zhan ye

Enter the Dragon: 

Enter the Dragon The Chinese Game Industry and Market Zhan Ye zhanye@msn.com John Laurence laurence@redflagstudio.com

The Purpose of This Presentation: 

The Purpose of This Presentation This presentation will try to deliver you An overall picture of the Chinese game industry and market A basic understanding of Chinese culture and society as it relates to the game industry A case study that analyzes what other companies have done right and wrong in China in the past decade A long-term plan for American companies looking to capitalize on the opportunities in China over the next decade This presentation will not give you Accurate statistical data about the Chinese market. Because there isn’t any! Details about governmental regulations and laws regarding the game business. We will not talk about the Taiwan market.

China Today: 

China Today China is a country in a crucial transition period. The next 10-15 years will determine whether China will become “a freer and more democratic state or a maturing fascist regime”. – Wall Street Journal, Feb 22, 2002.

China Today: 

China Today Some simple facts 1.3 billion people Rapidly growing urban middle class A country with substantial economic power 165 billion US dollars in its Foreign Exchange Reserve Officially joined WTO in November 2001 China’s huge consumer market attracts foreign businesses from all over the world. Cities along China’s east coast are booming. American businesses, from fast food to general accounting, are playing a major role there.

Chinese Gamers: 

Chinese Gamers China is a gamer’s heaven Pirated games, priced at 1.5 US dollars each, are everywhere. China’s “One Child” policy creates a demographically inverted pyramid. Parents and grandparents are willing to invest all their resources in the single child, which results in Chinese children’s unbelievable buying power. It is very common to see kids with more than 200 game CDs piled up in their bedrooms. No rating system! In China, gamers can just buy whatever they want, play whatever they want. After playing so many games, Chinese gamers become the most sophisticated gamers in the world. They are very picky, very knowledgeable, and very hard to satisfy.

Chinese Gamers: 

Chinese Gamers Sophisticated gamers Not just play games, but also think about games, and try to find the deeper meaning of games. By doing that, they have created a cultural phenomenon. Game Critique magazine. This kind of magazine can only exist in Asia, where people not just treat games as an entertainment form, but go deeply into the business, social, and political implications of games.

Chinese Gamers: 

Chinese Gamers How many gamers in China? A Japanese report claims there are 19 million console gamers in China. A Chinese game publisher claims there are 50 million PC gamers. This number is highly suspicious since there are only 22.5 million Web users in China, according to an official report released by CNNIC. Most analysts believe there are fewer PC gamers than Web users in China.

The Market : 

The Market Arcade games Arcade games are extremely popular in China. Arcades are an essential part of urban youth culture. The arcade business is highly profitable, compared with the PC and console businesses. Sega and Namco have been operating in China for several years. Ironically, the arcade business is publicly criticized and strictly regulated by the government. Has shown signs of decline due to the emergence and increasing popularity of online games and the so-called “Net Bars”.

The Market : 

The Market Console games Software is almost 100% pirated; hardware almost all smuggled Small retail stores play a major role in pirating and smuggling. Major console makers are very reluctant to enter this market. Sega made a failed attempt several years ago by marketing Saturn in China and quickly pulled out. The console business is structured so that hardware is sold below cost and profits are derived from software. This model won’t work in China due to software piracy!

The Market : 

The Market PC games In contrast with the troublesome console game business, the PC game sector has been booming in recent years. Legal distribution channels have been established. Many foreign publishers have found local partners and started to release more and more PC games in the local market. In 2001, 363 PC games were published in China. The PC game market’s recent success was largely due to the “low price” strategy taken by PC game publishers. A legally manufactured PC game is sold at 5-10 US dollars. That is the price range Chinese gamers are willing to pay and publishers can make a decent profit from.

The Market : 

The Market What kinds of games are popular? Large population creates diverse tastes. American games and Japanese games are equally popular. Even the most “extreme” genre can find its audience in China. For example, Dating Simulation Games. Just like in other Asian countries, RPG is the most popular genre in China.

The Market : 

The Market PC game market chart The numbers came from a report by Kingsoft and have not been verified!

The Market : 

The Market A unique genre - martial arts RPG Martial arts RPG is a unique genre created by Chinese. Originated in Taiwan in the late 1980s, it quickly swept through mainland China, Hong Kong, and countries in Southeast Asia and became the most popular genre in the region. Many of these games were based on Chinese martial arts fiction written in the 1970s and influenced by contemporary Hong Kong movies. Closely tied to Chinese ancient history, culture, folklore, and mysteries, making it hard for foreign gamers to understand. With martial arts always comes romance (just like the movie Crouching Tiger Hidden Dragon). Character development and storytelling are far more important than computer graphics and AI.

The Market : 

The Market Martial arts RPG (continued) The two most famous franchises were developed in Taiwan and mainland China. Sword of God & the Wondrous Chivalry (left), developed in 1995 by Softstar, Taiwan, is considered a timeless classic by many Chinese. Kingsoft’s Sword Master Love Story series (right), though a clone of the former, sold well in mainland China.

The Market : 

The Market Online games Many Chinese analysts believe online games are the only way to fight piracy. A new revenue model will solve all the old problems. Therefore many Chinese, Taiwanese, and Korean companies have jumped on the online gaming wagon, spending millions of dollars on infrastructure and development. Japanese companies started to catch up. In January 2002, Enix invested 4 million US dollars and set up a 50-50 joint venture with a Taiwanese company in Beijing to provide its services to Chinese gamers.

The Market : 

The Market Online games Chinese don’t play online games at home. They go to the so-called “Net bars” to surf the Web and play online games. Net bars have PCs and high-speed Internet connections. They became extremely popular in recent years. Strictly regulated by the government, special filtering/monitoring software has to be installed on each machine. Credit cards are still not widely accepted in China. Most online game companies have to sell prepaid charge cards.

The Market : 

The Market Online games The most popular online game in China is Stone Age, which was originally developed in Japan but failed to attract Japanese gamers. A Taiwanese company bought the game, marketed it in Taiwan and mainland China, and achieved huge success. American PC games with online features, such as Counter Strike, are also very popular in net bars.

The Industry : 

The Industry Three categories Distributors Publishers Developers We will mainly focus on developers in this presentation.

The Industry : 

The Industry Distributors Legal software is sold in software chain stores and bookstores in China. Federal Software is China’s biggest software distributor. It has a market share of 30%. Its income was 42.1 million US dollars in 2000. The state-run Xinhua Bookstore has China’s biggest book distribution network.

The Industry : 

The Industry Publishers Local publishers Acquire, market, and sell games to distributors Some have their own development studios Some purely localize and sell foreign products Matrix is Sega’s local partner EverStar used to be Konami’s local partner Foreign publishers that publish foreign games in China

The Industry : 

The Industry Two types of developers Local developers that focus exclusively on PC game development. Development studios established by multi-national companies that focus on console game development. They are export-oriented.

The Industry : 

The Industry Local developers Why is PC their primary platform? The first generation PC game companies emerged in the mid 1990s. Very few of them survived to this day. Most of them failed because of poor management and lack of investment. The PC game market got a jump start in the last 2-3 years. The new generation companies became more mature. They began to diversify their resources, focus more on revenue models, and seek investments from outside, mainly from Taiwan and Hong Kong.

The Industry : 

The Industry Development studios of multi-national companies Japanese and European companies started to establish their strongholds in China from the late 1990s. Ignored China’s immature domestic market. Focused exclusively on using China’s cheap labor force to develop games for overseas markets. This strategy has been proven to be very successful. Ubisoft now has a local development force of over 300 employees. Tose has about 150 employees. Konami opened its development studio in Shanghai in 1999. Koei has two development studios, one in Beijing, the other in Tianjin.

The Industry : 

The Industry A partial list of games developed in China Disney’s Donald Duck Advance (GBA) Rayman 2 (PS) Ninku (GB) Namco Gallery (GB) Konami Collection (GB) SPACENET (GBC) Football 2000 (GBC) Dragon Quest (GBC) Pokemon (GBC)

The Industry : 

The Industry A tale of two cities Two development centers have emerged over the past 10 years – Beijing (left) and Shanghai (right).

The Industry : 

The Industry A tale of two cities Beijing, China’s political and cultural center, became a hub of local PC game companies because Beijing has the Zhongguancun zone, so-called “China’s Silicon Valley”, which is the center of China’s PC hardware/software industry. Beijing has China’s best universities. Local companies can easily recruit talented and energetic young people fresh out of school at a relatively low cost.

The Industry : 

The Industry A tale of two cities Shanghai, China’s financial center, became a ideal harbor for foreign businesses. For decades, it has been the most Westernized city in China. Relatively far away from Beijing’s strict political controls, thus creates a much friendlier environment for foreign businesses. Many well-educated white-collar workers China’s animation industry is concentrated in the areas around Shanghai.

Special Topics: 

Special Topics Fighting piracy: Mission impossible? The government has closed down some underground factories and cut off the distribution channels of pirated software. This addresses supply, but not demand. Consumers, millions of ordinary Chinese gamers, still want pirated games. Chinese gamers don’t feel guilty. In fact, some extremists think producing and using pirated software is a glorious patriotic act and historic revenge. A famous quote from an anonymous Chinese hacker – “Just look at your museums. You Westerners have looted so many things from China in the past. Now it is our turn to get something back!” Closing down an underground factory is easy. Eliminating people’s bias is hard. Fighting piracy is not just a legal battle, or a political campaign. It is more like culture work – trying to change the way people think and behave.

Special Topics: 

Special Topics Fighting piracy: Mission impossible? Any actions taken by foreign companies will face criticism from the Chinese media, the government, and the public. In 1999, Microsoft sued a Chinese company for allegedly using a pirated version of its Windows operating system. Microsoft not only lost the lawsuit, but also lost some government contracts. Some senior government officials urged the government to switch from Windows to Linux and boycott Microsoft’s products such as Microsoft Office. Let the local industry carry out the war against piracy - they are also victims and they are willing to do something about it. Local companies don’t bear the “moral burden” that many Chinese think foreign companies should bear. The actions taken by local companies will be less offensive and more persuasive to ordinary Chinese.

Case Studies: 

Case Studies Case #1: WayAhead – foreign investment, local studio, undeveloped market In 1994, IDG’s Pacific Technology Venture invested $200,000 to set up a joint venture with a Chinese company, thus forming WayAhead Inc. It became the first PC game company in China backed by foreign venture capital. The focus of the new company was to develop and sell PC games for the local market. With $200,000 in its pocket, the company began to expand rapidly. Within 3 years, it had become the most prolific game company in China, however WayAhead overextended beyond the capability of the market to support its products. The investors decided to pull the plug. The company went out of business in 1998. The whole local industry mourned.

Case Studies: 

Case Studies Case #1: Lessons learned WayAhead failed because Local market of the late 1990s was not prepared for full price domestic products No access to overseas markets During its last days, WayAhead tried to shift its focus to overseas markets, but it didn’t have either the knowledge or the connections it needed to access overseas markets. IDG didn’t transfer its global knowledge, marketing experience, and management expertise to WayAhead.

Case Studies: 

Case Studies Case #1: Lessons learned Companies shouldn’t gamble all their resources on an undeveloped market. Find a mature market and a feasible business model first! To make a joint venture succeed, foreign investors not only need to provide money, but most important, to provide their local partners the knowledge of the global market, share their experience, and give useful advice. Help the local partner access overseas markets.

Case Studies: 

Case Studies Case #2: The Koei incident – clash of cultures Koei is a Japanese company famous for its historical simulation/strategy games. In 1997, Koei decided to make a WWII simulation game. Its local employees in China were asked to integrate into the game some photos of General Tojo. Tojo is considered by many Chinese to be responsible for making the decision to invade China that eventually killed millions of Chinese. Local employees protested, and later quit their jobs. Chinese newspapers relentlessly turned the event into a nationalist propaganda campaign. The government finally got involved and requested Koei to apologize to Chinese people. The game was finished outside of China and released in overseas markets. Koei is still operating in China with 2 development studios.

Case Studies: 

Case Studies Case #2: Lessons learned A wake-up call for foreign companies to realize that making games in China is not a simple matter. There are many sensitive cultural, historical, and political taboos. Chinese society lacks freedom of expression, tolerance, and diversity that Americans take for granted. Before moving a project to China, consult your local partners. Be sensitive to cultural issues.

Case Studies: 

Case Studies Case #3: The success story of Ubisoft Ubisoft has been the most successful foreign game company in China due to their two step strategy. Step 1: in 1996 Ubisoft established a development center and recruited about 300 local artists and programmers to develop console games for overseas markets. Step 2: after the local development center began to run smoothly, Ubisoft cautiously expanded the scope of their operation Gathered information about the local market. Tried to understand how games were published and distributed in China. Then localized some of their games and put them on the market to test its potential. Also started to build brand awareness in China.

Case Studies: 

Case Studies Case #3: The Success story of Ubisoft China The results were amazing – Ubisoft not only successfully utilized China’s cheap labor to cut its development costs, it also seized 1/3 of China’s PC game market. Since it has gained valuable experience and superior knowledge of the local market, other foreign companies begun to let Ubisoft localize and market their games in China. For example, Resident Evil 2 from Capcom. Ubisoft became a household name to Chinese gamers. It also became a model for foreign companies. Many Japanese companies are following the same approach.

US game companies have failed to capitalize on the resources of China’s game industry: 

US game companies have failed to capitalize on the resources of China’s game industry If China is a consideration it is as a sales channel, not a market Missed opportunities to enter market may lead to long-term failure Have not taken advantage of short-term opportunity in cost structure/quality of local development in China Not establishing a development foothold has precluded American publishers from short term profits, learning about this market, establishing brand equity, and nurturing long-term relationships with the local industry Unless this changes, American companies risk being shut out of market when it matures Americans have been followers, not leaders when compared with Japanese and European competitors Unusual, because Americans lead in other areas in China

Current Landscape For Foreign Participation – China: 

Current Landscape For Foreign Participation – China Problems and opportunities Low cost structure Maximum 20% of US wages for programmers and artists Talented, experienced programmers trained by world-class Japanese and European companies, such as UBIsoft and Tose, who have created quality games for the world market Artists who can create both Japanese and American styles Don’t utilize repeatable process models that are compatible with best practices of American publishers No window to outside world Cannot design for US and Japanese consumers

Current Landscape For Foreign Participation – US: 

Current Landscape For Foreign Participation – US Problems and opportunities Good designers with knowledge of their customers and market Expertise in business processes such as market analysis, product acquisition, licensing, marketing, technology and access to resources Challenged with rising costs of marketing, sales yield a constant squeezing of publisher margins. More and more competitive environment requires companies to find new business models to ensure ongoing creation of shareholder value Outsourcing becomes a viable solution for publishers seeking a competitive advantage Added quality is the driver – not lower cost. Outsourcing to China is a perfect fit! Look who is already doing it…

Which foreign companies have entered the China market and what model do they use?: 

Which foreign companies have entered the China market and what model do they use? Ubisoft – Create Ubisoft games in China. Don’t provide development services to other companies. Also localize and distribute foreign product. Tose – Contract development for Japanese publishers only – Nintendo, Square, Enix, Konami, Namco, Capcom. Almost all Japanese publishers have used Tose’s development services. Konami – Create games for the Japanese market Koei – Outsource art pipeline Infogrames? Planning to follow Ubisoft’s model? Enix – Established WOFE 50/50 between Softstar and Enix. Published Crossgate- MMORPG Sega – Found partner, Matrix, to publish its PC games EA – Entered China in mid-1990s as a sales channel for products – not a new market… American companies have no entry point until now Red Flag Studios

Ways to take advantage of China market.: 

Ways to take advantage of China market. Developers – Outsource art pipeline (Japanese and US style) Publishers – Develop a game in China Licensed properties for 2-D platforms, i.e., handheld Find companies that focus on quality, not price Local point of contact in US for acquisition and production Distributor – Initiate relations with potential distribution partners and retailers in China. Keep abreast of online distribution methods in China. These may be the only way to fight piracy.

Opportunities for American Companies: 

Opportunities for American Companies Today’s proven business models - Design the Game US Headquarters Make the Game Development branch China Market the Game US Headquarters Model1 Global Developer UBISoft Big companies Design the Game Make the Game Services Company China Market the Game Model2 Contract Development Enix + Tose Other publishers Market the Services US Representatives

Opportunities for American Companies: 

Opportunities for American Companies American companies advantages Management style Access to best technology and training English Most Chinese would prefer to work for an American company because they have a positive perception that people are treated with respect and more fairly in American companies. American companies in China, for example, P&G, Motorola, Microsoft, helped to create this image for American companies - the American companies not only treat their local employees with respect, but also challenge them and give them more personal development opportunities.

Opportunities for American Companies: 

Opportunities for American Companies With the growing market, there will be a need for the following avenues that are already established in North America No market research services available (NPD, TRST) No industry organization (IDSA, IGDA) No trade show or developers conference (GDC, E3) No training school (Digipen) No rating system (ESRB) Opportunities are abundant!

Opportunities for American Companies: 

Opportunities for American Companies Conclusion Hope this presentation serves as a starting point of your future study and research. China, a mythical dragon, is there for those who are brave and visionary to explore! We are working on a market report. Once finished, you will be able to see some real numbers of the Chinese market. We would like to see our efforts help American and Chinese game industries work together and achieve mutual benefits. We have established an email forum for issues/trends regarding the Chinese game industry. Dialogue is mostly in English, with some posts in Chinese. If you are interested in joining, please leave your business card.

Q & A: 

Q & A