Chinese gaming to boom to $2.1b

Research firm Niko says market in world's most populated country will explode by end of decade; cites Internet cafe, broadband proliferation as factors. Q&A inside.

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Call it a tiger, a dragon, a sleeping giant, or any other nickname, the forecast is always the same--China is set to become an economic powerhouse. As online gaming has spread over all of Asia, China, with around 1.3 billion citizens, is a region that many in the industry are keeping a close eye on.

Niko Partners, a research and consultancy firm that focuses on the Chinese gaming market, today released its findings for 2005 as well as predictions for the future--and it looks rich. The report exceeds even that of analysts' predictions from just last year, when DFC Intelligence projected that China's gaming market would be worth $1.7 billion by 2010. Niko predicts that by 2010, China well be home to a $2.1 billion gaming industry.

According to its findings, the market currently stands at $683 million, and will rise 24 percent per year. The proliferation of Internet cafes and broadband Internet connections in homes is cited as a major factor in China's growth, as 84 percent of games played are online-enabled. Casual games will also contribute, Niko says, jumping from 20 percent to 40 percent of online games.

As for how to milk the market, Niko advises companies to cater to the crowd. The firm states that Chinese gamers "enjoy softer graphics and brighter colors," and consider online gaming a social event.

"Not only is it imperative for a foreign videogame company to understand the preferences and demands of Chinese gamers, they must also strive to develop games that fit the restrictive regulations of the Chinese government," said Lisa Cosmas Hanson, managing partner of Niko Partners. "The Chinese market is different than other global markets, and it will take perseverance as well as innovation in business models for foreign companies to succeed there."

The Niko forecast is based on PC, console, handheld, and online games, and was formulated from data collected in 10 different Chinese cities.

GameSpot spoke with Lisa Hanson this afternoon.

GameSpot: You talk about "developing games that fit the restrictive regulations of the Chinese government." What are the hot buttons that the government looks for...gameplay elements that raise red flags?

Lisa Hanson: The government promotes "healthy gaming." Gamers under 18 are prohibited from Internet cafes and from playing violent player-kill games. Games may not include pornography, violence, or terror. There are many content regulations including points that are discouraged, such as violence, and those that are encouraged, such as promotion of Chinese culture, patriotism, and national ethics. Also, highly creative games and those that do not encourage addictive tendencies are favorable. Games that are unlikely to attract more than 10,000 registered users are unfavorable.

GS: Are there lessons to learn from the Chinese success stories (casual game business models) about the potential for casual game development in this market that could hit it big in China?

LH: It is critical to create a game that is fun to play in an Internet cafe as well as alone at home. In casual games the most success comes when a game is appealing across a broad audience, including female gamers and new gamers. The cute-style games attract more gamers than games with player-kill and harsh graphics. The business model that allows gamers the option of paying a fee to play if they want to have premium services, as is the case with Premium Casual games, works well.

GS: Premium casual games...interesting. What are they?

LH: Premium casual games is another term for Advanced casual games, and they are those which generate revenue, as opposed to puzzle and board games. Examples are FreeStyle, Kart Rider, Audition, and O2Jam.

GS: What are the two or three companies to watch in China? In terms of growth (return on investment potential) as well as just plain creativity and novelty when it comes to business models?

LH: NetEase has the most ingenuity and promise among the publicly traded online game operators. Shanda offers innovative business models but they may not pay off for a while, if ever.

GS: What are the most popular games in China now?

LH: The top MMORPGs and Premium Casual games are World of Warcraft, Fantasy Westward Journey, Westward Journey 2.0, Audition, and O2Jam.

GS: As Internet cafes become more popular, are there chances the government will step in to regulate, for example, the number of hours any one gamer can play?

LH: The government has done so already, by initiating the Fatigue System in 2005. It is not related to hours of play at Internet cafes, just hours of play in a row. If a gamer plays for longer than three hours, the level of his character gets cut in half automatically. If he plays for more than five hours, the level gets cut to the lowest possible level in the game. After five hours in a row of zero gameplay, the system resets itself. Not all games are on the system, but the big ones are.

GS: Finally, the packaged goods business in China has always fared badly due to piracy. Has there been any progress made on that front? Is there more, or less, shrink-wrapped product being sold in China today then there was a year ago?

LH: Even the pirated shrink-wrapped market has taken a hit in the past year, particularly due to illegal downloads of games via P2P technology such as Bit Torrent. According to one Chinese government survey, 27 percent of all 111 million Chinese Internet users have used Bit Torrent at least once in the past year. The ratio of gamers who use the technology may be higher than 27 percent. Legitimate sales suffered from both illegal packaged sales and illegal downloads, and tumbled with a double digit decline from 2004 sales.

GS: Thanks, Lisa.

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