Competitiveness of the Chinese Online Gaming Industry - Essay Example

? Competitiveness of the Chinese online gaming industry Introduction The Chinese online gaming industry is a fast growing interactive entertainment industry with more than 200 game titles launched to the market annually. Some popular game characters have earned iconic status in the Chinese culture as the industry continues to expand attracting new ventures. The local gamer base is expansive with local media entrepreneurs producing games that meet local consumer demand (Yuan and Chung 2009). The Chinese gaming industry has grown to comparable levels with global online media giants. This essay explores the online gaming industry in china and examines factors that contributed to its development. Of special interest to the study are factors that give Chinese online gaming entrepreneurs competitive advantage such as large market size, increasing local demand, aggressive industry rivalry, improved and advanced game production skills and technology, and agglomeration of the gaming industry and its supporting industries (Yuan and Chung 2009). Broadband development and penetration in china has grown rapidly with millions of citizens accessing connectivity every year. The Internet penetration in china rose from 18% in 2004 to 23% in 2006. China had 137 million Internet users in 2007 with over 70% of them been under the age of 30. The country is the world’s largest mobile market with 565 million users in 2007. China attracted foreign capital investment of 22billion dollars by 2008. The Chinese online gaming sector has grown simultaneously with the development of broadband technology; it only seconds the USA as the world’s largest Internet market (Jakobson 2007). Major global online gaming companies such as Microsoft, Sony and Nintendo have tended to shy away from the Chinese market due to Internet piracy. As a result of the absence of console game players, online games have thrived. The foreign gaming companies in china operate by engaging in mergers, acquisitions or joint ventures with local game companies; Ubisoft, Vivendi and Electronic Arts, are the three major international players in the Chinese market. Electronic arts invested USD 167 million equivalents to 15% share of local game company The9 in 2007. Local game companies are major players in the Chinese industry due to the influence of the state with regulations limiting transnational capital and imports (Jakobson 2007, (Navarro and Autry 2011)). Initially the local game industry acted as distributors of imported Korean games but developed into a stable industry with homegrown companies encompassing all levels of the value chain including development, publishing, and distribution and selling. Local software producers contributed 65% of china's online game content in 2007. There are two tiers of local Chinese game companies; the first tier consists of large scale companies such as Shanda, The9 and Netease, they occupy 70% of total industry profit. The second tier consists of specialized companies such as 17Game, Tencent, NineYou and Perfect world; they serve as distributors or portal operators with some of them releasing foreign games. Others produce local Massive Multiplayer Online Playing Game (MMORPG) and casual games. Tencent for instance, provides instant messaging and a Myspace-like social networking site while Perfect World produces popular MMORPG game, Perfect World (Wasserstrom 2010). This paper examines roles of state, culture, market and new communication technology in the Chinese media industry. The relationship between the state, local game companies and foreign game companies are complicated. This is because china heavily depends on foreign direct investment for its economic growth while using restrictive regulations to protect its new media industry. This system is a reflection the consequences of globalisation evolving from the rise of international media companies. Globalisation connects people and intensifies link between people of different geographic locations furthering information exchange and transnational companies are primary agents of globalisation (Wasserstrom 2010). The creative media industry in china has quickly adapted the open approach to contest directly and intersect with western media; as such Chinese online games are now compatible with those produced by transnational media giants. This is achieved through a cultural economy of imitation and innovation. This is further strengthened by the high priority placed by the government on achieving economic goals promoting local media firms to concentrate on quickly achieving technology transfer and acquiring R & D skills from international media companies. Innovation is, therefore, achieved at the distribution level rather than the conceptual level (Simon and Cao 2009). Government intervention concentrates on censorship and internet regulation. The Chinese government restricts activities of foreign game companies and proposes regulation on local game firms in order to maintain a healthy gaming industry. Regulation is based on the belief that online games are an area of moral concern that might bring down social order and, therefore, the government imposes restrictive policies to mitigate problems such as internet gambling and internet addiction (Simon and Cao 2009). The Chinese online gaming industry is a cultural industry influenced by factors such as the decentralised economy, the collectivistic culture, and the one child policy. The collectivist culture is the particular interpersonal relationship with which the people perceive themselves in relation to others to define their social obligations in society. The adoption of a decentralised economy has transformed the Chinese society from a single authoritative voice to many voices projecting plurality rather than hegemony (American Economy Hearing 2009). The typical Chinese online gamer is young ranging in age from 18 to 30; this population comes from a generation under the influence of One Child Policy. This population has cultivated a culture of consumerism and is better educated than their parents who grew up under Cultural Revolution. The segment of the population between 18 and 30 is self-motivated and well traveled with 37 million of them having traveled overseas by 2007 (American Economy Hearing 2009). The Chinese online gaming industry outgrew the early domination by Korean games in the late 1990s and early 2000 to develop in- house games. The emerging companies created an agglomeration effect by working with local and foreign firms and eventually entering all dimensions of the value chain. By 2005, the number of Chinese homegrown game titles exceeded the number of foreign games in the local market and was being exported to various Asian markets (American Economy Hearing 2009). The iResearch report of 2006 indicates that the top five local companies occupied 72.7% of the local gaming market with 100 new users added to the market every minute. There were 210 million online subscribers in 2007, and this was attributed to increased PC ownership. Most online gaming companies are based in Beijing or Shanghai with some listed on the New York stock exchange or the Hong Kong stock exchange (American Economy Hearing 2009). Chinese production standards lag behind those of major international game companies. Their products are not compatible Western or Korean quality as exemplified by games such as World of Warcraft from Blizzard. However, access to easy capital enables local game companies to enjoy market competition by having the freedom to move between publishers that release marketable foreign products and developers who experiment with self-innovated games. For example, the 3D game of Chengdu, produced by Giant demonstrates the expertise and understanding of local gamers and the ability to produce game titles with content that meets the tastes of the market (Yuan and Chung 2009). The presence of foreign game companies such as Ubisoft and Electronic Arts with superior quality game products augurs well with China’s status as an outsourcing base for foreign companies as they provide an alternative source of skilled labour to build talent resources and human capital for the online game industry. Chinese online game companies especially those listed in overseas stock markets gain easy capital, in addition to profits from the, domestic market, enabling them to initiate corporate development and expansion (Yuan and Chung 2009). Mr. Zhang a manager at Netease confides that most Chinese companies have in excess of 300 million Yuan in capital and access to private equity or venture capital to invest in business is easy even for small firms. Capital availability enables bigger companies to engage in aggressive merger and acquisition activities. Ms Hua an executive from Shanda Interactive intimates that they engage in discussions about acquisition or cooperation with smaller rivals in such activities as development and web design on 18th and 20th of every month. Venture capitalists actively search for opportunities to get into the Chinese new media industry (Yuan and Chung 2009). There is a sophisticated distribution network in the online game industry which ensures that game content is delivered to consumers. Initially game companies studied foreign games in order to understand the desires of consumers in design concepts but later they incorporated unique traits of Chinese gamers by requiring game company employees to play the games during working hours (Navarro and Autry 2011). This is confirmed by Mr Wen from Joyzone who explains that they have hundreds of staff in customer care who play games, interact with other gamers online, troubleshoot and send client feedback to R&D in time to modify content. They also initiate game events to attract more gamers (Yuan and Chung 2009). Local game companies cooperate with Korean companies through working on research and development projects in order to learn new technologies and skills sometimes trading-off a portion of the local market. This is achieved by engaging pro-gamers by sponsorship in the international game events. However at the internal level, local game companies engage in marketing drives and strategies to understand market structure and potential market niches in China (Yuan and Chung 2009). The Chinese gaming market generally prefers games featuring traditional Chinese fantasy stories. In 2007, the top ranking games by popularity, included; Mo Yu, Fantasy Westward Journey, and Zhengtu produced by such companies as NetEase and Sohu. The rise of these games has created local demand for martial arts games and PK genre games. Chinese gamers are very devoted and have a high degree of involvement in game play. The classification of gamers is diverse, for example, gamers in Shanghai are different from those in Zhengtu. Therefore, companies like Netease target teenagers in small and medium sized cities with a moderate amount of cash to spend and offer them services at prices they can afford (Yuan and Chung 2009). Gamer sophistication and demand for quality by local gamers push firms to provide better products and services with the success or failure of an online gaming company depending on the capability to meet local demand. Some companies focus on delivering content that attracts consumers by building up their virtual identity within games while others focus on low priced models (Springut, Schlaikjer and Chen 2011). This has caused new distribution models to evolve; the Chinese market prefers free-to-play content where an item-based model is offered; this is unlike the Western model which relies on monthly subscriptions to secure market revenue. In essence, the online company offers games for free but the company profits when players buy virtue items in the course of their game play. The system exploits Chinese consumers’ passion for collective work, staying on a winning team and showing off superior items to establish identification (Springut, Schlaikjer and Chen 2011). There is a strong presence of related and supporting companies near the online gaming companies. Typically gaming companies are located in high tech areas of Beijing and Shanghai which facilitates easy and quick adoption of technologies within industry clusters. The concentration of peer companies promotes technology acquisition and the prevalent job hopping among competitors. Technology spillovers helps follower companies catch up with first movers but, job hopping of employees among peer companies weakens them(Springut, Schlaikjer and Chen 2011). The development of online gaming industry has opened up opportunities for related and supporting industries including game and animation developers, hardware manufacturers, internet cafes and telecom operators. All these support industries earned 33 billion Yuan from online game related business in 2006. The connection with Chinese movie industry has led to international demand for cultural products involving Chinese martial arts and history. The support industries supply high-quality low cost production talent further stimulating new ideas and synergy among industries (Springut, Schlaikjer and Chen 2011). For example Perfect World, launched Chibi, which was derived from a TV play. Combination of online game industry and traditional media leads to production of cultural content that appeal to overseas markets. The game entitled The Sign produced by Shanda, involved a musician (He Xuntian), and a director from the movie industry (Chen Kaige), and as a result of such collaborations Chinese online games penetrate overseas markets in Vietnam, Taiwan and parts of the West (Springut, Schlaikjer and Chen 2011). Strong government regulation in the Chinese gaming industry restricts the entry of foreign game companies creating an industry environment that allows fierce competition among local game companies. Cultural challenges such as language barriers and use of cultural figures in games further hinder the competitiveness of foreign game companies (Springut, Schlaikjer and Chen 2011). Intensive competition among local companies motivates the entire industry and fosters improvement and new product development. It also encourages cost efficiency, quality improvement and pressure for companies to explore new markets. Most foreign rivals use China as a pure R&D center with subsidiaries in china acting as a continuation of existing services of parent companies. Their products are high quality and tailored for Western consumers. They use China as an outsourcing center due to the obvious cost efficiency and low cost of human capital. For example, the cost of hiring a senior game developer in the US is $200,000, but in china the cost is RMB200, 000 (Springut, Schlaikjer and Chen 2011). The advantage of competition in Chinese industry is that local companies that remain competitive in china gradually expand their services to the global market. For example, Shanda initially engaged in mergers and acquisitions with domestic companies before eventually building alliances with international media companies such as NC Soft and Walt Disney. The aim of the alliances is to develop talent through foreign outsourcing companies before breaking away to establish a niche in overseas markets (Yuan and Chung 2009). Challenges Piracy is a big challenge for the online game industry in China especially for foreign companies. The provinces of Guangzhou and Shenzhen are major hubs for video game copying where video games are transferred from the Internet to cartridges using copiers and are available to retail markets and shops throughout china (Assessing China’s Efforts 2012). These two hubs together with Jinan are major distribution hubs for video game consoles the sale of which is illegal in china. Distribution of illegal consoles leads to increased demand for infringing games as licensed consoles are not distributed in china. China has an average Internet penetration rate of 28.7 and Internet cafes are widespread in china especially in rural areas. Pirated versions of gaming software are commonly pre-installed on cafe computers, with an estimated 240,000 Internet cafes in china using unlicensed or pirated copies of gaming software (Breznitz and Murphree 2011). To cope with the challenges of piracy, some foreign companies offer subscription based access to their works in the form of monthly subscription in order for players to access the game developer’s server and play online games against other users. An example of such strategy was used by Blizzard Entertainment and operated in China by its licensees The9 and Netease; the game gained an estimated 5 million subscribers in china (Breznitz and Murphree 2011). Foreign firms venturing into the Chinese market endure enormous amount of competition from both local and international companies. This is because the Chinese market is dominated by local companies with a powerful grip on the domestic market. A lot of local customization is required to penetrate the market, for instance one has to adopt Chinese language interfaces and different usage preferences. The Chinese market is very fragmented, and this can pose a problem for foreign companies trying to connect to clients and business partners in some cities and provinces. Most industry activity is concentrated in coastal provinces though rising costs in the big cities have stimulated inward push (American Economy Hearing 2009). Moreover, despite the rise in Internet connectivity, broadband service is not satisfactory (Breznitz and Murphree 2011). This is well illustrated by the fact that 69.4% of Chinese game players cite connect speed as the main factor determining the game they play. The government policy on inline gaming is vague as while the government promotes an investment policy the licensing system for Internet cafes is punitive; not to mention the exorbitantly high Internet connection fee compared to the income of the average Internet game player. The government classification of online gaming under cultural industries implies that it is highly protected and restricted from foreign influence this is especially important as china has not signed the WTO agreement on opening up cultural industries (Rowen, Hancock and Miller 2008). Though, China is signatory to intellectual property rights (IPR), compliance to these laws and regulation is limited, and enforcement is hardly effective. However, there has been improvement in recent years as evidenced by the increasing number of court cases and rulings in favour of Chinese firms, government and foreign firms (Assessing China’s Efforts 2012). In 2008, China amended the patent law to enhance innovation capabilities by raising the bar on patentability of inventions and utility models; this policy has made the Chinese patent system more compatible with international standards. However, the enforcement system is still plagued by lack of clear statement on punishment for violators and fines for infringement are insufficient or ineffective. There is also a disjunction between central government intent and local government enforcement (Rowen, Hancock and Miller 2008). Conclusion The Chinese online game industry has grown in the last 10 years from being distributors of Korean and other foreign games to the current trend of developing, publishing and producing games for the local market by homegrown companies. The major online game players in china are Shanda, The9 and Netease raking in over 70% of industry profit. The gaming industry has developed through a culture of imitation and innovation backed by government policy of nurturing local industries and protective regulation that discriminates against foreign competitors. The industry is further promoted by access to easy capital through FDIs and listing in internationally established stock exchanges like New York and Hong Kong. Several factors such as Internet penetration and connectivity, huge market and policies like the one child policy have promoted the growth of the online game industry. However, the quality of Chinese games still lags behind foreign counterparts. This is because of the minimal almost non-existent foreign competition, government policy favoring local firms and cultural barriers that constrain foreign firms from venturing into the Chinese market. The government enforcement of copyright laws is wanting and serves as a deterrent for MNEs. Bibliography: American Economy, Hearing before the US–China Economic and Security Review Commission, One Hundred and Ninth Congress, First Session, March 24, 2009. Accessed on 07th Jan 2013 from: http://www.uscc.gov/hearings/2009hearings/transcripts/09_03_24_trans/09_03_24_trans. pdf Breznitz, D. and Murphree, M., 2011. Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China. New Haven, CT: Yale University Press Jakobson, L., 2007. Innovation with Chinese Characteristics: High-Tech Research in China. New York: Palgrave McMillan. Michael, R. 2012. Assessing China’s Efforts to Become An “Innovation Society” – A Progress Report, Hearing before the US–China Economic and Security Review Commission, One Hundred and Twelve Congress, Second Session, May 10, 2012, Accessed on 07th Jan 2013 from: http://www.uscc.gov/hearings/2012hearings/transcripts/MayHearingTranscript_10_2012. pdf Navarro, P. and Autry, G. 2011. Death by China: confronting the dragon--a global call to action. Upper Saddle River, N. J.: Prentice Hall. Rowen, H., Hancock, M., and Miller, W., 2008. Great China’s Quest for Innovation. 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