play games, which don't require an upfront purchase of the gaming software. Tencent is a past master at generating revenue from in-game purchases,
Both Fortnite and "PlayerUnknown's Battlegrounds" are battle-royale games, combining a last-person-standing "Hunger Games"-style fight with a survival-skills element. And yes, Tencent also owns 15.4% of Krafton KR:259960, the South Korean developer of PlayerUnknown.
Krafton held South Korea's largest initial public offering in a decade when it raised US$3.8 billion in July. But the sheer size of the IPO, the second-largest in Korean history behind the US$4.3 billion listing of Samsung Life Insurance KR:032830 in 2010, overwhelmed the market. The stock, which ended its debut day down 8.8%, is still trading 5% below its offering price of 498,000 won.
Epic Games has a meal ticket in the form of Fortnite globally, which had 350 million users as of mid-2020. It's not clear how many people were playing in China, but anecdotally the game had a strong core following.
More broadly, China under Xi has shown less and less interest in allowing foreign cultural imports. U.S. movies are finding it hard to get approval for Chinese distribution, and there's a campaign against "vulgar influencers" and "effeminate" male stars, not to mention "unhealthy content."
Epic Games may maintain its Tencent ties, but will surely rid itself of headaches linked to those cultural, political and censorship intricacies. A China behind the Great Firewall is literally walled off at the moment, with no foreign visitors allowed into the country due to COVID restrictions. It is an isolated market, a huge one, but a costly one to which to cater. More and more companies are deciding localization complexities are just not worth the bother.