Synopsis:

  • Two recent regulations indicate that the Chinese government intends to tighten the administration of online games, in particular, foreign-copyrighted games.
  • Developers need to remain vigilant about licensing, approval and censorship requirements imposed on online game publishing.
  • Non-compliant games and their operators may be blacklisted, with potentially devastating consequences.

Recent regulations in the publishing and cultural industry send a strong message to foreign investors that China is becoming more restrictive on foreign participation in content production and publishing activities. Foreign investors, who are currently operating their online games in China or seeking to do so, should pay attention both to the stricter licensing requirements and the newly-introduced blacklisting mechanism. The State Administration of Press, Publication, Radio, Film and Television (“SAPPRFT”, “国家新闻出版广电总局”) and the Ministry of Industry and Information Technology (“MIIT”, “工业和信息化部”) jointly promulgated the Regulations on the Administration of Online Publishing Services (“Regulations”, “网络出版服务管理规定”) on February 4, 2016, which took effect on March 10, 2016. In addition, the Ministry of Culture (“MOC”, “文化部”) promulgated the Administrative Measures on Cultural Market Blacklisting (Trial) (“Blacklisting Measures”, “文化市场黑名单管理办法(试行)”) on February 3, 2016, with immediate effect.

Dual Approval Regime Remains Unchanged

As discussed in our earlier feature article Getting Foreign Mobile Games to Market in  China, both the SAPPRFT and the MOC regulate in parallel the publishing and operating of online games in China. This dual system creates heavier administrative burden for enterprises within the industry. Such strict scrutiny does not seem to align with the Chinese government’s reforms involving “streamlining administration and delegating powers (简政放权)” in recent years. By issuing the Regulations and the Blacklisting Measures, the Chinese government now imposes more onerous duties on participants in the market. The dual system is unlikely to be streamlined unless the State Council (“国 务院”) further clarifies the jurisdiction of SAPPRFT and MOC regarding the publishing and operating of online games. Being probably the most lucrative business within the cultural industry, online gaming continuously receives heavy censorship from the Chinese government.

Highlights of the Regulations

The Regulations came into effect on March 10, 2016. In comparison with its predecessor, the Interim Regulations on Internet Publishing (“互联网出版管理暂行规定”) issued in 2002, the Regulations include “online games” under the category of “online publications”. Therefore, all restrictions on online publications now fully apply to online games as well. Below are the highlights of the Regulations:

  1. Online Publishing Service License

The Regulations define online publishing services as providing online publications to the public through information networks. Any entity that engages in online publishing services must obtain the Online Publishing Service License (“License”, “网络出版服务许可”) from the SAPPRFT before commencing operation. With respect to online gaming, the Regulations require engaging entities to satisfy certain network infrastructural conditions, including domain names, onshore servers, technical equipment and applications for mobile devices. Furthermore, the Regulations name the following staffing requirements:

  • The engaging entity must obtain a qualified legal representative as well as a qualified manager. The legal representative must be a Chinese citizen who is residing in China. At least one of the two must have the Intermediate Professional Qualification for Publishing (“IPQP”, “中级出版专业技术人员职业资格”) or above.
  • In addition, the engaging entity must maintain at least eight full-time editing staff. All the staff must hold qualifying certificates recognized by the SAPPRFT, among whom three must hold IPQP or above.

The Regulations explicitly forbid sub-licensing, leasing or transferring of the License or any similar arrangement that achieves the same effect. The License shall be valid for 5 years. The License holder is subject to annual review by various provincial branches of the SAPPRFT.

  1. No Foreign Investment

Unsurprisingly, the Regulations continue to prohibit foreign investors and enterprises from engaging in any online publishing services in China. In earlier regulations, the SAPPRFT already made clear that foreign investors were not allowed to operate any online games in China in any manner. After issuing the Regulations, the SAPPRFT further eliminates the use of any alternative arrangement to circumvent such restrictions, including the VIE (“Various Interest Entity”) structure which has been widely adopted in other foreign-investment-sensitive sectors. The Regulations also require prior approval from SAPPRFT if any License holder cooperates with foreign investors in online publishing services.

  1. Prior Approval for Foreign Online Games

The Regulations require entities to obtain SAPPRFT’s approval, on a case-by-case base, before publishing any online games. Most foreign online games are handled by one individual entity, taking care of both the publication and the operation. It is also appropriate if the “publishing entity” and the “operating entity” are separate. According to SAPPRFT’s guidelines, the “publishing entity” shall take on the major responsibility of reviewing and supervising the game. Such publishing entity must hold relevant publishing license issued by the SAPPRFT. The “operating entity” shall be responsible for the commercial operation of the game (including making the game available to players through network) and it must have an ICP License (“Internet Content Provider License”) from the MIIT.

SAPPRFT’s latest list of “Imported Online Games Approved in 2016” shows that games with separated “publishing entity” and “operating entity” have no difficulties receiving approval. Based on our informal consultation, the SAPPRFT has no plan to change such practice in the near future. However, strict interpretation of the Regulations might lead to a different result. That is, the “publishing entity” only supervises the content of the game, while the “operating entity,” who does not necessarily hold a License, is the party that actually makes the games available to the public. Whether the SAPPRFT would adopt a strict interpretation of the Regulations in the future remains unclear.

  1. Accountability Systems

A License holder must put in place various accountability systems to monitor and control its online publications. In order to ensure the legality and appropriateness of the content, the accountability systems must cover every aspect of the publication, including but not limited to editing, proofreading and reviewing. Publishers of online games, in addition to ensuring the legality of the game script, shall also be responsible for censoring players’ intra-game communications by implementing relevant monitoring measures.

Highlights of the Blacklisting Measures

The MOC set out the Blacklisting Measures in February 2016. It establishes, although still at its trial stage, a blacklisting system to discipline non-compliant cultural products as well as their operators. During the 1-year trial, the system monitoring products will implement nationwide, while the system monitoring operators will start experimenting in Shanghai, Tianjin, Chongqing and five provinces including Guangdong and Zhejiang.

According to the Blacklisting Measures, any branch office of the MOC, equivalent to or higher than the county level, may blacklist and penalize a cultural product if such product contains prohibited information. Once blacklisted, the circulation or operation of the product will be banned nationwide. Similarly, if any operator of a cultural product violates any regulations, to the degree of revocation of its license, such operator may be blacklisted and will be closely reviewed if it applies for any license in the future. The MOC may remove an entity on the blacklist if the entity establishes its continuous compliance with law and regulations for five years after being blacklisted. Note that the Blacklisting Measures include online games under the category of cultural products. Thus operators of online games are subject to the blacklisting system as well.

Impact of the Regulations and Blacklisting Measures

Neither the Regulations nor the Blacklisting Measures bring significant changes to the existing legal regime regulating online game operation in China. However, they both deliver a strong signal that the Chinese government is further tightening its supervision within this heavily-regulated area. Before China introduces any major policy breakthrough on foreign investment, it remains difficult to import foreign online games. Foreign investors have to obtain all administrative approvals and to team up with qualified Chinese partners. Developers and publishers of foreign online games should conduct comprehensive due diligence on their prospective partners. Close attention should be paid to their partners’ qualification status, their records in obtaining administrative approvals, and whether the partners associated with any blacklisted cultural product. In addition, be aware that any branch office of the MOC, equivalent to or higher than the county level, is authorized to enforce the Blacklisting Measures. Once blacklisted, publishers may face devastating consequences including disruption of gaming services and potential reputational damages.