Last year, online gamers numbered more than 23m, or 24% of China's 94m Internet users, fueling a 48% growth in a market that generated US$298m revenue. By the estimates of research house IDC, the market will expand annually 34.7% compounded through 2009 when should top US$1.3bn.
Casual games like mahjong and chess have their following, but the big earners driving 70% of market revenue are "massively multiplayer online role-playing games," or MMORPGs, if you can get your lips around it. These support hundreds of thousands of players simultaneous- including some who can play the same game for years.
With more than 200 online games on market, China's biggest hits have been Korean MMORPGs, and to a lesser degree, Japanese and Taiwan imports. Western imports are still bit players.
In May, Beijing made its debut at egaming's big annual trade show, the E3 Electronic Entertainment Expo in Los Angeles, where the deputy director of General Administration of Press and Publication addressed industry executives the whys and wherefores of the China market. Xiao Wei Kou spoke at a propitious moment: just the day before, NASDAQ-listed Chinese online game operator Shanda Interactive Entertainment said its first quarter revenue topped last year's by 118%.
American developers at the show undoubtedly listened hard to what Xiao had to say. "Western games haven't been successful in China, because they?re not reflecting [Chinese] cultural interests," says Elias Glenn who follows online gaming at Shanghai-based research and media house Pacific Epoch.
But they could start making inroads. Expectations are high for World of Warcraft by Vivendi Universal's Blizzard Entertainment, a game known for its rich 3D graphics and story dimensions that have captured gamers worldwide. Warcraft could be the first Western title to crack the market, if the half million Mainland-registered users of its beta release is any indication.
China's online gaming market is not easy to navigate – 50 games were banned this year, reportedly for not squaring with the official line on Taiwan and Tibet, among other rules. Before games can be licensed, they require approval from the Ministry of Culture, which last year set up a committee to censor imported games perceived to threaten China's "national unity, sovereignty and territorial integrity."
In June, regulators shifted into even more nebulous territory, requiring developers, for example, to modify rules that might lead to game addiction.
Analysts also say China – eager to encourage local developers and foreigners looking at setting up mainland shops – has been tougher for imports, particularly Korean exporters who now own over half the market (and charge hefty licensing fees to the tune of US$1m to US$5m a game).
Beijing likes foreigners on the ground, and offers tax breaks and other incentives to set up locally. "Right now, the imported games are [merely] localized for the Chinese market, but the government wants the games to be developed in China," says Frank Yu, a program manager at Microsoft in Beijing.
The problem there is, China's talent shortage. US-based Electronic Arts, the world's largest game publisher, relocated its global online game headquarters to China last fall and set to work building a studio in Shanghai, aiming to staff it with 5,000 developers – about all China has in total right now (EA is shooting for US$1bn in Asian revenues by 2010.)
Even the government admits China is short of supply, reckoning the market needs at least 20,000 developers in the next five years. To that end, it is pledging millions in incentives and funding, and a new university level academy dedicated to training game developers.
A new turn
Meanwhile, local publishers are fighting back – with four of China's top 10 online titles last year, up from three in 2003. Domestic development will also get a boost from game operators like Shanda and Netease, both expanding in-house development capabilities, and from portals like Sohu and Sina, which are also expected to invest more in online games. Games are the big income drivers for portals right now, Microsoft's Yu says.
They are also a very risky business. "Create a dud or two and your star and capital are on the downswing," says Yu who says Microsoft is still trying to figure out a business case for entering the China market.
Any business case in China has to factor in IP theft, even for online games once thought to be pirate proof. "As more online games emerge, the possibility for hackers to hack into the servers and launch pirated servers will grow as well," says Lisa Cosmas Hanson of Niko Partners LLC, which studied the market last year. "I doubt the government will be able to stop it."
Market growth will hinge on China's regulatory policies and technology, including how well the market transitions to the next generation of MMORPGs in the absence of more hardware to support them and, crucially, how Beijing oversees the country's 350,000 Internet cafes where half of China online gaming takes place.
Analysts also caution MMORPGs are approaching saturation point, a trend made evident by Shanda's last financials. Shanda's year-on-year "casual" game revenue growth was 349%, outpacing MMORPG growth by 283 percentage points. "Game operators are using casual games to spur growth, because the MMORPGs don't have much more [up-side]," notes IDC's Grace Zheng.
Whatever the game, at a few American pennies per hour of play, online games are becoming a popular entertainment in a country where few affordable options exist – and for a broader cross-section of the public. "More and more white collar workers need an entertainment release that these games provide, "Zheng says.
Besides office workers, women and older, richer people are joining in the fun. "It's not just a numbers play," says Niko Partners Hanson. "It's more of a lifestyle shift. People have taken to playing – they're aging and not running away from the games."