Q&A: Niko's Hanson On China's Gaming Future

Author: by Simon Carless, Staff

Will China ever produce a worldwide smash like World of Warcraft? Which next-gen console would succeed in the territory if officially government approved? As Niko Partners releases a study showing China's game market jumping 68% overall in 2006, we conducted an exclusive Q&A with the firm's Lisa Cosmas Hanson on these and other subjects. According to Niko’s fifth annual report, China’s overall video game market not only jumped 68% in 2006, but the segment of online games generated $995 million in revenue, up 74% from the 2005 level. The report cited an increasing number of gamers who spend more money per game as the main market driver. The survey also noted that the country added 3.4 million total gamers in 2006, and now boasts 37.5 million gamers, 90% of whom play online games. By 2011 this number is expected to swell to 71.9 million. Particularly relevant in this regard is the approximately 20 million PCs in China’s 225,000 Internet cafés, which make it possible for gamers without home PCs to play online games. These cafés also serve as the center for social interaction for 18-24 year olds. Other market segments faired well in 2006 and show promise for 2007 and beyond, particularly PC offline games and console hardware. Legitimate sales of PC offline games rose 28.5% to 904,000 units from 700,000 in 2005, led by titles from Taiwan. Console sales, currently prohibited in China, remained active in the grey market, demonstrating that hard-core Chinese gamers are devoted to buying the latest products for gaming even though they cannot buy them through legal channels. We sat down to talk to Niko's managing director Lisa Cosmas Hanson about some of the major points raised in the report, from the online gaming boom to whether consoles can truly take off in the Chinese market. Which companies in particular have taken advantage of the growth over the last year or so in China? Are there any major companies who have, relatively speaking, been left behind? Lisa Cosmas Hanson: Most of the beneficiaries of the growth in China's video game industry in the last year or so are Chinese online game operators, many of which developed their own games. Of the foreign companies, Blizzard continues to succeed with World of Warcraft, and some games from Korea are hits. Electronic Arts and Ubisoft have PC offline game titles that made it into the 2006 Top 10 list, yet that segment of the market is much smaller than the online segment. EA has not seen the success it had hoped for with regard to online games yet, but that may change in 2007. Most of the foreign game companies are still struggling with the complexities of the market. Outside of the software companies, some of the Western hardware companies that have benefited from the growth in the games market in China include Intel, Nvidia, Hewlett Packard, Dell, and AMD. Inside The Key Online Gaming Sector How do you see the balance of free to play vs. subscription games tending in the future? Obviously, World Of Warcraft is essentially a subscription game, but has still done very well. Is that an aberration? LCH: It seems that the trend is toward free-to-play (FTP) MMOs. If a game is a huge hit such as World of Warcraft then it can command a subscription model. Of the Top Ten MMOs in the second half of 2006, 5 were 'FTP' and 5 were subscription. Most online operators will not bother to shift a subscription game to the FTP model unless it is a few years old and needs an infusion of new gamers. When a new game is launched it will likely be free unless there is commanding evidence that a subscription model is sustainable. The irony is that many of the FTP games make more money per gamer than the subscription games, due to heavy spending on virtual items and in-game services. Why have some Western companies struggled to make an impact in China - is it cultural, government regulation-based, or both? LCH: The biggest barrier to market entry for a foreign game product is the complex regulatory landscape. There are many rules in place that make it cumbersome and difficult for a foreign company to get its game or hardware to the point of legitimate launch in China. The cultural differences are important too however. Specifically, the demands and preferences of the average Chinese gamer, and his reasons for playing games in general, are different from the average Western gamer. Western game companies may be better off developing Asia- or China-specific games to target that market. Then again, many PC offline game titles are quite popular through the pirated market, so maybe if foreign games had an easier time getting approved for legitimate launch the market would have a chance to show where demand really exists. Do you think the Chinese government will take a more active legislation role if companies such as Shanda continue to find ways to skirt restrictions on length of play in MMOs? LCH: The Fatigue System that restricts the length of time a gamer may play an online game is not yet in place, and is currently scheduled to be active in July of this year. It only regulates gamers under 18 years of age, and they make up about 15% of the market. Hence, I would not say that any company has skirted restrictions as of yet, but I would say that the government will play an active legislative role in the video game industry for many years to come. Do you think that a Chinese developer can or will come up with a World Of Warcraft-style worldwide blockbuster in the next 5 years? If not, why not? LCH: I would not bet against that happening, but in a shorter time frame than 5 years I believe it would be unlikely. The main reason is that the creative development teams at Chinese developers have a few more years of training to go before they can be on par with some of the Western developers. The Chinese developers who already have the skills and experience are focused on developing games for the local market, which, as mentioned before, has a different set of demands and preferences for game content. The company who develops a worldwide blockbuster from China will need to understand gamer preferences in all regions. Even among Western games, World of Warcraft raised the bar to a new level in that regard. What's the overall growth driver for the Chinese market in the online space? LCH: Chinese gamers pour into the cafés every day to play online and LAN games with friends. They spend money in the games on virtual gifts for friends, services for their characters, and virtual items to help with leveling. The intertwined nature of China’s Internet cafés, social gaming culture, and few entertainment alternatives at a low price point, will continue to be the basis for strong growth through 2011. Console Growth In China You say in the survey overview that: "If a game company can get an impressive game or console to market in China, the gamers there will embrace it." But isn't there a problem with pricing of game software that will prevent this happening, since Chinese consumers are used to buying pirate versions of console games at $1 or less each? Or do companies need to wade in to ever overcome this? If a game company can manage to get regulatory approval and a strong distribution partner for an impressive PC online game or PC offline game today, gamers in China will embrace it. Currently the sale of game consoles is prohibited in China, yet several hundred thousand of the newest consoles have already made it into the hands of hard-core gamers there via the grey market. Their hunger for the latest games and technology shows that demand is there. Console games are available in pirate versions for $1 or less or in grey market versions for $40-50. Far fewer grey market games are sold because of that price differential. Yet if the console ban were lifted, then the console makers could presumably launch business models specifically for China that enable sales of lower priced software. Perhaps they will follow the online game subscription model. Until the ban is lifted, nobody can discuss their business strategy for console hardware and console game sales. On this front, what's the status of the Nintendo co-created iQue? How did it end up faring in China? LCH: iQue is doing well in China for its target audience of younger gamers. When it hit the market in 2003 the only product was a 64-bit machine called the iQue Player that played old Nintendo games localized for China. At that point Nintendo's name was not publicly associated with iQue. Today, Nintendo's name is prominent on the iQue website and there are iQue versions of all Nintendo handheld products as well as the iQue Player, plus many titles to go with them. The primary audience is younger gamers, which is a smaller segment of the market than the hard-core gamers who play MMOs. If the Wii is allowed to launch in China one day because the console ban is lifted, it would likely be sold through the distribution channels that iQue has established already. Which console do you think would be the biggest success in China based on its current game content, if released officially? LCH: Xbox 360 was the big winner via the grey market in 2006, so it probably would be the big winner through legitimate channels too. [The 2007 Chinese Video Game Market Annual Review & Forecast Report by Niko Partners is a thorough review and forecast of the 2006-2011 PC online, PC offline, console, handheld games and hardware market, and is based on 75,000 points of data collected by Niko Partners in 10 Chinese cities in March 2007.]