Fortnite is latest company to quit on China over regulations

The news: Fortnite joins the list of high-profile tech properties to flee China, following the recent departures of LinkedIn and Yahoo, per Bloomberg.

How we got here: Tencent Holdings, an investor in Epic Games (the maker of Fortnite), shut down all its China-based servers after running a trial version of the game for three years. The game never made any money in China.

• The hugely popular Fortnite game generated $5.1 billion in revenue in 2020 for Epic Games, a 37% increase YoY but still below the $5.4 billion it made in 2018.
• Fortnite, with over 350 million monthly active players, 60% of whom are 18–24, is one of the most popular games in the world.
• In China, distributors never got government approval to sell in-app content, the free game’s moneymaker. Many popular games like Minecraft and Roblox similarly thrive on the sales of in-app purchases.

Why this matters: Fortnite’s failure to launch in China is a red flag for global companies seeking to cash in on China's $45 billion gaming market, which is expected to hit $55 billion with 781 million gamers by 2025, per Niko Partners.

The country’s regulators have not signed off on a single new video game release since July. China is asking for more scrutiny over gaming-related content, ostensibly to protect children’s mental health and eyesight. 

• China has enacted stricter time constraints on gaming for minors, enforcing no more than three hours per week of gameplay time.
• Pulling Fortnite out of China is a warning to would-be investors that tussling with Beijing on in-app purchases in a highly regulated environment might not be worth it.

The big takeaway: Global Big Tech’s exodus from China is gaining serious momentum. Unlike LinkedIn, which was running a deprecated version of its social media service, or Yahoo, which was already in the process of divesting its various Chinese properties, Fortnite is a popular and profitable game with global appeal.

• Fortnite’s failure to earn from in-app purchases and Tencent’s decision to pull the plug on its Chinese servers is a clear message to other developers with similar business models: avoid China altogether or be ready to offer incomplete or deprecated versions of games with no guarantee of profits from in-app purchases.