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The Game Business Comes to China August 16, 2005 In the past year, Blizzard’s World of Warcraft (WoW) has redefined what it means to be a best-selling subscription based online-only game (aka MMOG). In June 2005 it was announced that WoW had passed the 2 million subscriber mark. That same month, WoW had an historic launch in China. Early indications are the game is redefining some common perceptions about the Chinese game market. Employing a large, Western style advertising campaign including a deal with Coke, WoW garnered 1.5 million active paying accounts in China after only a month of operations. China is of course huge. Combined the population of North America, Europe and Japan equals the 1.3 billion people in China. However, from a consumer goods perspective, China has been largely out of reach to foreign companies. With video games, China has been best known as a piracy leader. In recent years this has been changing. While piracy remains rampant, a legitimate online game business has emerged. DFC Intelligence forecasts that in 2005 the Chinese game market (not including piracy) will be $580 million. The upcoming DFC Intelligence report specifically on the Chinese game market looks at many of the complex issues companies face in that country. The good news is that the release of World of Warcraft has helped prove a point that many had previously doubted: Chinese gamers DO like Western-style games. Prior to the release of WoW there were many that thought cultural differences would make it impossible for Western companies to ever be successful in China. The thinking was Chinese consumers only want games that are closely associated with Chinese culture. The only companies that had been successful in China were those from Asian neighbor South Korea. A great deal of the skepticism about Western games in China was based on the failure of one product: Sony Online Entertainment’s Everquest. Everquest was released in China in 2003 and did not have noteworthy sales. At the time, Everquest was the most successful Western MMOG ever, so its failure in China led many to dismiss the entire concept of bringing a North American or European game over to China (of for that matter the rest of Asia). However, as we discuss in great detail in our new report, we think Everquest’s failure in China was due more to multiple execution errors as opposed to pure cultural differences. For one, it is worth noting that pirated versions of games like FIFA soccer, Counterstrike, and yes, Blizzard’s Warcraft III, have been very successful in China (WoW already had brand awareness via piracy). We think that the recent success of WoW has proven that legitimate Western games can have very strong appeal to the Chinese consumer. Therefore, we have spent a great deal of time looking at what Vivendi Universal Games/Blizzard did to make the product a success. The bad news is that even by following the WoW blueprint for success, China remains a very difficult market for foreign companies. Obviously government regulation in China is immense. A game company looking to enter the market will have to work through the various regulations of such agencies as the State Press and Publications Administration (GAPP), the Ministry of Information Industry (MII), the Ministry of Culture (MoC), the State Copyright Bureau, the Ministry of Public Security, the Bureau of State Secrecy, the Commission of the State-owned Assets Supervision and Administration (SASAC), and the State Administration of Radio, Film and Television (SARFT). These agencies all have a hand in controlling the game industry through regulations that not only are constantly changing, but often conflict. But just trying to figure out how to dot the i’s and cross the t’s is not enough. A company looking to release a product in China needs to be aware of the overriding goal of government regulation. Chinese consumers may be receptive to Western content, but the Chinese government is very reluctant to allow content that deviates from Chinese cultural norms or seems to have too much of a Western influence. Of course, the Chinese government also wants to promote economic growth. However, the government does not necessarily believe that free markets and trade are the best way to grow China’s economy. When it comes to games, this means that the Chinese government can be inclined to use regulation to favor domestic products and discourage foreign products. Over the next few years the market for games in China is likely to be one of the fastest growing in the world. Nevertheless, foreign companies looking to enter the Chinese market continue to face numerous risks and uncertainties. On the positive side, the success of World of Warcraft in China has mainly told us that the fundamental rule of the game industry still applies in China: quality and execution are the key determinants of the success of a game. As part of our ongoing research efforts DFC Intelligence is delivering monthly briefs on hot topics in the interactive entertainment and video game industry. You (or a colleague of yours) have signed up to receive these briefs. DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry. A sample of reports on the video game and PC game market include: Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Complete five-year forecasts for all individual console and portable game platforms by region (Asia, Europe, North America, rest of world)) through 2010. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as portable game systems. The Business of Computer and Video Games This report includes an historical analysis, overview of individual hardware system, top-selling games, game genres, consumer demographics, business models, retailer profiles, marketing elements and case studies, industry trends. Market Leaders in the Video Game and Interactive Entertainment Industry This 750+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 25-50 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company. The Online Game Market This 660 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles.
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