Profits high from China's online 'opium'
By Catherine Jiang

SHENZHEN, China - Despite a recent warning by a mainland Chinese Internet and online gaming authority that the industry will be facing stiffer government regulations it is clear that the companies in the sector are on a sustained climb.

Kou Xiaowei, deputy director of the audio-visual and Internet publication department of the General Administration of Press and Publication (GAPP), recently warned that "although China's online gaming industry has been hot in recent years, online games are regarded by many as a sort of spiritual opium and the whole industry is still marginalized by mainstream society".

If "marginalized" means being consistently listed on the Hurun and Forbes lists of richest Chinese entrepreneurs, that’s probably just fine for someone such as Chen Tianqiao, founder and chief executive of Chinese gaming company Shanda, and his peers.

Kou himself had to admit at the same January 2008 online gaming industry forum, where he issued the stern warnings about unspecified "tighter regulations", that the capitalization of China’s nine domestic publicly listed online game enterprises has exceeded 100 billion yuan (US$13.88 billion).

The country’s online game market grew by 74.6% year on year to 11.4 billion yuan in 2007 and is expected to reach 18.7 billion yuan in 2008, according to research by Chinese Center for Information Industry Development (CCID), a Beijing-based outfit that was the first mainland consulting firm to be listed on the Growth Enterprise Market (GEM) of the Hong Kong Stock Exchange.

Much of the growth has come from the decision of the largest competitors to push free network games. NetEase.com, the country's second-largest provider of online games, recently announced it will launch a free-to-play game - companies earn their profits from such games by selling items such as weapons, rather from the time a fan spends playing.

"NetEase is the last major online game company in China to move to the item-based model," said Richard S Wei, a mainland internet analyst for JP Morgan, told AFP news service.

"In the past, we went to the extreme and overemphasized the time-based game model,'' William Ding Lei, chief executive of Nasdaq-listed NetEase said in a recent statement announcing the launch of the free-to-play game Tianxie II. "As competition in the industry changes, users started to like the free or item-based game model.''

Sohu.com Inc, China's third-biggest Internet portal, said this month that fourth-quarter profit more than doubled after its new Tian Long Ba Bu online role-playing game helped attract users. Net income rose to $15.1 million from $6.07 million a year earlier, the company said. Sales climbed 90% to $65.3 million.

Tian Long Ba Bu players are offered the martial arts program for free, with income coming from the sale of items used in the game. Its popularity has attracted advertising by China Construction Bank Corp, Volkswagen AG and other companies to Sohu's site, according to a Bloomberg report.

In the past two years, all major new online game releases on mainland China have been item-based games, according to market research firm IDC, which found in a recent survey that most of the mainland's top 10 online games last year were offered for free.

The study, which drew more than 260,000 respondents, also found the most anticipated online games slated for release this year are item-based games.

"Free games help to significantly expand and enhance the mainland's online game user base and drive higher individual spending," said the JP Morgan analyst in Shanghai.

More than 40.17 million people played online games by the end of last year, up 23% on a year earlier. At least half, or 22.36 million, were paying customers, IDC said.

Average spending on the free games of two major companies, Giant Interactive and Shanda is about 100 yuan and 60 yuan per month respectively and higher than the 20 yuan to 30 yuan per month fees NetEase charged for its time-based games, the JP Morgan analyst said.

One Shenzhen gamer, 28-year-old Dong Jun, an employee of Digital China Institute, said he used to spend 400-500 yuan per month on the immensely popular pay-per-pay foreign-developed World Of Warcraft (WoW) but has since initially reduced his expenses with a free game called Chi Bi – developed by China-based, NASDAQ-traded, Perfect World. Chi Bi draws on the history, warfare and turmoil of China’s Three Kingdoms period (280-220 BC) for its action and appeal.

"With Chi Bi I only pay for upgrades and not many of them," Dong said. "I quit WoW because I was spending too much money on it and it was also ruining my dating life. I like the history and tradition and action in Chi Bi also. It’s more familiar."

Another mainland game fanatic, 30-year-old Janson, said he also swore off WoW in favor of free domestically designed games due to financial pressure and his professional work load. "I was paying 200 yuan a month for WoW and too many hours," he said. "It was affecting my job performance."

The IDC' survey found that mainland-developed games were getting more popular. There were 126 Chinese online game companies in 2007, 33, or 35.5%, more than 2006. Of the 76 online games released in the nation last year, 53 were developed by domestic firms. Total revenue from mainland-developed games reached 6.88 billion yuan last year, or 65% of the total market. That total revenue was up 62% from 2006.

Catherine Jiang is a freelance journalist based in Shenzhen.

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