Roy Kheng's Article

Business Times - 06 Dec 2005

Gaming takes flight in China

Technology vendors cash in on the growing market as the booming economy boosts city dwellers' spending power

By ROY KHENG

CHINA'S rapid industrialisation and urbanisation has resulted in higher living standards for its population. According to official Chinese government statistics, in 2004, 542.83 million or 41.8 per cent of its citizens were classified as urban dwellers. In 2003, 40.53 per cent were classified as urbanites.

This process of urbanisation has led, indirectly, to a rapidly growing urban-based entertainment industry. Technology-based entertainment like home theatres, computer games and mobile entertainment have all experienced rapid expansion in recent years and will continue to grow in the foreseeable future. PC and online gaming, and mobile gaming are viable markets for developers, advertisers, publishers and technology hardware and software vendors to explore.

Some game publishers charge a monthly subscription to play their games online while others work in the cost of connectivity to their servers into the final price. Online gaming is set to climb new heights because users no longer use only the PC to connect to the Internet to play games, but also through consoles like Microsoft's X-Box and Sony's Playstation 2 which have Internet connectivity.

Burgeoning global market

No longer a fringe and niche market, computer or video gaming has become a profitable market segment. PricewaterhouseCooper's Global Entertainment and Media Outlook: 2005-2009 report published in June predicted that the global entertainment and media industry will grow to US$1.8 trillion in 2009. They foresee improved economic conditions and an advertising upswing, combined with expanding online distribution of music, films, books and video games as the key drivers to trigger end-user spending.

PWC expects the Asia-Pacific region to remain the fastest-growing region in the next five years, led by China's strong growth. China is on track to overtake Japan as the region's biggest market by 2008.

China's growth in spending power will be the highest in the world, at a 14.2 per cent CAGR (compound annual growth rate) excluding Internet access spending, and 25.2 per cent after accounting for the explosion in Internet access spending.

Growth in the region will be led by double-digit increases in the Internet, video games, casino gaming, TV distribution and recorded music. Technology market researchers at IDC estimate that the Asia-Pacific online gaming market, excluding Japan, grew over 30 per cent last year, generating US$1.09 billion in revenue.

Captive audience

The games industry has started to segment gamers into casual and serious. There are more and more gamers who define themselves as serious gamers.

Casual gamers are players who play with puzzles, digitised board games, and table games such as mahjong.

Anyone can download or play these games online. They normally involve low time-commitment. Games like these are easy to pick up and equally to keep away from.

On the other hand, the games that serious gamers play are almost like interactive cinema because these games have complex storylines and intriguing sub-plots which can generate strong emotional responses and draw users into a pervasive virtual reality; they might have expensive motion-capture and digital effects; and in some cases, have production budgets that match some movies.

Also, a movie might cost you US$6 and entertain you for two hours while a computer game, though priced slightly higher at US$30 will have you engaged for weeks, perhaps even months. Some online games incorporate product placement and even in-game advertising to generate unparalleled access to a captive gamer audience through the dynamic and targeted delivery of advertising messages.

In June of this year, Funcom, an entertainment software company, announced it had signed an exclusive agreement with Massive Incorporated, creator of the world's first video game advertising network.

Under this agreement, all free players of Anarchy Online (www.anarchy-online.com) will see dynamic in-game advertising billboards in central areas of the game. This is a new area advertisers can explore, especially considering that advertising in this media is in an environment with a captive audience of a very defined demographic.

Popularity contest

The popularity of online games is due, in large part, to the lack of smart artificial intelligence (AI) opponents. Players very quickly learn how to overcome scripted computer controlled enemies. Taking your gaming experience online often means challenging human adversaries. From a gamer's perspective, there are few experiences that can match the intensity and rush one gets from competing with and overcoming real human opponents. Players experience the thrill of victory and the agony of defeat.

Media and Entertainment giant Vivendi Universal is a leader in the subscription-based massively multi-player online (MMO) market with Blizzard Entertainment's World of Warcraft, (WOW) launched in North America in late November 2004 and in South Korea, Europe and China in early 2005. World of Warcraft boasts 4 million players as of August 31, 2005.

The game also reached 1.5 million paying users in China in July this year. World of Warcraft is hosted by The9 and costs players 30 yuan (S$6.30) to purchase a CD-Key and 0.45 yuan per hour to play.

While WOW can be considered Eurocentric, there are games made specifically for the China market. The South Koreans were first to the Asian market with games like Lineage by Ncsoft.

Legend of Mir II by Wemade Entertainment Co of South Korea was the most popular MMORPG (Massively Multiplayer Online Role Playing Game) in China from 2002 to 2004.

Its peak concurrency hit 600,000 users (peak concurrency refers to the total number of subscribers playing simultaneously). While World of Legend, by China's Shanda Interactive Entertainment Ltd, was the most popular domestic online game.

Shanda is barely six years old, but it raised US$151.8 million from its IPO on the Nasdaq in 2004. It publishes a wide range of entertainment content via the Internet. In its recent third quarter statement of financial results (ended Sept 30), total peak concurrent users for all Shanda games in commercial service increased to 2.55 million from 2.52 million in the previous quarter.

Their financial performance in the last quarter was acceptable with total net revenues increasing by 41.4 per cent year-over-year and decreased 7.4 per cent quarter-on-quarter to 499.7 million yuan while net income increased 58.1 per cent year-on-year and 17.1 per cent quarter-on-quarter to 261.1 million yuan, and diluted earnings per ADS (American Depositary Share) increased 61.8 per cent year-on-year and 16.3 per cent quarter-on-quarter to 3.56 yuan.

Another big domestic player is NetEase, which publishes and hosts Westward Journey Online II. This game is based on Wu Cheng En's 16th century classic, Journey to the West. The online game has 56 million registered users and 460,000 peak concurrent users. NetEase's makes games which tend to have a more historical focus.

As of July 2005, 53 million of China's 103 million Internet users were accessing the Internet via broadband. About 20 per cent of Internet users in China are online gamers. In fact, online gamers helped push up the sale of online games by 48 per cent to US$298 million last year.

According to China Internet Network Information Center, the average Internet user in China spends 10.9 hours each week gaming online.

Legitimacy for devotion

The World Cyber Games, which were hosted by Singapore last month, have lent an aura of legitimacy to computer gaming and China is certainly not excluded, with 6,000 participants at the preliminaries for the finals in China alone.

Participants played Counter-Strike: Source, Fifa Soccer 2005, Need for Speed: Underground 2, Starcraft: Broodwar, Warcraft III: The Frozen Throne, Warhammer 40K: Dawn of War, Dead or Alive Ultimate and Halo 2. Counter-Strike: Source was the most popular with over 3,000 contestants.

At the end of the games, China was ranked fifth with one gold medal in Blizzard's WarCraft III: Frozen Throne, won by China's Li Xiaofeng. Singapore ranked 10th, ahead of France (11th), Holland (13th), Malaysia (14th) and the UK (18th). Singaporean Wilson Chia won the republic's only medal, a silver, in Dead or Alive Ultimate.

Mobile gaming for the masses

The integration of 2.5G, and soon 3G mobile services, also heralds the advent of mobile gaming. Using Java, Sybian and Smartphone software platforms, users can download software either through mobile Internet or from their service providers. Subscribers can also engage in SMS (Short Message Service) games with each other.

As at the end of June this year, China had over 363 million mobile subscribers, according to the country's Ministry of Information Industry. Market research firm, eMarketer, projects that the Chinese mobile phone gaming market is to hit a net worth of 5.8 billion yuan by 2008, increasing seven fold from its 2004 value. It is expected to get bigger with the introduction of 3G mobile technology in China. On top of gaming, with 3G implementation, mobile users can look forward to streaming video and faster Internet connectivity.

Shanda Interactive is making a foray into the mobile games market with its acquisition of Digital-Red Mobile Software Co Ltd. This forward thinking purchase into the emerging mobile gaming market is bound to pay off. Digital-Red develops and supplies mobile games. Users can download games from their mobile gaming portal for 107 yuan per game.

Nanjing-based BBMF is another domestic mobile game developer. They publish games in different languages and for platforms such as Java, BREW, WAP and SMS. On their website, www.bbmf.net, games are sorted according to phone make and model, and cost 15.49 yuan each. The company plans to collaborate with overseas partners to develop their brand and delivery channels.

Speaking of gaming on the go, eFlyte's Asia Pacific CEO, Darrel Chua has plans to port many of eFlyte's inflight games into Chinese specifically for the China market. The Jacksonville-based company provides games for in-flight entertainment systems. He has managed to secure Singapore Airlines, China Eastern, Cathay Pacific and Air China as clients.

Though a niche, eFlyte's current expansion is indicative of the potential of and demand for gaming in China and the Asia Pacific region.

As the digital revolution in China takes root and thrives, this segment of the media market is no longer a niche business. Subscriptions to online and mobile games, in-game advertising and sales of games are viable revenue streams for publishers, developers and service providers. Advertisers can look forward to advertising with surgical accuracy to specific demographic segments via in-game advertising and astute product placement.

Don't miss this revolution.

The writer is an assistant editor with China Knowledge Press, a premier provider of trade and investment information on China. Log on to www.chinaknowledge.com for more information.