Summary of Key Points
In the first half of 2026, the revenue of China's gaming market increased by 12% year-on-year. However, this growth was highly concentrated among leading manufacturers such as Tencent and NetEase, which together accounted for nearly 70% of the industry's revenue. The situation for mid-to-small-sized manufacturers was quite divided: some managed to profit through hit games or AI investments, while others suffered losses and even dropped out of the top ten. Major companies like ByteDance and Alibaba have sold their gaming assets, marking a shift from a rapidly growing, highly sought-after industry to a more mature one that requires more meticulous planning. Nevertheless, opportunities for long-term development still exist through international expansion, AI-driven cost reduction, and changes in channel revenue sharing.
I. Overall Growth: A Feast for Leading Games, Meager Rewards for Mid-to-Small Manufacturers
The industry's overall figures look promising: revenue reached 188.45 billion yuan, up 12%, with a user base of 684 million. However, this growth is largely due to the top players. Tencent alone generated nearly half of the industry's total revenue, and together with NetEase, they accounted for nearly 70%. Tencent's success is largely attributed to its established games; "Honor of Kings" has generated over 117.6 billion yuan in global revenue, and Tencent had six of the top ten highest-selling mobile games in July, including four of the top four. Although NetEase did not release any new hit games, it continued to grow thanks to its established titles like "Dream Journey" and "Egg Baby Party," though its profits were affected by investment losses (in companies like Pinduoduo and Alibaba) and exchange rate fluctuations.
The survival space for mid-to-small-sized manufacturers has been severely squeezed. Many companies that did not make it into the top ten experienced declining revenue and profits, leading to layoffs and business consolidations. As Jinshan World Games stated, the situation for these companies is becoming increasingly challenging: new growth opportunities (such as those provided by WeChat and Douyin's mini-games) are mostly taken by smaller players, and traditional markets are dominated by the leaders, leaving mid-sized manufacturers in a difficult position.
II. The Struggle of Mid-to-Small Manufacturers
The fate of these manufacturers varies greatly:
- Profit from Hit Games: Century Huatong's "Endless Winter" (known as "Whiteout Survival" overseas) became the highest-selling mobile game globally in June, generating nearly 5 billion US dollars, and the company has seen consecutive 13 quarters of growth. Giant Network's investment in "Supernatural Action Team" was a success, with revenue and profits doubling, and it received 70% of the profits in the second quarter.
- Profit from AI Investments: 37 Interactive Entertainment's main business declined by 14%, but its AI investments yielded over 1 billion yuan in profits (for example, from the listing of its AI-related company on the Hong Kong stock market), resulting in a 26% increase in net profit. This reflects the industry's shift towards using AI to compensate for declining game revenues.
- Painful Transformation: Perfect World's established games ("Perfect World" and "ZhuXian") are in the later stages of their lifecycle. Although its new game "YiHuan" generated over 2 billion yuan in revenue, the income needs to be recognized over time (since publishing costs were incurred upfront), resulting in a loss of 120 million yuan and a drop in ranking to ninth place.
III. Why Are Major Companies Selling Their Gaming Assets?
Major companies like ByteDance and Alibaba are selling their gaming assets because the gaming industry is no longer as attractive as it once was. While the gaming industry can still be profitable, its growth rate is much lower compared to the rapidly growing AI sector. AI companies see their revenue doubling annually, while the gaming industry only grows by 10%. Investors prefer to invest in AI, as buying AI stocks leaves them with more funds available for other investments. The gaming industry has transformed from an emerging one to a more traditional one, with funding declining from 10 billion US dollars in 2021 to 2 billion US dollars, and the number of new players globally decreasing from 150,000 per year to 5,000 per year. Profits have also become more in line with the average in other industries, leading to less interest from investors.
As industry insiders put it, gaming cannot compete with the hype of AI or the stability of enterprise software. Games lack the appeal of AI and are not as reliable as enterprise software, so major companies prefer to allocate their resources to areas with higher growth potential.
IV. The Industry Is Not Dead, but Its Approach Needs to Change
The gaming industry is not on the decline; rather, its approach is evolving:
- International Expansion: Chinese companies are leveraging their expertise in mobile game development and long-term operations to enter overseas PC and console markets. The hybrid revenue models used in domestic mini-games are also being adapted for overseas social platforms.
- AI for Cost Reduction and Efficiency Improvement: AI can help reduce development costs (e.g., by automatically generating game content) and improve operational efficiency (e.g., through more targeted user management).
- Changing Revenue Sharing: Lower revenue shares from Apple and Android allow game companies to retain more of their profits. The increasing number of game licenses also encourages innovation.
Institutions like UBS believe that the gaming industry still has a bright future: players and revenue are still there, but the distribution of funds has become more concentrated, making it harder for companies to attract new users. Manufacturers need to shift from focusing on spending heavily on hit games to focusing on efficient operations.
In summary: The gaming industry is moving from a period of rapid growth to one of more focused and strategic development. Leading companies will continue to profit, while mid-to-small-sized manufacturers must rely on their strengths (hit games, AI, or strategic transformations) to survive. Major companies are looking for more promising areas of investment. Nevertheless, there are still long-term opportunities ahead for the industry.