China Angle: Top 2007 Events Shaping The Future Of China's Industry

In the latest China Angle column, Pacific Epoch's Shang Koo looks back at the biggest events in China's games industry for 2007 and how they will affect its future in 2008, from top companies listing publicly overseas, EA's partnership with The9, and Ubisoft's future in the region. Listings Galore The number of overseas listed online game companies in China doubled in 2007. New bloods Giant Interactive and Perfect World listed in the US while industry veterans Kingsoft and Netdragon listed in Hong Kong. After the listing, Giant and Perfect World are now the largest and fourth largest online game companies in China by market cap, respectively. So far, all four companies have been content with launching existing games in their pipeline, but watch for all four to make aggressive game acquisitions in 2008. The four companies have more than US$1 billion in cash after their listing, and with the US dollar rapidly depreciating against the Chinese RMB, game and company acquisitions seem like much better investments than the savings account. Unfortunately for these companies, all of the best potential acquisition targets have either listed or were acquired in 2007. Only one top 10 games remain independent – AskTao. The 2D MMORPG is one of the few domestically developed games not operated by the developer, making the game a complicated acquisition target for companies looking to add both revenue and IP to their portfolio. In July, Nasdaq-listed Shanda Interactive purchased one of the few remaining independent Chinese game developers with any significant user base in Chengdu Aurora. Most of the remaining targets either have older games with declining users or have yet to launch their games. Any success by an independent game company in 2008 should attract a flood of acquisition bids. Likewise, overseas online game titles should benefit from the fat wallets. EA-The9 Marriage However, the newly listed companies all must compete against The9 for any overseas titles. The9 has never shirked from signing (at the time) seemingly outrageous licensing deals for hyped up games. The9 commited US$74.1 million to sign World of Warcraft in 2004 and US$35 million for a two year license for Korean dancing game Audition in 2007. In May, The9 received a US$167 million boost to its coffers when EA invested in the company for a 15 percent share. To date, EA is regretting its investment decision. The9’s stock price has fallen by nearly a third from the price of EA’s purchase price. Worse, The9 has delayed the launch of EA’s first online game in China – FIFA Online. With upcoming EA titles NBA Street Online and Warhammer Online just around the corner, EA must soon decide whether to open up bidding for the two titles or protect its investment in The9 and give the titles to a partner that has yet to prove its competence. The9 may be regretting the investment as well. There were rumors in 2005 that Blizzard and its parent company Vivendi may acquire The9, but the partnership fell through at the last minute. With the EA investment, The9’s relationship with Blizzard turned from a “just friends” partnership into a pure business deal. After Vivendi’s alliance with Activision, the relationship can only deteriorate. The9’s licensing contract with Blizzard for World of Warcraft runs out in summer of 2009. Ubisoft Chengdu September 2007 marked Ubisoft’s second attempt at online games in China when it announced its second China studio in Chengdu. Ubisoft opened its first China studio in Shanghai in 1996, but that studio concentrates exclusively on console game development. Ubisoft’s Shanghai studio briefly flirted with online games back in 2005, when it attempted to launch an MMORPG based on the movie The Promise, which set new records in China for budget, hype, and negative reviews from both critics and audiences. The game never got off the ground. This time, Ubisoft is taking a slower but more ambitious route. While the Shanghai studio saved cost relative to other studios, it never took advantage of the cheaper labor force due to a large percentage of expatriate workforce and low retention rate. Today the Shanghai studio is often jokingly referred to as Ubisoft U, for its critical role in training half of the workforce for the dozens of online game companies in Shanghai. The Chengdu studio will employ predominantly local workers, who cost about half as much as local staffers in Shanghai. Ubisoft will slowly scale up from internal outsourcing initially to eventually produce MMORPGs for all platforms. If successful, Ubisoft will have one of the lowest cost studios in the world, and Chengdu may become the second hub of online games in China. [Shang Koo is an editor at Shanghai-based Pacific Epoch, and oversees research and daily news content on China's new media industries, with a concentration in online games. Pacific Epoch itself provides investment and trade news and publishes a number of subscription products regarding the Chinese technology market. Readers wanting to contact him can e-mail [email protected].]