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Show Me The Money
China Online Gaming; MMORPG/Casual Revenues and Business Models
By Michael R. Polin
The International Law Offices of Michael R. Polin
Exclusively for InvestorIdeas.com
September 24, 2007
MMORPG Revenue will continue to rise-
MMORPG revenues hit $662 million while casual game revenues reach $153 million in 2006. In 2006, revenues from China's massively multiplayer online role-playing games (MMORPGs) market hit RMB 5.31 billion ($662 million), increasing 69.1 percentfrom 2005, while revenues from Casual games reached RMB 1.23 billion ($153 million), surging almost 100 percent, according to an IDC China report published in July.
Explosive Growth-
The report estimated that revenues from MMORPGs would reach RMB 15.68 billion ($1.96 billion) by 2011, with a compound annual growth rate (CAGR) of 24.2 percent between 2006 and 2011. Meanwhile, revenues from casual games are estimated to rise to RMB 8.75 billion ($1.09 billion) by 2011, with a CAGR of 48 percent in the same period.
The growth of MMORPG revenues is mainly due to the increase in popularity of several classic MMORPGs, including Shanda's MIR series, NetEase's Westward Journey series, The9's World of Warcraft, Shanghai ZhengTu's Zheng Tu and Kingsoft's various games. Popular MMORPGs in the online industry are similar to blockbusters in the movie industry, and will represent the core of the market during the period between 2006 and 2011. However, their rate of growth might slow due to pressure from the rapid development of casual games, according to the report. The growth of casual game revenues in 2006 was mainly due to the emergence of game operators like Tencent and 9you, which focus on casual games, said the report.
Business Model Trends to look for-
The report also pointed out several trends in China's online gaming industry.
First, the free-to-play model will be the mainstream model in the short term, but operators are working on new business models. The free-to-play model was adopted by many games in 2004, but became common practice after industry leader Shanda began using the model in November 2005. The free-to-play model means that operators charge users according to their virtual items as well as value-added services, instead of by time. In 2006, only 16 percent of games on the market still charged users according to gaming time. However, game operators are studying other workable business models that could be accepted by players.
Second, the rapid growth of casual games could soon compete with MMORPGs.
MMORPGs still dominate the market, but are facing stiffer competition. MMORPGs are time consuming, and casual games are often more suitable for players who have limited time to spend on games. In 2006, the casual game market showed great potential.
The market environment is also favorable for casual games, as both operators and players are showing increasing interest in casual games. For example, profits from casual games accounted for over 20 percent of Shanda's net profit in the third quarter of 2006, and the company is actively developing its home entertainment platform. Casual games will gradually become a major source of income for Shanda, according to the report. Other game operators like NetEase, Kingsoft and Optisp have also joined in the casual game market.
In addition, the casual game market is becoming further diversified. In 2006, the casual game market saw the further development of music games, sports games and electronic sports games. Moreover, the number of gaming companies that will make a profit will increase, according to the report.
Although operational expenses of online games are high, and China's policies regarding its "anti-addiction system" and limits on Internet bars are constantly changing, resulting in high risk, many operators are rushing into the market, making it more crowded. Many second-tier gaming companies have made profits, and the norm in the industry not too long ago, that only the top five companies could turn a profit, is rapidly changing.
Keeping the Money and Talent in China-
The fifth point made was that copyright and royalty fees that must be paid to foreign companies will gradually decrease as domestic companies develop, and exportation of games will increase.
During the early stage of the online gaming industry's development in China, large amounts of capital flowed to overseas companies to pay copyright fees and royalties. However, more and more Chinese online game companies, such as Kingsoft, Game Snail and 9you, are beginning to explore overseas markets, a milestone in the development of China's online game industry. The report also pointed out that in-game advertising is developing as a new source of revenues.
Finally, the last trend that was mentioned is that the content of games will be further diversified, making them more sophisticated and attracting more kinds of users.
Negative Factors for Analysis and Consideration-
The completeness of the report also included several negative factors that may curb the development of the online game market.
First, addiction to games has resulted in strong and vocal objections from parent groups, resulting in restrictive policies from the government, such as the anti-addiction system, which forces young users to play for a limited amount of time.
Secondly the free-to-play model is not fully accepted by users. Many users are attracted to games because it is free to play, but discover later that the online games are not actually free, since players must pay for certain features, such as items or virtual abilities. Whether most players will accept this model in the future still needs to be tested.
Thirdly, similarities may dilute products. The market is becoming crowded; MMORPGs are beginning to resemble each other, meaning that there are fewer unique games. Users therefore may get bored with the options unless there is continued innovation.
The market will continue to grow and their can be very interesting business models still yet to emerge while the demand remains strong for access to the best games.
All articles and full reports are available for purchase. If interested in purchasing reports or other information about China, please contact the author directly at mrpolin@cox.net and visit his website at www.polinlawfirm.com .
Disclaimer
Michael R. Polin is an independent columnist for this web site.
Michael R. Polin may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
Michael R. Polin is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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