An Apple for China Gaming: The most bullish thing to happen to Chinese gaming this quarter was not a Chinese decision

Relationship between Apple and the broader China Internet sector – For any app that is downloaded via the App Store on China, Apple charges a certain commission on in-app purchases (think skins for games, in app currency, music streaming tier upgrade etc).

This is one of the larger constraints limiting margin expansion for platform-based companies. However, in an effort to expand its service revenue volumes among its China installed base, Apple has made the following tweaks to its commission structure.

• Lowered commissions on Standard Paid Apps & In-App Purchases from 30% to 25%​
• Lowered commission on the App Store Small Business Program (revenue of <$1m/year) from 15% to 12% ​
• Lowered commission on the Mini Apps Partner Program from 15% to 12%

Lowered commissions on Auto-Renewable Subscriptions from 15% to 12% after completion of the first year​.

Figure 1: China online gaming market growth outlook​

Could we see a further easing in restrictions/lower commission rates?

(i) Play stores available on Android continue to charge>50% commissions on certain in-app transactions/paid subscriptions which would see a reduction to stay competitive with Apple​

(ii) While Apple has managed to ward off regulators with these lowered commission rates, they are still under scrutiny for not enabling third-party payment service options for in-app purchases, which could see a change .

Ionic View​

Within China internet, given the volume of in-app transactions, we believe the gaming sector, particularly mobile and PC gaming, is going to be the biggest beneficiary of these reduced app store commission rates.

With no signs of increased VAT rates on consumer internet names (which was the most pressing concern after the hike on Chinese telcos), expectations of strong industry growth (see figure 1), regulatory tailwinds with market regulators approving new titles at a record rate and now reduced commissions from apple payments, the growth environment for Chinese gaming could remain structurally supportive, which is more than what can be said for its Western counterparts.

As such, we believe names like Tencent and NetEase may attract increased investor interest as consistent compounders lacking a major AI overhang

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