DEC. 26, 2013 • After a long run of growth the number of Internet cafes in China is on the decline according to internal research from publisher Tencent Holdings Limited. Internet cafes have been the primary venue for lower income Chinese to play online free-to-play PC games. In 2003 there were 113,000 such establishments serving 16 million users. By 2010 the number of Internet cafes had reached 144,000 and 163 million users. Two years later the number of establishments and users was in decline at 136,000 and 126 million, respectively. The drop-off coincides with the arrival of 3G mobile networks, as well as the widening penetration of smartphones and tablets throughout China. Estimates for 2013 are not yet available.

Impact: Getting consistently accurate data on online gaming trends in China is often a difficult undertaking. There are numerous sources of information, sketchy disclosure on methodology, and few trusted standard bearers to compare against. Tencent is one of the big five game publishers in China with its own internal data to check against, plus established distribution relationships, so we tend to take notice when they announce data such as the above. Even so, we realize these numbers do not include unlicensed cafes, of which there were hundreds of thousands at one point. Regardless, disclosures such as these give us a window on how the game business in China is changing. As in South Korea, the availability of Internet cafes played a pivotal role in the growth of electronic gaming culture in China with individual Internet cafes adding many more stations over time as their popularity increased. The extent of economic development in the country during the last 20 years has been staggering with whole new upper and middle classes established during this period. Many millions of Chinese can now afford their own computers and broadband connections. But it is the explosion of smartphones and tablets within the population that is wreaking major changes in how Chinese consume their games. Fully featured smartphones can be had for around 1,000 yuan ($165) and companies such as Tencent are rushing to meet demand for mobile content driven by social chat networks. This is a huge transition that leaves us little surprised that Internet cafes are suffering a drop in business as a result. That doesn’t mean these vendors are going away. Arena games such as League of Legends are a huge hit in China, and group settings like Internet cafes are attractive to players of these titles. In addition, progress and connectivity are marching westward in China as underdeveloped portions of the country are built up to counter wage inflation in the coastal zones as consumers in the latter have prospered. That means there is still a major role for Internet cafes to play within the interior of China, just not as much in places like Shanghai or Beijing.