Games as services, video games

Arrested development: Giant potential in the Chinese domestic games market

January 2006

Despite already achieving impressive scale, China’s games market still has a long way to go and it will continue to need the help of more experienced games companies to grow further. However, companies interested in China must keep an eye out for some issues in the marketplace.

Today 22m Chinese play games, 90% of them young males playing online RPGs produced or localised and published by China’s 170 indigenous games companies. Fewer than ¼ of these companies are profitable and the market is controlled by a handful of major publishers whose global scale might surprise. Netease, for instance, has a market capitalisation of nearly $1.9bn, larger than Ubisoft, SCi/Eidos and Infogrames/Atari combined. Despite their financial muscle, Chinese publishers’ presence on the world stage has yet to be felt.

The Chinese market has sprinted over the last few years to nearly $400m in value (according to the China Game Publisher Association) but has slowed substantially in the past year. In a market considered by many to be still in its infancy, why has it plateaued?

The Chinese games industry is firmly bound by government policy which currently takes a dim view of games. High profile, games-related deaths prompted a moral backlash: Beijing’s mandarins limited online play to a daily maximum of 3 hours and cracked down on illegal games cafés. More damaging is the lack of government assistance in a country where such hand-outs have, elsewhere, created new industries almost over-night.

Rampant piracy, at levels scarcely imaginable to us in the west, has also hamstrung the retail games market in China. 92% of all software sold there is pirated. Such stratospheric levels of software piracy have disconcerted console manufacturers and driven games online, where subscriptions and constant subscriber authentication allow a degree of protection from piracy. Yet 30% of China’s online gamers don’t pay, either hacking into an official game, or playing for free on an illicit server mirroring the official game.

Today there is inadequate choice for Chinese gamers – RPGs overwhelm the market. Before 2005, most of China’s favourite games were developed in Korea, then licensed for localisation in China. In 2005, China’s developers began to license Korean games engines to create original games, but the variety, quality and originality of these new Chinese games was (and remains) very limited. Any marginally successful game is quickly replicated by competitors and then swamped by carbon copies, stifling original and copy alike.

The games console has failed to gather momentum in China. Piracy dampens hardware manufacturers’ desire to promote their consoles there, and there is little chance of ever reaching profitability. Sony launched a basic PS2 in 11 of China’s largest cities, yet in two years it has sold only a few hundred thousand units. Retail prices and hardware piracy were too high, the range of games actually released was limited and sometimes inappropriate for the Chinese market, and early adopters often played low-quality pirated games, which damaged word-of-mouth effects. Microsoft however intends to ship 360s to China in 2006, hoping to learn from Sony’s mistakes, but progress is expected to be slow.

Despite these obstacles, China offers some interesting opportunities to western firms. China is a growing destination for outsourcing, with a growing body of artists capable of handling quality production work. Many major studios either outsource work there or (like Ubisoft, EA, Tose and Take Two) operate subsidiaries there to realise cost efficiencies. Secondly, east-west partnerships are being investigated that could pair western creativity and experience with low-cost Chinese production. Producing games attractive to the Chinese market with western quality levels is difficult but can be immensely profitable. World of Warcraft has been very successful in China and has avoided the copycat effect due to its quality and playability. Chinese companies find it hard to emulate these features and many are open to approaches from western games companies. Finally, just as cash-rich Korean publishers have begun opening offices in the west, so the larger Chinese publishers are expected to follow suit, possibly by acquiring more experienced western studios.

So, look before you leap into a fraught but fascinating developing market for games.

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