Sunday, May 22, 2022
InícioLivecastLivecast #16: Greg Pilarowski on China Gaming Regulations

Livecast #16: Greg Pilarowski on China Gaming Regulations

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Greg is the founder of Pillar Legal, a boutique international law firm across Shanghai and San Francisco that specializes in the video game industry. Before founding his own law firm, Greg served as General Counsel for Shanda (盛大网络), which was the largest Chinese gaming company at one point with a very successful game Chuanqi (传奇 The Legend of Mir), and completed an IPO at NASDAQ listing in 2004. Hear about:

What was the regulatory environment like back then vs now?What was a game approval process like? Are Chinese sensors actual gamers themselves?

What challenges did bureaucratic rivals cause for game companies? What happened after the March 2018 reorganization?

Why does the Party always have a love and hate relationship with the gaming industry? Is the Chinese government’s stance now going more towards the fear side?

Why are Chinese gaming companies looking for a global audience from day one?

Has the IP situation in China improved over time?
Finally, hear Greg’s recommendations for foreign companies to anticipate in China, especially after the new Personal Information Protection Law was passed on November 1st.

Find Greg at http://www.pillarlegalpc.com/en/

Rui: Greg. Welcome. You have actually very extensive background in Chinese gaming industry. So give us a glimpse into everything that you’ve accomplished so far in your career.

[00:01:32] Greg: Sure. Thank you for having me on the podcast. 

[00:01:35] I am the founder of Pillar Legal, which is a boutique international law firm. We have offices in Shanghai and also here in San Francisco. Most of our clients, about 80, 90% are video game companies, both China video game companies, and United States, Europe, other jurisdictions.

[00:01:57] Part of the reason we’re so heavy into video games is that before founding my own law firm, I served as general counsel for Shanda, which was one of the early movers in China’s game industry and completed an IPO and NASDAQ listing in 2004 on the back of its very successful game Chuanqi (Mir). And so after leaving Shanda was a natural progression to continue to work with game industry clients.

[00:02:29] Rui: Yeah, which is what you’re doing today. And today’s topic, really just want to talk about the Chinese gaming industry. So people who are unfamiliar with Shanda, Shanda at one point was definitely the largest Chinese gaming company, correct? 

[00:02:42] Greg: Yes, that’s right. Before Tencent ended up winning out and NetEase following closely behind that, initially Shonda was really the first mover in the game space and the biggest game company in China for several years.

[00:02:58] Rui:  Because you are on the legal side and I do want to talk about the regulations and not just the market environment. What would you say was even the regulatory environment back then?

[00:03:09] Greg: In China, games were online first, and so the single-player PC games or council games that wasn’t something commercially successful or viable in China in large part because of piracy challenges, but with the online games where you could separate the client software from the server software and have a multiplayer environment where the client server software needed to constantly interact.

[00:03:36] That really helped to defeat the piracy problems associated with games that came out on a disc or in a box. That was an important feature for the regulatory environment, because games then were an internet product and the internet in China, as from a national security perspective in the way that the party views that issue, was an area of great sensitivity. It still is, and because games fell into that general internet regulatory framework.

[00:04:09] The games were automatically heavily regulated. So there’s no foreign operations of games allowed in China. There were very strict sensor approvals, right from the beginning, just like with any other internet content or cultural product. And there’s always been a long push for real name verification in the game space, as well as the internet generally.

[00:04:32] Rui:  For those of us in the audience who don’t know, could you give us some background on what it was like in the old days, 2005 era in terms of game publishing, game distribution? Who are the agencies that you had to go through? What was that process like? Describe for us the game approval process. 

[00:04:49] Greg: The game approval process it’s similar to today in that there’s a submission of the game, as well as certain extracts that come from the game. Because when you play the game, it’s often a very large environment.

[00:05:03] And being able to play through the whole thing is a sensor, that could take a long time. And it was necessary to extract all the text and to have videos from certain segments of the game as well. And so it made it an easier chance to review the game similar to today.

[00:05:19] Rui: Wait. So are you saying the sensors actually play through the whole game or you guys are providing them with gameplay that day? 

[00:05:25] Greg: We would provide them with the game and also extracts and videos and the whole text string from the game, can they play through it? I don’t know. Some of these games are pretty big but would they log on? I assume so. We would give them accounts to log on. And so that would be something that I assumed that they would do. 

[00:05:43] Rui: A lot of people assume that the sensors in China or the people working on gaining improvements in China are not gamers themselves. If they were, the argument goes that they wouldn’t come up with such draconian measures against gaming companies. In your estimation, do you think that’s true, or that’s not the case? 

[00:06:01] Greg: It’s a good question. After leaving Shanda and establishing Pillar Legal. We did have an opportunity to meet with some of the regulators. And during those interactions, the more senior people that we talk to, I don’t think were gamers, but some of the more junior people on their staff definitely were, and were big fans of certain games. 

But at that time they also would outsource some of the censorship work and bring in other folks who don’t have conflicts from being in an industry, but in academics or in other roles.

[00:06:36] And so the broader group of people who participated and helped in the censorship reviews at that time was involved more people than just the ones on the staff at what was a gap.

[00:06:46] Rui: Okay. So maybe the guys actually making the final decisions are not gamers, but what I had heard from talking to friends and other companies was that the low level sensors, the people who are actually interacting, giving feedback on the games were actually quite detailed oriented and expert at the games and very familiar with all the mechanisms as well as of course the game play.

[00:07:09] Greg: I think that sounds right. 

[00:07:10] Rui: You just said that the process is largely the same as 15 plus years ago. Are there any differences you think we should know about?

[00:07:18] Greg: I don’t have an insight into how an app is running the process and how that differs on a granular basis without a gap running it or MOC ran it many years ago. But I know from a policy perspective that the party’s priorities continue to remain consistent. There’s a number of censorship goals that apply to all internet content.

[00:07:42] They tend to be pretty broad brushed in terms of what they are, but it’s essentially anything that the party’s not happy about and opposing party goals and party policies. 

[00:07:54] Rui: I didn’t actually mean the specific review process, but you just mentioned a bunch of acronyms about the agencies that are working on this. Maybe you could give us a brief overview of those agencies because they have changed over time.

[00:08:08] Greg: Early on there were struggles between two different agencies that both wanted to have regulatory authority over the game industry. One was the Ministry of Culture, and one was the General Administration of Press and Publications. And the bureaucratic rivals between the two groups occasionally caused some challenges for game companies.

[00:08:31] The most notable example was in 2009, when World of Warcraft tried to transition from The9 over to NetEase. It had received game approvals four years before, but at that point, both regulators jumped up to say that they needed a new game approval as they were both trying to assert their control over the industry and that resulted in World of Warcraft being offline for a number of months during the transition. So that was a little painful. 

[00:09:00] Over the years, there have been different mergers and reorganizations of the different government departments for games and where we eventually got to is after the reorg in March of 2018, the key regulator for the game industry now it’s directly under the party propaganda department as opposed to under the state council. So a little bit of a shift there. And then the Ministry of Culture doesn’t really have much of a role in the game industry regulation today, compared to what it was before.

[00:09:33] Rui: Do you think that’s had any effect on the industry? How do industry insiders consider this change and the bureaucrats that are overseeing them? 

[00:09:43] Greg: There was a pretty important change that happened with the March, 2018 reorganization. And that was with respect to the game approvals to themselves. So initially game approvals stopped and for a period of nine months, there was nothing. But then in December of 2018, they did restart. But when those game approvals restarted, they were much lower level than the number of games that were approved in say 2017 before the reorg. 

All in it’s about, on average, about a hundred foreign games a year and about 1,300 domestic games a year are getting approved, but that’s only about 15% of the numbers from 2017. So that’s a real significant drop. The explanation for it is there’s a focus on higher quality games, if you will. But the direct outcome though, that the time to get a game approval, it’s much longer than it used to be. And there’s no guarantee that the games get approved.

[00:10:47] So for example, Epic, Fortnite, they’ve been waiting for a game approval forever, and at some point they just gave up and threw up their arms. They recently announced that they’re pulling a fortnight out of approval 

[00:10:58] Rui: Apparently, Tencent was testing it for three years before finally deciding that it wasn’t worth the weight.

[00:11:05] When you were saying from 2017 to 2018, after the reorg, the number of game approvals dropped precipitously, are we seeing that drop continue by the way, or has that moderated?

[00:11:20] And if so, how has the industry responded to this? Are there people who are like, okay, then I agree with the government’s decision, I’m going to go and make higher quality games, or has this turned the game developers away from the domestic market and more to international markets? 

[00:11:37] Greg: Great question. The slowdown does continue and there are these defacto caps in place in August of last year when the anti addiction rules for minors tightened down before it used to be 13.5 hours per week. And then it was tightened down to three hours per week for the under eighteens to be able to play games.

[00:11:59] When those rules happen, the game approval stopped again, and everybody was like, how long is this going to last? No games have been approved since August of last year, but there were some indications through a training session, run by NPPA a little while ago that the game approvals will restart again soon.

[00:12:19] It was supposed to be the end of last October or November, but that hasn’t happened yet. But we anticipate that things will be back to normal soon, meaning post 2018 normal with those defacto caps in there about a hundred foreign games a year, 1,300 domestic games. 

[00:12:35] It’s so much harder to get a game approval now and the delay to get that approval is much longer than before. And so I do think that makes the China market less attractive than it used to be. Not only for foreign game developers, but also for domestic game developers. And so I think on the margin that has to be pushing China game companies to be focusing more on international market

[00:13:01] Rui: what is your opinion and maybe what is the industry’s opinion on, is gaming even a good industry to be in, in China anymore? Or are there so many signals from the government such as these, de facto greatly lowered limits on gaming that makes it simply just a lot of trouble to be in this space?

[00:13:20] Greg: I’m focused mostly on the regulation and the contracts and not really looking at quarterly earnings releases or market data. So I can’t really comment so much from a number cruncher perspective. But what I can say is that China has the largest game market on the planet. And it doesn’t seem as though there’s a fundamental shift in the party’s position towards the game industry. The party has always as you may know, had a love, hate relationship with the game industry. 

On one hand, there’s the love because early on, and even now games were one key way for internet tech companies to monetize. And the game industry really did help a lot of China’s tech companies be successful and grow to the behemoths that you have in a Tencent or in a NetEase today. 

On the hate side there is concern about the impact that games or overindulgence on games has in particular towards kids. I think that’s something that parents anywhere can resonate with, but in particular from a place that is as focused on education and where the drives to study and achieve are as strong as they are in China you can see where they would always be a little bit of tension in terms of games taking kids away from study.

[00:14:47] Rui: I definitely think that most people understand the love, hate relationship. The fear that a lot of people have is that it’s tipped more towards the fear side than the love side. The evidence that is typically trotted out to say, that’s not the case is, people have done for example, analyses, big data analysis of state media, and how often they’ve compared gaming to something destructive like opium or digital fentanyl or whatever it is, and that number has gone down on a percentage basis from 20 years ago to now I think there’s something like 13% of the mentions now are negative and they’re overwhelmingly positive actually. Gaming is a way to export Chinese culture. It is a way for people in China to have a good spiritual life, et cetera, and entertain themselves, of course. 

What is your professional opinion on that balance that love, hate relationship has tilted in a way that we should be more concerned about, because games have become a lot more immersive, and therefore maybe more addictive? And then you do have the fact that, games now are a profession. When we look at e-sports consumption, consumption in games and of games are at all-time highs, right? People are watching other people play games over livestream because that’s easier to do than ever before. Do you think in China, the government stance maybe is now going more towards the fear side? 

[00:16:15] Greg: As I look at the recent changes, I don’t see evidence of a fundamental change in the party’s attitude towards the video game industry. So one of the recent changes has been:

One is Apple has been forced to enforce the game approval rules. But that was something that was there on the books for a long time. And so taking down thousands and thousands of games from the iOS app store I think is a loophole that, probably the party would have preferred to close even sooner, but just eventually got around to it. 

What are other changes? MPPA is now as of the summer requiring direct integration for mobile games into their own real name verification system to help check compliance with the anti addiction rules for minors under 18. That’s been a part of to have real name registration and strict adherence to the anti-eviction rules since they first came out in 2007. So now getting it fully integrated in the MPPA system 14 years later, I don’t see that as a change. 

In August of last year, the anti addiction rules were tightened. The number of hours that kids under 18 could play was changed from 13.5 to three. That’s definitely a tightening. No question about that. But again that’s consistent. Anti dictionary rules have been around for 14 years. They’ve just gradually tightened down over the years. So I see a change in that sense. I just see more stricter enforcement or tightening of already existing policy goals that have been around for a long time. 

I think it’s also important to look at those changes in the broader context of what’s happening in the tech industry in China, and also what’s happening in China, generally under current leadership. Xi Jinping, since coming to power in 2012, he has taken a much stricter position with respect to content industries in general, and the internet in particular ,and games for right under that. And so don’t know if the tightening that we’re seeing in the game space is necessarily reflective of a change in view towards the game industry, or is more implementing pre-existing goals and then a larger tightening of control over a culture and internet products that we’re seeing across the board. 

[00:18:54] Rui: Just for people who don’t understand the registration system. My understanding is that this is a system that only recently was fully implemented, right?

[00:19:04] Greg: That’s absolutely right. So when the rules first came out in 2007, real name registration was not fully implemented. And under the reasons for that when we dug into it, it seemed as though the checks that you had to do to see whether a person’s ID number actually lined up with that individual, you’d have to clear it through a central database, but there were going to be charges to do that like ¥1 per person, which doesn’t sound like a lot, if you have a hundred million users that starts to add up.

[00:19:39] And so the game companies were pretending to comply with real name registration. It was easy for people to fake it. You could just type in an ID number that matched the format for the ID numbers and you’d be able to get through. And so we ran compliance checks every couple of years for about a decade. 

[00:20:00] And during that period, the compliance rates started to increase a little bit, but when compliance really went up was when the SIM cards for the mobile phones, when that was fully implemented with real name registration and anonymous SIM cards were phased out and eliminated.

[00:20:16] And at that point it was much easier to do real name verification by linking with people’s phone numbers that already had a SIM card that would have been verified with one of the telecoms. And so at this point, I do believe that real name registration by and large is implemented now.

[00:20:32] Is it possible to fake it with your parents account or something? Yeah, sure. That’s possible. But some of the game companies are looking at ways to avoid that with facial recognition software as well. So we’ll see where that goes, but by and large real name registration does seem to be implemented.

[00:20:50] And, why is that important for the game industry? Because that feeds right into the anti addiction regulation. So if you’re under 18, then the anti addiction restrictions apply. If you’re 18 or above, then it doesn’t. Obviously for internet regulation in general, real name registration has many other implications in terms of holding users accountable for information that they post that would violate PRC law.

[00:21:14] Rui: Is it possible then that the regulations that we’re seeing the tightening in some respects was like you said, some of these rules were always there and maybe they’re even 14 years old, but they just couldn’t be executed to the government satisfaction until this entire system, which required other pieces to come together, not just from the gaming industry but like the SIM cards that you were talking about and it required this coordination across multiple players to happen. And then in the last, maybe two years, that’s what it finally all came together. And now you actually can enforce these rules. 

[00:21:51] Greg: Yes, I think that’s right. The real name registration drive has been there for a very long time. And now it’s finally in place. The reasons for it, of course, it does in a game industry tight anti addiction, but the party has obviously had much bigger incentives for wanting to eliminate anonymity on the internet that are outside and beyond the game industry.

[00:22:14] Rui: What I told these days from friends who work with gaming companies in China, is that pretty much everyone is going towards a global audience, especially development studios that have pretty good skills. They’re all looking for a global audience from day one. And a lot of it has this fear that they’re not going to get approved inside of China. It seems just much easier to operate outside of China. First of all, is that what you’re seeing?

[00:22:44] And having worked for 15 Plus years in the industry. What is your take on their chances? Do you think that the Chinese gaming industry has improved enough from the days when Shanda was importing games to publish to now where it’s going to be a flourishing export industry?

[00:23:01] Greg: Anecdotally from what we see in our little corner of the game industry, yes, we have seen companies from China be more focused on international markets than they might’ve been in the past. And I do think that some of that is driven by the restrictions in the game approvals and, general volatility in regulatory actions in the home market. So I do think that makes a lot of sense. 

Now Tencent has been, of course, one of the most active investors and acquirers in the game industry globally for a number of years. And so their international game performance with it, with Supercell, with Riot, with their streak and Epic games and many other investments is doing quite well. They’re ubiquitous. And I remember looking at some statistics, I think earlier this year, they were like closing an investment deal every three days on average. 

[00:23:56] But just based on some of the success that we’re seeing with Genshin Impact and also the titles that Tencent has invested in abroad. It seems to me that China as the largest game market is just naturally going to become a force as a game developer over time as well.

[00:24:15] Rui: Do you work with a specific type of gaming company, or is it all over the place? And then, what about the metaverse? 

[00:24:22] Greg: Our clients are in the mobile space, PC space, council as well. These days we have a lot of clients throwing around all the normal VC buzzwords, whether it’s metaverse, or blockchain, and NFTs. And so those are definitely the areas that we hear quite a bit. Just like anyone else.

[00:24:44] Rui: You don’t sound too convinced. 

[00:24:47] Greg: I saw already player one, like everybody else. And I thought it looked pretty cool. When we get to that level, I think it’ll be a lot of fun. 

[00:24:53] Rui: Greg, what are some things that you think people misunderstand about the gaming industry? What are some things that you keep on having to explain to your clients? 

[00:25:01] Greg: Great question. For us, we do a lot of cross border work. So we’re helping Chinese companies come to the United States, or US, or European companies go to China. And one of the traditional mistakes that we see on the legal front is a natural tendency to assume that the way to approach problems at home is also the way that you should approach them abroad.

[00:25:26] But China and the United States in particular, obviously have very different legal systems. And in the US, we have rule of law where the law, the constitution is in the highest position in the land. And all of the government officials are constrained by the law. 

In China, that’s not the case. The party is in the highest position. And the law is just a tool of the party to implement its will and its policies, and the law does not constrain the party itself. I think that’s generally understood as a difference between democracies and autocracies, but that difference permeates everything that you do on the legal front when you are hopping between those two jurisdictions. 

What’s the actual implications of that? For US and European business folks and attorneys, when they’re going to China, they tend to err on over-reliance on the contract, or over-reliance on what the laws or rules or regulations say, and undervalue maintaining that ongoing relationship and ongoing need between the parties, and also looking at the policies and the practices in addition to the actual laws.

In the flipped direction, when China companies come over here, there tends to be an undervalue of the sanctity of contract, and not enough importance placed on legal compliance work. One example of this, we were interacting with one company from China where they came over here to the bay area and then placed that undervalue on general legal things, but they ran around and wanted to get to know the mayors of all the local towns and try to establish good relationships with them. And in the mayors here in the east bay, they’re all part-time positions. They all have side companies. And so the China company hired all the mayors and their side companies to try to establish good relationships.

[00:27:19] I think in China, that would be wonderful for them, and here it might be helpful on the margin. But I think It’s definitely a differ ent cultural environment when folks cross the ocean. 

[00:27:29] Rui: That is actually ridiculous. Besides that, what about specifically IP law? That’s something I hear a lot about. The IP situation in China has actually improved a lot over time. Is that something you’re seeing with your clients? 

[00:27:44] Greg: Like everybody else, we’ve always anticipated that as companies in China have more of their own products that are protected by copyright, trademark, patent that obviously there would be a much greater incentive to enforce those laws in a way that’s protecting innovation and development and creativity.

[00:28:07] And yeah, I do think that we see that I don’t think that it necessarily changes the nature of the legal environment in China itself. And so one question that always, or that often comes up is foreign developers will consider sharing the source code of their games with a China publisher because the foreign developers, of course, can’t self publish in China.

[00:28:29] And then if you want to integrate with the various Android stores or do localization work, either the foreign developer needs to be intimately involved with that, or they have to hand over their source code. So smaller foreign developers who don’t necessarily have the resources to help with that localization or integration effort.

[00:28:47] Often we’ll consider handing over their source code. Larger companies with more resources won’t generally do that. But to the extent that there’s value in that source code, I do think that’s a risky endeavor.

[00:29:00] Rui: What do you usually end up recommending? 

[00:29:01] Greg: It really depends on the resources that they have. For some smaller developers, maybe they don’t have a choice. But for the larger developers, they won’t release source code. They’ll just export assets that are in English. And then those assets will get translated. And after the translation is done, they’ll re-import and reintegrate, and then they’ll deliver the localized bill. And then if there’s any other localization changes beyond translation, that would be something that’s negotiated between the parties. And then it’ll often be the foreign developer that’s implementing suggestions from their China publisher, as opposed to handing over the source code.

[00:29:40] Rui: Got it. Are there typical questions that you get from investors on the gaming industry? Especially now that there has been so many regulations that have come out.

[00:29:49] Greg: Absolutely. One of the really significant change that went into effect on November 1st is the personal information protection law that China passed a couple months ago.

[00:30:03] And this is their version of Europe’s GDPR or the California Privacy Acts that we have here. It does borrow a lot from GDPR. But there is one area that is much more strict, and that’s cross border data transfers.

[00:30:22] Europe has its own set of restrictions for transferring personal data outside of Europe. And it’s generally focused on whether or not the target country for that transfer has adequate safeguards to protect the privacy of European Union citizens whose personal information would be transferred or accessed at the Target company.

China is a little different. So in China, there’s actually data localization rules, meaning that you have to store your data locally in China. If you have user data on over a million users, there are ways to access or transfer data outside of the country. 

One is through a standard contract, although that form contract isn’t available yet, but there are security assessments, registrations, and annual reporting requirements. And so everything is pointing towards making it really difficult to transfer personal information or access personal information on China users outside of China. 

Now for most foreign developers, this isn’t going to matter at all. Why? Because they can’t operate games in China in the first place. But there could be situations for non-game companies where this comes up. Or for game companies, if they’re operating with a local publisher in a manner that does give them access to personal information that they can use in their analytics software or customer service software outside of China. And so there will be a number of compliance issues for companies who had that access to personal data of users in China. 

[00:31:58] Rui: Does that mean for those foreign gaming companies who, for example, are using the data and their analytics internationally, that if they just onshore that activity within China, then they’d be okay?

[00:32:09] Greg: Yeah, that’s one way to do it is onshoring in China. Other ways to achieve it is through anonymization or de-identification so that you’re just looking at aggregate data where you could go through that painful process of getting access overseas through standard contracts and security assessments and those types of things. So this is something that I think companies will need to be focused on. If they have that type of access to user data. 

[00:32:36] Rui: I don’t know if you have any concluding remarks about China gaming that you can share with us.

[00:32:41] Greg: To end on an optimistic note, I know that everybody here has gotta be a China watcher and is paying close attention to the US-China relationship, which was obviously very rocky since the trade war began on this side of the ocean. 

[00:32:56] But the white house transition, it seems like it’s cooled the temperatures down a little bit, that said it does seem that the fundamental direction of the relationship is a challenging one.

[00:33:06] Why does this matter for the game space? The one thing that I always wonder about and try to pay attention to is, will game approvals for American game companies at some point experience a slowdown? Why do I ask that? Because it’s happened to Korea before. So in September of 2016, after Korea deployed the US missile defense system, all Korean games didn’t receive game approvals for a number of years. That started to ease up recently, and a few Korean games have been approved this last year. 

But it’s always sitting in the back of my mind, will China at some point do that to American games? We haven’t seen any evidence of that. And I’m hopeful that we won’t, but it’s something that we do worry about at t imes. 

[00:33:54] Rui: I would’ve assumed there was a ban or at least a pause on American games. I didn’t realize that hasn’t happened. 

[00:34:00] Greg: No it hasn’t. And just looking at the statistics, there doesn’t seem to be any lower percentage of American game approvals. Now we don’t know how many were submitted. That information isn’t public. So we can’t do a proper analysis, but if we just look at the percentage of overall foreign games that have been approved, the American contribution to that has held largely steady. 

[00:34:24] Rui: Okay. Really interesting. Thank you so much, Greg, for sharing and spending your time with us today. How can everyone reach you if they have more questions about China gaining or need to hire you? 

[00:34:36] Greg: You could go to our website. That’s pillarlegalpc.com and it’s easy to get in touch with us there. 

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