Games set to heat up the Chinese economy

SHANGHAI, China--The Chinese online game market has been part of almost every North American and European publishers' plan of action for at least the past year. Most analysts agree the market is strong and set to spike--about all that differs from one report to the next are the specifics: How much is the market really worth, which companies are likely to emerge as market leaders (and therefore might make appropriate partners), and what impact will the various and sometimes misaligned government agencies have on the sector's growth?

Which is to say that there are significant questions that remain unanswered.

As one reporter found during a week of meetings and interviews, as well as various conference sessions, keynote speeches, and roundtable discussions at the ChinaJoy game conference in this city, the deal-making turf remains wildly turbulent--not quite as complex and mysterious as an Oliver Stone film, but close.

More than the usual number of conversations took place off the record or on background, and a surprising number of them were punctuated with sideward glances, muffled words, and general John le Carré-esque demeanor.

But rather than dwell on the subtle, it may be best to address the exuberance of the ChinaJoy show floor, in all its ungodly noise.

Taking in ChinaJoy
The show itself was impressive. Although this week's event was only the second ChinaJoy ever, the setting, a modern hanger-like hall located east of Shanghai's central business district, compared favorably with what the Western industry is presented with at E3.

The two main halls were packed with about 25 large-sized stands, and nearly 100 smaller booths on each hall's perimeter. Some of the stands had vast stages and booming sound systems. Two of China's largest companies, The9.com and Shanda, were positioned face-to-face on the show floor. In tight orchestration, the two company's stage shows alternated hour by hour, allowing attendees at times to merely pivot 180 degrees as one show ended and the next began.

Conversations with the show's primary backer, representatives of the central state's General Administration of Press and Publication, and the show's organizer and producer, Howell International Trade Fair Limited, indicated the show was a success. By any international standard, the show came off without a hitch and measured up to the general expectations of what makes for a productive and entertaining trade show.

But as the fun played out on the show floor, there were other topics on attendees' minds. As the game industry evolves in China, issues including piracy, the government approval processes, and quotas limiting the importation of foreign-developed games still need to be addressed and managed, say many industry observers.

The Challenges Ahead
When it comes to the extent of government oversight, the locals have mixed opinions. J. Zhu, cofounder and now CEO of The9.com, the Shanghai-based game operator localizing Blizzard's World of Warcraft, welcomes the involvement. "They do a good job of managing competing interests," he said. Striking a slightly different chord, NetEase COO Michael Tong said, "I think [the central government] would need to take time to go through some processes before they really implement these kinds of ideas." ESA president Doug Lowenstein was near adamant in his presentation on Monday that the government closely analyze its policies before the hasty implementation of quotas, for example.

Speaking off the record, however, others expressed a more jaded attitude. "Never compete with the government--on any level," one Chinese executive said, suggesting there was more to gain by playing ball with Beijing rather than being too demanding of its policies.

The government isn't the only important partner to consider in this market. There is the consumer to win over as well.

Chen Tianqiao, CEO of Shanda, put it this way: "Content is not something that Chinese consumers spend money for. For example, they look at how thick a newspaper or magazine is to measure its value." An experienced China staffer from the West confirmed that sentiment, saying it wasn't uncommon for Asian publishers to load up game boxes with items to increases the box's weight. Consumers in China equate value with the heft of a product, he explained, not the digital content, hence the difficulties of educating the consumer to respect content, including digital content.

Piracy is, of course, a common theme of discussion. On ChinaJoy's last day, Legend of Mir 3 operator Optisp sponsored a roundtable on intellectual property rights, an area that has almost no history in the country. The session was chaired by Optisp president Jing Yang. Sources attending the session told GameSpot the three-hour discussion produced few answers. Local game operators, lawyers, government officials, and media reps pressed on in the talks, but the lack of conclusions is indicative of how far the country has to go in taming the trends toward piracy.

It certainly doesn't help when Westerners can be seen anxiously interacting with vendors of obviously pirated products just outside the hall, be it game CDs or Rolex watches. Looking especially intriguing were PS2 versions of FIFA Soccer 2005 and Madden NFL 2005--selling for 20 RMB, the equivalent of about $2.25, in most outdoor markets in Shanghai (dropping to 5 RMB, or $.65, in the alleyway shops run out of private homes). Given that sources have indicated to GameSpot that there are only a million PS2 consoles in the country (with 9 out of 10 units arriving via smugglers), the market here for pirated games is unlikely solely Chinese. In fact, it was only with reluctance that one seller of pirated product would discuss a sale with a Chinese, or Chinese-looking, individual. On the other hand, Westerners were quickly escorted to the back of one stall to look over the goods. Other Westerners could be seen toting foot-high stacks of CDs with them as they left the marketplace. It appears that the market for pirated goods isn't one that is directed solely at locals.

Journey to the East
Currently, only two major Western companies are settling in China. Ubisoft has a long-standing studio and distribution operation, and while EA has had an office in Beijing to assist in the sale of offline games for some time, its plans for the future in China are extravagant (see our interview with EA's Erick Hachenburg, who is heading up the effort in China).

While Western publishers experiment with Asian expansion, Chinese developers and operators are getting their act together as well--working to reverse the trend of acting only as localizers of externally developed games, mostly originating in Korea. Shanghai's The9.com will launch its first internally developed game next month. And Shanda, also based in Shanghai, has put US game industry veteran Monte Singman in charge of its internal studio. According to Shanda, the studio staff numbers 1,000. Likewise, Optisp is hoping to increase its staff attached to game development to 2,000 by 2008.

Huang Hua, a producer with Beijing-based NetEase (developer of China's only locally created hit game, Journey to the West), says foreign companies may have the advantage now, but that something needs to change. "If local operators and publishers continue to rely on those [foreign] games, it will someday become an embarrassment," he said. "We should establish our own IP. We have a long history. We can develop our own games."

One developer, TQ Digital, claims to have a head start on the government mandate to develop more games locally. Its 300 developers, based in Fujian province to the south, have three internally developed games (Conquer Online, Monster & Me, and Era of Faith) in the Chinese market already. Given TQ Digital's long-standing strategy of internal development, its founder, Dejian Liu, predicts that the company will soon challenge market leaders Shanda, NetEase, and others for dominance in the China marketplace.

Addressing the trend that sees greater and greater interest in China on the part of Western publishers, NetEase's Tong welcomes the challenge. "I think it's good. First of all, we really welcome [Western] publishers. I think we are prepared for it. The locals will cry for a while but then you will definitely see competition, and then [we'll] see who does better."

Tong takes the challenge one step further, looking toward the day when China-based companies are developing for the world market, not just their own. "I am seriously thinking that we should be designing games that are going to international markets, he said." Not because we feel that the international market is as big as the China market, but we feel that this really will improve the competitiveness of our developers…to let them understand that we are competing on a world stage, rather than comparing ourselves only with our Chinese counterparts. This is really the way to make them improve themselves."

The move to become more international, of course, is already happening. Shanda, Sohu, and NetEase are listed on the Nasdaq, and there are more companies on the way. The9.com is in its "quiet period" as it fine-tunes its upcoming IPO on the Nasdaq.

Overall, the market looks ripe for US developers ready to give China a try. The9.com's director of marketing and sales, Leo Liu, said, "Because the game industry in booming, China is a hot point for the US investor." Liu should know. With a population that tops 1 billion, the Chinese market is certainly present and accounted for. The complete answer to whether its gaming population will pay to play, and therefore support the continued growth of local operators intent on beefing up their internal development teams, as well as rewarding the goals of Western publishers esgrt to tap this vast market, continues to be played out in the streets, in the boardrooms, and in game shows all over China.