Mobile gaming: The cash cow of China's mobile phone industry

East Asians basically have two ideas of the mobile gaming industry: one, a purely financial concept that this industry is extremely profitable; two, a purely moral concept that compares gaming to a mental opiate. However, mobile gaming has a crucial albeit overlooked social position as a core pillar of China's mobile phone industry. The US was the first to open up the smartphone industry; as a follower, without the mobile gaming industry, China's mobile phone industry would not have achieved what it has done today.

To understand why mobile gaming supports China's mobile phone industry, we have to be clear about two points. First, how profitable mobile gaming is, and second, how China gained its edge for offering phones that are "value for money" - that is, through the division of profits between mobile phone makers and game app developers.

If one were to ask about the most profitable mobile game in the world, Tencent's Honor of Kings would be a red-hot candidate. Tencent has never officially announced the monthly earnings and profits of the game, so there is no clear answer as to exactly how much it earns, but according to market estimates, the game earns about two to four billion RMB a month, depending on the festivals and holidays in that month; the more the breaks, the more likely it is that profits go up, and vice versa.

More than once, Honor of Kings has also broken the billion-RMB mark in single-day traffic. China's gaming titan Tencent earns between 80 and 90 billion a year from smartphones (its financial reports might differ from the actual situation due to accounting regulations). About 40% of the earnings of this internet company with the highest market worth in China comes from gaming.

Mobile gaming is also criticised by many for being an electronic drug. On the one hand, it can lead to addiction, and on the other, the profits are extremely high, just like drugs. A popular game generally has a profit margin of about 80% to 90% - luxury goods like LV and Gucci have a profit margin of only about 60%. Few industries can rival mobile gaming in terms of profit margins.

Looking at an industry in terms of its gross profit margin, at the opposite end of the spectrum would be the mobile phone industry which is known for its extremely low gross profit margins. In fact, electronics and smartphone brand Xiaomi's slogan is to manufacture phones with low profit margins.

The average gross profit margin of China's smartphones is a mere 7%, which is even lower than that of the ordinary manufacturing industry. Comparing mobile phones with the same core hardware configuration - if a company like Apple Inc. sells the phone at an average of 7,000 RMB per phone, a domestically-produced one is only sold at 4,000 RMB apiece. This is also the reason why Chinese phones are known for being the best value for money. At present, nearly half of the global smartphone market share is occupied by Chinese smartphones. In developing countries, Chinese smartphones are the most popular, chiefly because of their extremely high value for money.

So the question is, why is the Chinese smartphone industry able to withstand such low gross profit margins over a long period of time? The answer is, Chinese smartphone companies always get a cut of the revenue earned from China's mobile gaming market. Once a China-made game is downloaded onto a China-made Android phone from the app store, Android phone vendors obtain up to a 50% cut of the revenue. Nowhere else in the entire world is there a higher revenue cut than this. Using the same channel, smartphone giant Apple Inc. is only able to get a 15% revenue cut from its own app store, and so does Google Play.

Because of this additional cut of the revenue, Chinese Android phone manufacturers are still able to make a profit even if manufacturing the phones themselves does not make money. And it is also because of this additional cut above the industry average that Chinese smartphone companies are able to expand into the global market with the slogan that their products are good value for money. Now, many countries are attempting to make a breakthrough in the smartphone industry. But apart from China, no country can challenge the US's position in the smartphone industry. The unique thing about China's mobile phone industry is the symbiotic relationship it has formed with the high-gross profit margin gaming industry, which has provided it with a steady stream of profit.

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