China Online Firms Not Playing Around; Games Get Ahead
Patrick Seitz
On Friday May 29, 2009, 6:45 pm EDT
The growth of online PC gaming in China not only has boosted the fortunes of several companies there, it could portend a major shift ahead in the worldwide video game market.
Online gaming in China generated $2.75 billion in revenue last year, according to Niko Partners of San Jose, Calif. The research firm predicts revenue will hit $8.9 billion in 2013, a compound annual growth rate of 26.4%.
"There's a lot more growth left in the Chinese gaming market," said Lisa Cosmas Hanson, managing partner of Niko Partners. "As Internet penetration and broadband penetration continue to increase in China, we find that online games are one of the leading applications that people are drawn to."
Riding this rapid growth curve are companies such as NetEase.com (NasdaqGS:NTES - News), Changyou.com (NasdaqGS:CYOU - News) and Shanda Interactive Entertainment (NasdaqGS:SNDA - News).
Shanda, an online content company based in Shanghai, last week signaled plans to spin off its gaming division, Shanda Games, into a separate pure-play company. In doing so, it would follow the path set by Chinese Web portal Sohu.com (NasdaqGS:SOHU - News), which spun off its gaming unit as Changyou in April.
Shanda is scheduled to report earnings on Tuesday. Analysts polled by Thomson Reuters expect earnings per share of 74 cents, up 32% from a year earlier, on sales of $156 million, up 40%.
Shanda is the No. 1 online PC gaming company in China with about $500 million in game services revenue last year, Niko Partners says. Its big titles include "The Legend of Mir II" and "The World of Legend." In the jargon of the trade, these are MMORPGs, or massively multiplayer online role-playing games. There can be thousands, even millions, of users playing these games at any time.
In China, video games are delivered as a service, as opposed to the U.S. where most game software is sold as a packaged product at retail. The service business model sprang up in China because software piracy is rampant there.
Video games are low-cost entertainment in China, where the average revenue per gamer is $52 a year, Niko Partners says.
Gamers in China pay 30 cents to 40 cents an hour to play, using prepaid cards, says Tian Hou, an analyst with Pali Research. "It's very inexpensive," she said.
The most popular games in China are the virtual world games where thousands of players interact at the same time in a fantasy environment, Hanson says. MMORPGs accounted for 77% of online game revenue in China last year.
Shanda has 5.9 million active paying accounts for its massively multiplayer online games, she says.
NetEase, the No. 2 online PC gaming company in China, generated $366 million in game services revenue in 2008. Its big title is "Fantasy Westward Journey." But Beijing-based NetEase recently scored a major coup by winning the license to distribute Activision Blizzard's (NasdaqGS:ATVI - News) popular "World of Warcraft" franchise in mainland China. Shanghai-based The9 (NasdaqGS:NCTY - News) currently holds the contract, but it's set to expire in June.
Young people frequently meet in China's 170,000 Internet cafes in China to socialize and play games, Hanson says.
China's video game business model is catching the attention of Western game publishers.
"It's the biggest growth story in the industry," said David Cole, an analyst with DFC Intelligence in San Diego. "It's a paradigm shift. The profit margins are so much higher compared to the traditional boxed retail guys."
And online games can have longer lives, Cole says. Many of the games popular in China today were released five years ago and still earn annual annuities in the hundreds of millions of dollars, Cole says.
Chinese companies looked to South Korea as a role model for online video games. South Korea is home to such online gaming firms as Webzen (NasdaqGM:WZEN - News), NCsoft and Nexon. But South Korea is fairly well saturated for online games, analysts say.
MMORPGs have not been as big in the U.S. because this market could afford the higher cost of console-based video games and the piracy problem isn't as big here. But multiplayer online console games, especially for Microsoft's (NasdaqGS:MSFT - News) Xbox Live, do have a following.
The online video game business perfected in China and South Korea could translate to markets such as Brazil and India, Cole says, because of the low cost and the piracy problems in those countries.
"The business model of PC online gaming in China is going to be utilized around the world," Hanson said.
Other online game companies in China include Perfect World (NasdaqGS:PWRD - News), Tencent, 9You.com and Kingsoft.
The growth of online gaming could lead to the emergence of new leaders in the video game industry, analysts say.
The merger of Santa Monica, Calif.-based Activision and Vivendi Games to form Activision Blizzard in July 2008 was a sign of the coming shift. Console games publisher Activision saw the need to diversify by joining up with the creator of "World of Warcraft," which has over 11.5 million subscribers worldwide and is the biggest MMORPG.
AI
