China: Online champions shine

The top three Chinese online game firms, NetEase, Shanda and The9, have all reported better-than-expected fiscal results.

This again proves that the online game market is on song, and one of the most vibrant and profitable sectors in the country.

This report previews the Chinese online game market for 2007 and addresses the big questions: Which kind of game will become popular; what’s the best business model; and who will be the winners and losers next year.

Free choice

Shanda Interactive Entertainment, which posted a US$30.8 million profit in the fourth quarter against a huge loss a year ago, is the first giant company to stop charging users for game time. Instead, Shanda charges users for virtual items in the games.

“The CSP (come-stay-pay) business model was successful in 2006, and we will enhance it in 2007,” said Shanda’s Chairman Chen Tianqiao, who also foreshadowed the launch of 16 new games this year.

Rivals NetEase.com and The9 will continue charging users for game time.

In China, about 80 games are free to users, compared with 50 paid games, according to IDC Corp, a US-based IT research firm.

“The free boom shows the diversified business models in the Chinese online game market,” IDC said in a Tuesday report. “In 2007, competition will be enhanced and the key is who provides better value-added services.”

Game firms cash in through selling game time, virtual items and advertising. Some firms adopt the mixed-business model.

“The capital sector to me is a game’s design quality, not the business model,” said player Alan Wang, 26. “I won’t choose the dull games even if they are 100 percent free.”

The impact of the “free lunch” is that the game user base has surged in China. It grew 11.2 percent year-on-year to 17.81 million in 2006.

The figure grew less than 10 percent in 2005 when charges applied for most games, according to Beijing-based CCID Consulting, a research firm under the Ministry of Information Industry.

Game types

“The MMORPG (massive multi-player online role-playing games) will dominate the market without any doubt, so the top three firms will keep their leading positions,” said Chen Wen, an analyst at CCID.

Casual games, including online chess and poker, will grow steadily in 2007 because of limited profit margin, Chen added.

“I think the games with sports concepts will join the spotlight as the country hosts the Olympic Games,” said Hou Tao, an analyst at Internet consulting firm iResearch.

Shanghai-based 9you.com, the country’s No. 4 online game firm, will officially launch its Real Extreme Action, a soccer game. Meanwhile, it has imported a South Korean-made car-racing game, Ray-city Online, which has attracted more than 30,000 players in test conditions.

9you.com’s income mainly comes from selling virtual items and advertising.

The9 will operate South Korean-developed Huxley, an online first-person shooting game (FPS), in the Chinese mainland this year to ease its high dependence on MMORPG game the World of WarCraft (WoW).

Market share

“The diversified game type leaves opportunities for many newcomers and the competition will turn more heated,” said Chen.

The combined game revenue market share of the top three was 58 percent last year, compared with 75 percent a year ago. Small game firms, like 9you.com, Tencent (QQ) and Kingsoft Corp, will grab market share from the top three, according to iResearch.

The leader, NetEase, with a 24.1 percent market share in 2006, has had mixed reviews.

Hou said NetEase’s market share will decline as its coming games Westward Journey III and Tianxia II received worse-than-expected market response among players.

But Chen gave an optimistic forecast on NetEase as it has such a large range of products.

Shanda, with a market share of 20.8 percent last year, will face a tough year as it hasn’t “killer-application” games like NetEase’s Westward Journey series or The9’s WoW, the world’s most popular game, analysts said.

The9, boosted by WoW and with a new-generation WoW just around the corner, will probably expand market share this year from 13.6 percent in 2006, analysts said.

Other issues

Mature virtual items and a money trading system haven’t been established in China, which has raised many concerns, such as online gambling and computer worms.

The hackers can easily sell stolen items online.

It is unclear whether the government will introduce a new policy to regulate the sector.

Meanwhile, the potential stars will rush to go public.

The list of the possible overseas initial public offerings includes Kingsoft, 9you and Shanghai-based ZT Networks Science Technologies Co and Beijing-based Perfect World.

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