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Collapse, Death And Re-Birth In The Chinese Online Game Market
March 24, 2005



Posted by Frank Yu
Chinese online gaming seems for many investors a potential goldmine of ever increasing revenue and growth. Everyday we see news of some Chinese company making millions from their latest online game or perhaps buying up (or being bought up) by one of the emerging game companies.

The news and momentum of the game industry seems to be shouting growth while the greedy little imp whispers to investors to buy now and ride the tiger to IPO on Nasdaq. Chinese tech companies that have never made profit from productivity software now see red (the color of the 100 renminbi) from the profits of licensing or developing their own games in China.

Like Red chips, real estate companies, and internet portals before, Chinese Game companies seem to be the newest flavor to excite investors with the “if everyone in China played online games mantra”. Although it does seem that this industry in China is just starting and that the potential remains unrealized, the Video Game industry is actually quite mature in various parts of the world. What seems new is that the online games for many investors appear to be a bombproof revenue generator since it seems resistant to traditional CD-Rom piracy. Even as this market grows and new users sign on each day to more and more online games, the seeds of destruction have already been planted.

The Video Game industry is a little like evolution. Although the number of game players and the size of the market increase each year, there have been several mass extinctions of whole industry segments in the world of video games. One of the most notable meteors to cause one of the largest die-offs was the demise of Atari, Mattel Electronics, Coleco and even Commodore during the 1984 industry crash. Overnight, what seemed to be a growing new market crashed with truckloads of “ET: The Extraterrestrial” cartridges having to be dumped in landfills. However, as American console makers began to wither, the Japanese console makers like Nintendo, Sega and NEC began to flourish. It’s as if the American reptiles on land were now being replaced by Japanese mammalian game companies for dominance of the still growing industry.

As PCs began to become an alternative gaming platform to consoles, companies like Broderbund, Origin Systems and Infocomm rose to dominance to take advantage of the new markets. Years later these companies would be gone or bought out by larger companies such as Electronic Arts, THQ, and Activision as dominant players for videogames even as the markets got larger. Of the three major console makers today, only Nintendo is a medium age veteran. Sony and Microsoft are relative newcomers in this industry.

The lesson to take away from this short history flashback is that the Video and Online Game industry in China will continue to rise and proliferate even as some of the major online game companies in China will no doubt collapse, be bought out or quietly close their doors. The Honeymoon period of Chinese online gaming is almost over and a shakeup seems inevitable in the next few years as users, companies and the industry matures.

Risk: Currently, many of the more popular online games in China are licensed from Taiwan and Korea through local portals and game companies. As the drive to develop domestic production increases and foreign firms set up development shops in China, so does the risk and financial requirements for creating a full cycle game development operation from scratch. Two or Three dud or mediocre releases is all that it takes to shut a game company down. Licensing, although a more conservative approach for getting to market, will increasingly be discouraged by the powers that be to promote local development.

Game Lifecycles: All games will eventually become old and boring to some degree. What once excited you in the past seems pure repetition now. The challenge is gone and the sense of wonder in exploration and discovery is lost. The key is to make your game last long enough to recover your costs and keep subscribers playing until you can transition them to a newer version or your next big game release. Will it even work on the next version of Windows?

User Lifecycles: Users get old as well. When those students graduate and start families, they soon will need to budget not just their wallets but also their time to playing games. How can you ensure that your game will attract new users and get them hooked enough to keep coming back. Even hardcore male game players go through phases where they just grow tired of playing games and discover things like girls or sports instead. Perhaps the gamer will instead just play a different game and never come back to yours again.

Lower Quality knockoffs: As Chinese game companies become awash with cash investors, there is a lot of dumb money chasing a small tiny pool of competent game developers. This situation will attract shoddy game start-ups who will release me too clones or just plain terrible products to soak up the influx of private and government seed money. As the quality of games degrade, users will become disgusted and be turned off games in general which is what happened in the Atari Crash of 84.

Price Erosion: As more competitors enter the field chasing new users with low cost subscription and free play, the market pricing will erode. In desperation, failing companies will dump products, even at a loss, to recoup some of their investment from development and start-up cost of running servers, distributors and online help systems. For MMORGs to work, they require a certain critical mass of users to help defray the cost of monthly operation. If you can’t hit that bar early enough, you might as well close and stop the bleeding.

Cheating: The biggest threat to the online game industry is not piracy but cheating. Players can still enjoy playing a pirated game but an online game where other users cheat or undermine the experience of game play will see their user base run away as fast as their mice can click onto another of the many other games that are now launching or have launched in China. Game developers fear this threat more than anything else. However, with the increasing sophistication of users and hackers, cheating will become an ever increasing issue. For the worst case is not if a user just leaves a game, they may be so disillusioned by cheating that they will no longer opt to play online games at all.

Many of these issues have led to the cycle of death and rebirth in the game industries around the world. China’s market still needs to undergo that cycle of a thinning of the herd of weak and diseased companies to ensure that the quality and experience of the industry in general continues to increase. Yes, there is money to be made in China’s online game market in the future but the question is if any of the companies that can be invested in now will still be around to give you a return on your investment.


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About the author:
Frank Yu is a Program Manager at Microsoft Research Asia's Advanced Technology Center. A Harvard graduate, Frank has worked in Hong Kong, Singapore and now Beijing for 8 years in the field of technology and banking. Views expressed in this article are those of the writer and not those of Microsoft Corporation. Frank can be contacted at [e-mail].