China's New Rules Of Internet Gaming
January 31, 2008
CCID Consulting projects the
number of China's Internet users will exceed 180 million in 2007. China's
online gaming revenues reached 11.35 billion Yuan, up 74.6% over 2006. CCID
Consulting now sees a second wave of development, and expects new, more
detailed government regulatory policies designed to guide and promote
China's online gaming growth.
China's second wave of
online gaming IPO activity in 2007 is summarized below. Compared with the
first—Shangda (NASDAQ: SNDA) and The9 (NASDAQ: NCTY)—this second wave had
companies that were more independent (rather than being subsidiaries) and
the listings were spread across different exchanges.
- In July 2007, Perfect
World (PWRD, www.wanmei.com), a
developer of massively multiplayer online 3D video games, successfully
executed its IPO on NASDAQ, raising US $217 million.
- In October 2007,
KingSoft (www.kingsoft.com), one of
China's first online gaming and, now, software companies, executed its IPO
on the Hong Kong Stock Exchange, raising US $99 million.
- In October 2007, ZTgame
(www.ztgame.com), known for its racy
and sensationalistic online games, filed an IPO application with the New
York Stock Exchange, under the name of "Giant Online".
- In November 2007,
NetDragon (www.netdragon.us) listed
its IPO on the Hong Kong Growth Enterprise Market (GEM).
These activities came in
the light of Alibaba.com's November 2007 Hong Kong Stock Exchange IPO. While
Alibaba.com is a B2B Internet company and not a gaming one, note that it
raised US $1.5 billion, the largest IPO by a Chinese Internet company ever.
However, to sustain growth
and realize real profits for the gaming companies, there are three rules to
Rule #1: Traffic is
Traffic does not guarantee
revenues and profitability, but it is a necessary foundation. Page rankings,
for example, by Alexa and others are important metrics to measure visibility
of a website. These and other "mindshare" measures are critical to gaming
companies. After all, at least half of all Chinese Internet users have
played online games.
To attract traffic,
companies will usually offer free online games. For example, relative
late-starter ZTgame offers a basic game "ZhengTu" that is free. There are
levels, however, and users will be charged for increased features and other
props. This stepwise approach to charging has been adopted by other Internet
services sectors such as e-payment services.
Flush with cash, many
Chinese gaming companies will continue the race to gain traffic. Therefore,
the "free" model will flourish, at least in the short term. Traffic, after
all, represents potential revenues.
Rule #2: Unbeatable user
experience for stickiness.
An online gaming website in
China must be able to offer the best user experience to start gaining
stickiness from the traffic they have built. Conversely, a poor user
experience could be fatal, as Internet user switching costs, as this stage,
The user experience must
not only be graphically and technically impressive, but the game design must
also incorporate subtle cultural, economics, and even ethical
characteristics that help a game's longevity and popularity. We believe this
will be the next level of competition of gaming companies. Another factor is
incorporate Web2.0 concepts of interactivity, user control, and community.
Consider learning from
other Internet services sectors. For example, Baidu Tieba and Baidu Zhidao
improved stickiness to the search engines through Web2.0-like
user-communities. Tencent QQ (www.qq.com), one of China's leading IM service
providers on the mobile phone, incorporated mobile gaming to increase
loyalty to both their IM and gaming offerings.
Rule #3: Separate the
wheat from the chaff.
Upon gaining traffic and
stickiness, gaming companies in China have to carefully design games in a
way that automatically stratify users into groups based on willingness to
pay. "Willingness to pay" can either be directly to the gaming company, or
to its advertisers. The high-value user is the one with the high willingness
One type of high-value user
will be the ones who appreciate a deeper level of the game to which the user
will pay. At the same time, they will be the most demanding; even some part
of their personal identity will be tied to the game itself.
Another type of high-value
user embodies tangible characteristics attractive to specific advertisers.
The challenge will be to design games that flesh out such specific user
characteristics. The more clearly identified the user characteristic into
large distinct groups, the more compelling the value proposition to the
As with many traditional
businesses, customers are stratified into groups, often with the high value
customers being the smallest, yet most profitable group. Online gaming
companies will be no different. Take Tencent QQ for example again: It has
250 million active users in China. But without user stratification (as one
reason), Tencent has so far been unable to convert this wide user swath onto
their B2B online trading platform.
This critically important
step is how revenues can be generates, and actual profits made. Without this
rule, it will be difficult for gaming companies to justify their current
For more information
contact us for these and
other China-related data, information and products.
Unless otherwise specified,
all information provided is sourced from CCID Consulting.