The Chinese online game market does not get nearly enough exposure in the West for how vibrant and exciting it is. Zhan Ye recently pointed out to me that Q3 was a tough one for many online game developers in China — mostly due to the government regulatory authorities clamping down on some of the largest game companies. Nevertheless, I see it as a temporary blip and there’s no reason to think that the market won’t continue to be a huge and compelling one for years to come.
A few facts you need to know about the China online game market: according to the Wall Street Journal, there are more Internet users in China (338 million) than the entire US Population (308 million). Recently, cnzz.com released a report that found that two-thirds of these users were playing online games. Given a reasonable 5-7% annual rate of growth for the Chinese Internet population, it won’t be long before there are more Chinese online gamers than the entire US population. Given the more community-oriented culture that pervades Asia along with the natural social environment of their popular Internet cafes, one can expect that games that focus on social cooperation (guilds and clans) will be even more popular than they are in the West.
Here’s a roundup of Chinese game companies. If you are at all interested in online entertainment (or games in particular), these are companies that you need to know about:
- NetEase (NASDAQ: NTES) – experienced slow Q3 growth of “just” 9% to $128.8MM. The big challenge was that Chinese regulators keep vacillating between allowing or not allowing the company to operate World of Warcraft. WoW accounts for 88% of their revenue. During the most recent quarter, 2.5MM simultaneous players were on NetEase titles. I don’t know about you, but I think 9% growth was pretty good in light of the ongoing global economic clusterf$#@ and the loss of WoW revenue. Beyond WoW, Activision is also working with NetEase on Starcraft II, which is almost certain to be a big hit in Asia (just as the original Starcraft was).
- Tencent (0700.HK) – also known as QQ.com, the company that grew out of ICQ (the instant messaging program which was once very popular in the West, but is now mostly used in Asia). You can now have virtual pets, games, etc., and it is these microtransaction-driven entertainment products that drive their impressive revenues (about RMB 4 Billion in 2008; 1RMB = .146 US$ as of this writing on November 26). Interestingly, Tencent has opened an office in the US, tapping into Boston-area online gaming knowhow (Boston is home to the largest privately-held US MMO publisher, Turbine–and there are many other online game startups in the area, including QuickHit and 38 Studios). Their ability to tap into huge global audiences through Tencent/QQ.com gives them some huge advantages. Hopefully Tencent will be able to build a major online game operation in the Boston area.
- The9 (NCTY) — net revenue decreased 91%. Activision did not renew their license to operate World of Warcraft (generally believed to have been done to increase their royalties–they gave the license to NetEase). Loss of WoW revenue was devastating, but the silver lining is that they’re experiencing significant growth in all of their products other than WoW. One has to look past the WoW license; they’re in turnaround mode, but there’s no reason to think they can’t pull it off.
- NetDragon (0777.HK) — has made a business of licensing popular IP developed in the West (e.g., Heroes of Might and Magic; Dungeon Keeper, Ultima Online) and bringing it to Asian audiences. It is also bringing its own IP into global markets by translating them into English, French and Spanish. Year over year, their Q3 revenues were up about 10%, but earnings have decreased by about a third.
- Giant Interactive (GA) is another victim of Chinese regulatory authorities, although they’re still doing well in light of that. During Q3, they had to discontinue a “treasure box” feature. Think of it as buying a booster pack for collectible trading cards, in which you sometimes get cool and rare treasure). Regulators decided that it was a form of gambling, and forced GA to remove the feature. In Q3, their revenues were RMB290.2, a drop from RMB309.5 in Q2 2009 although a healthy increase year-over-year from Q3 2008 results of RMB212.5. (1RMB is currently about .156 US$). Giant’s games (ZT Online, King of Kings) are virtually unknown in the west, but get huge numbers of players. They had peak utilization of 1,281,000 people online at once during Q3.
- Perfect World (NASDAQ: PWRD) — Q3 revenue skyrocketed 55% to $86.4 million. Earnings also rose 45%. It is licensing games in other emerging markets in places like Vietnam and Thailand. Meanwhile, Perfect World is expanding in the United States, bringing titles developed in Asia to the higher-paying consumers in the West. I’ve seen their products and they’re as high quality as any Western-developed MMOs.
- ChangYou.com (NASDAQ: CYOU) — spun out from Sohu.com’s online game business in a NASDAQ IPO in April 2009. They operate some of the most popular MMO titles in China (again, virtually unknown in the West). Their top game is Tian Long Ba Bu (“Novel of the Eight Demigods”) and is based on chinese folklore and martial-arts, as are their other titles (Immortal Faith, Legend of the Ancient World).
- Shanda Interactive (NASDAQ: SNDA) Large company with over 2,000 employees. Revenues were US$181.1 in Q2 2009 (47% increase year-over-year). Q3 results will be announced on December 1, so they’re one to keep an eye on. They have the license to operate Aion, the largest MMO launch of 2009, developed by Korean online game developer NCSoft.
Here are some of the entrepreneurial opportunities regarding Chinese game companies:
- Many of these companies are looking for Western IP that they can bring quickly into the Asian market.
- Some Chinese games could be brought to Western audiences, although there hasn’t yet been much success in creating cross-cultural games (World of Warcraft is the exception, not the rule). Chinese companies could also get better at learning to make games that could appeal to Western audiences–I think that’s a lot of why Tencent opened up Tencent Boston.
- Beyond China, emerging economies like Vietnam and Thailand are soon going to be exciting game markets–as well as cost-effective places to develop games. Chinese game companies are probably better-positioned than most to tap into these markets.
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