In the first half of 2023, overall revenue from China’s video gaming industry fell 2.4 per cent from a year earlier, but the combined amount of 144.3 billion yuan (US$20.3 billion) was up 22.2 per cent from the second half of 2022, according to a report released in July by China’s Game Publishing Committee.

Matthew Chen, co-founder and chief operating officer of Zencat Gaming, a start-up in Chengdu, Sichuan province, that develops and distributes video games, says the move “confirms that winter is coming” for the industry.

According to Chen, even though Beijing resumed approvals of new game licences last year, the industry is still struggling amid economic pressures. “Players just don’t spend that much money now,” he said.

In the first half of 2023, both the frequency and value of fundraising in the global video gaming industry dropped sharply, according to data from Chinese research institute Analysys. From January to June, the number of funding-related events dropped over 50 per cent from a year ago to more than 60 events, while the total value plunged over 90 per cent to just over 50 billion yuan.

This came after a tough 2022. Lisa Hanson, CEO of gaming industry consultancy Niko Partners, said 2022 marked the first time that China’s gaming market had shrunk in over two decades, “mostly because of very challenging regulatory measures including a multi-month licensing freeze, regulations on youth gaming, and more”.

“ByteDance burnt too much cash on hiring talent and promoting games, and its corporate structure isn’t flat enough to reduce costs,” said Zencat’s Chen, explaining how even those with deep pockets have been humbled by the changing dynamics in China’s video games market.

One employee, who asked not to be identified as he is not authorised to talk to to the media, said company founder Zhang Yiming is not a “video game lover himself”, but saw the business as a way to help the social media giant “tell a story of high growth” to investors.

However, Niko Partners’ Hanson points out that Nuverse only accounts for a very small proportion of ByteDance’s total revenue.

“While the company made US$54 billion in the first half of 2023, less than 1 per cent of that comes from their games business,” said Hanson. But she added that it has still come as a shock for many industry watchers that “a giant company has opted to restructure in this way”.

ByteDance entered video gaming as early as 2017, with an initial focus on casual games, a category that does not require heavy capital input. The company later doubled down on self-developed “hardcore” games and set up Nuverse in 2019 to focus on both development and publishing.

But the unit has struggled to come up with blockbuster titles.

According to Nuverse’s website, it has launched titles such as Flower, an ancient Chinese-style noble school development game, and One Piece Blood Routes, a 3D-action mobile game. As of October, none of them were on the list of the top 10 grossing mobile games around the world, while rivals Tencent Holdings and miHoYo each had two spots, according to data from US app analytics firm Sensor Tower.

Zhang Shule, an analyst with CBJ Think Tank, said ByteDance’s bet on video gaming was simply one effort to find new growth points in a once-booming gaming industry – and it has not been successful.

“Video gaming companies are not just traffic kings. To do a good job in this industry, you need to have masterpieces that are recognised both at home and overseas,” said Zhang.

ByteDance is not the only firm to have had their fingers burnt by video gaming though.

Bilibili, the Shanghai-based video sharing platform that once saw gaming revenue account for over 80 per cent of its total revenue, reportedly cut most employees – involving hundreds of jobs – at its Guangzhou-based gaming studio Xinyuan in 2022. CEO Chen Rui said earlier in the year that the video gaming unit was being scaled back so that the company could focus on projects it is good at.

For market leaders such as Tencent and NetEase, the news of ByteDance’s retreat is unlikely to bring any relief in what remains a highly-competitive market, but it may give them a chance to snap up some talent.

“These two gaming giants will be watching to see who is let go from Nuverse to sweep them up as new hires,” said Hanson from Niko Partners.

Zencat’s Chen said his studio would not be hiring any former employees from the likes of ByteDance though, “because they would not be productive enough for the pay [they’d want]”.