Q: Where can one find an entertainment sector which combines hyper-growth, a massive, potential base of youngsters, light-touch regulation and innovative yet proven ways of paying for content online?
A: the Chinese games sector. And increasingly it is doing the finding itself, seeking out external investment from other Asian and Western businesses and trying to build ambitious bridgeheads into other content areas.
Concentrated in cities in the southern and coastal regions, the Chinese games sector is widely recognised in Asia as likely to assume the role of the region’s major market and content producer. It is also markedly different from its Western counterparts, and could prove a laboratory for digital creativity in other markets.
Chinese market estimates arrive hedged with caveats about reliability and coverage. Nevertheless, according to official figures, the games industry grew by at least 45 per cent in 2003. Massive multiplayer online games (MMOG), rather than PC/consoles, account for 80 per cent of total market revenues. Online games can regularly attract 10,000-500,000 simultaneous players. Publishers earn revenues from pre-paid cards and from the web portals which manage the games. It is expected that by 2007, China could have 41.8m online gamers and 140m total internet users.
Estimates of the games market’s current value range from $157m to $309m. This excludes income it contributed to telecoms operators, internet cafes, portals and others. IDC and the China Game Publishers Association forecast that by 2007, the online games industry in China will be worth $807m.
State intervention is limited and the industry is dominated by independent businesses, creating opportunities for foreign companies to tap into the market. Korean and Taiwanese exports currently dominate, but there have been some indigenous successes. Online games accounted for 44 per cent of 2003 revenues at games portal NetEase, outstripping advertising and telecoms revenues. And Shanda, recently declared China’s fastest-growing media or telecoms company, claims up to 1m users on its site at peak times. There are more than 100 major Chinese companies engaged in online games development, and China has 60 games publishers, including mobile specialists such as Kongzhong.
In an industry often characterised by deal-making and vertical integration - large games publishers are web portals and internet operators, too. Kingsoft has secured interests in production studios in Beijing, Chengdu and Shanghai. Shanda plans to use a reported $100m cash reserve to fund an acquisition drive in content production. And fixed-line and mobile telecoms operators are also investing in games origination.
These companies and others recognise the gap in original content which must be plugged if China’s ambitious targets for broadband and digital roll-out (Beijing and other cities expect analogue TV and radio switch-off in less than four years) are to be matched by consumer take-up. Their interest is primarily in interactive and animated TV content because of the enhanced gaming experience.
So, where are the opportunities for UK businesses to break in? In our report for UK Trade Investment on China’s creative industries, we set out a detailed framework for examining China not simply as an export market but also as a locus for direct foreign investment, service provision, outsourcing and skills transfer. We floated ideas for creative neighbourhoods and other partnerships.
We found potential entry points along the entire games chain. These range from the provision by UK suppliers of creative services in the form of music or design to local games publishers, to investment in Chinese games publishers and agency arrangements for UK games to be published to Chinese users. They also included distribution deals on online, TV and mobile platforms for UK games, and prospects for UK games developers to provide localisation of Chinese games for sale in UK and international markets.
However, there are number of cautionary points to be made. Chinese mythology lies behind the most popular Chinese games. Western, fantasy-based games are not as admired as regional counterparts from Korea, which shares some mythologies with China. UK companies will face competition from many groups. NCSoft, Korea’s largest developer has invested in the region, as has Nintendo. Japan’s Enix is set to follow. Transaction costs may be high and some opportunities too large to exploit.
Further, Chinese games are still subject to restraints of public disapproval. Shanda has described games which pit gladiators against pandas as unacceptable. Sichuan TV was forced to close its newly launched games channel after parents complained that their children were spending too much time online and generating ridiculous phone bills.
Finally, piracy remains a primary concern right across the sector. The presumption that online gaming was pirate-proof has been completely undermined. Tech-savvy individuals are building illegal servers and developing cheat software.
The government, which has generally supported games development, has not been complacent. It has held regular campaigns to highlight the problems and there are also anti-piracy inspections focused on illegal servers and cheat software. The Chinese government, like others in Asia has recognised the key role of the creative industries in driving economic growth. Nowhere better illustrates this policy shift than the games industry.
Jeanne-Marie Gescher founded Claydon Gescher Associates. To find out more about the report “Changing China - The Creative Industries Perspective”, e-mail: email@example.com