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China bids for Asia online game crown against Korea

SEOUL/BEIJING - Flush with cash from IPOs and a lucrative online game operating business, Chinese companies are trying to expand into game development, breaking free from their dependence on foreign titles and boosting incomes.

After long relying on foreign hit games such as U.S.-based Activision Blizzard’s “World of Warcraft” (WOW) and “Kartrider” from South Korea’s Nexon, China now wants to develop its own blockbusters and eventually lead the fast-growing market.

It may be a while before China overtakes South Korea, which dominates Asia’s online gaming market, but there are growing signs that Chinese firms such as Netease.com and Tencent are now in a strong position to compete globally and are catching up with rivals quickly.

Successful online games can generate earnings for years from monthly service fees, character customisation and other micro-transactions and carry higher margins than classic console games. Developing games in-house also reduces uncertainties over license contracts and renewals.

“We consider in-house development a sound business model, which brings relatively high margins,” said Phyllis Sai, spokeswoman for Nasdaq-listed Chinese game firm The9.

The Chinese online game market may have had a late start, but it is growing faster than anywhere else. And China has huge potential with over 55 million online gamers — overtaking the United States last year as the world’s biggest Web user.

Analysts say the global online game market, estimated at about a fifth of the total video game market, is growing by about 20 percent annually. The Chinese online game industry is forecast to more then treble to $10 billion in 2012, from $3 billion in 2008, according to Beijing-based iResearch.

Despite the robust growth, Chinese companies have been hurt by a lack of homegrown hit titles and their shares have swung whenever licenses for hit games such as WOW exchange hands.

But now Chinese firms have the financial muscle to compete globally, said Lan Hoang, CEO of Aeria Games & Entertainment, which offers Asian games in the U.S. and European markets.

“Although the current offerings are still lacking in quality...with time, we believe they will be strong competitors against current game development companies.”

Among dozens of Chinese firms, Netease.com, Tencent and Perfect World are seen as forerunners.

NetEase saw its self-developed “Westward Journey Online” and “Fantasy Westward Journey” enjoy explosive growth since 2002. NetEase shares have risen almost 60 percent this year to a record high in May.

Tencent has grown its game portal service while making money from servicing popular South Korean titles, and Perfect World has been successful with overseas expansion after it adopted South Korea-style development methods in graphics and game controls.

Cultural Advantage

As the success of an online game depends on content that appeal to players’ cultural backgrounds, Chinese developers enjoy a natural advantage at home and in neighbouring Asian countries that China has historically influenced.

“Chinese-developed games gain market share from Korean developers. One of the main reasons is an understanding of local culture,” said Dick Wei, a J.P. Morgan analyst in Hong Kong.

However, online gaming is a risky business model with increasing costs. Development costs have risen to more than $10 million per title for popular multiplayer role-playing games, which allow tens of thousands to play simultaneously.

At one point last year, a record 1.8 million users played Netease’s “Westward Journey Online”, according to San Francisco-based Pearl Research.

Gamers increasingly require sophisticated graphics and game structure. In WOW as well as popular online game “Aion”, users may invest months in developing a character, to build up skills and take on adversaries in a series of missions.

The industry is vulnerable to cannibalisation as only a few blockbuster titles dominate the market.

“We would expect a trend of consolidation amongst developers, as the resources required for game development increase and the risk of failure is heightened with more competition,” said Hoang at Aeria Games & Entertainment.

Korean Rivals

The emergence of Chinese players could make life difficult for established Korean developers such as NCSoft and Neowiz Games, which are looking to escape a crowded home market and eye China as their next target.

NCSoft shares have more than trebled so far this year as its new game “Aion” has been well received in China, where the title is offered by Shanda Interactive.

Due to regulatory issues, most foreign developers offer games in China through tie-ups with local publishers and the former are paid royalties of about 30 percent.

Still, Chinese developers have a long way to go before they overtake their South Korean rivals.

“Chinese companies will catch up quickly in the area of casual games as those are easy to imitate. But for multiplayer role playing games, there is still a few years’ gap,” said Shim Jun-bo, an analyst at HI Investment & Securities in Seoul.

“China’s market is growing so fast that Korean and other foreign developers can still expect to enjoy comfortable earnings for years to come,” Shim added.