Visiting Giant Interactive and Shanda

It has been a while since I wrote my first post on this blog about international expansion of Chinese Internet companies. I wrote the post during a train ride from Guangzhou to Shanghai. As I am now traveling to Beijing in an olympic themed train, I will summarize some of the findings I did in Shanghai.

Besides speaking to numerous experts and visiting companies such as the Dutch casual gaming company Spill Group Asia and the leading Chinese social networking site 51.com, my stay in Shanghai could not be complete without visiting two of the most prominent Chinese online gaming companies; Giant Interactive (GI) and Shanda. This is a brief overview of the topics discussed at GI and Shanda.

MMORPG’s in China

Online games are reasonably popular in China’s metropolitan cities, but it is in the 2nd, 3rd, and 4th-tier cities where online games are extremely popular and the amount of players is booming. Just walk into an Internet café in a medium or smaller city and you will see that nearly everybody is playing games. As a result online game developers are focussing on these particular areas. The total amount of players comes down to around 48 million; which is a lot especially when you consider that only 17% of the Chinese inhabitants have Internet access.

The main reason for the popularity of MMORPG’s in the less developed medium and smaller cities: there is no real alternative for entertainment available; as Marc van der Chijs nicely expressed it “when the sun goes the pavement is taken away; there is nothing to do”. GI, Shanda, and a other online gaming companies are pro-actively taking advantage of this situation and are reaching millions of Chinese youngsters that gather at Internet cafés to play games such as ZT Online and Fantasy Westward Journey.

In Shanghai I had set up meetings with GI’s Investor Relations Manager, Rich Chiang and Shanda’s Investor Relations Manager Vivien Chen to talk about current and future international operations. It turned out that the two meetings were actually quite similar and besides some domestic strategic differences GI and Shanda share the same points of view concerning international expansion.

Stick to the market you know: expanding to other developing countries

In developed countries games are all about 3D graphics and the latest technological developments. In China this is different: the hardware of the bulk of the gamers is less advanced. As a result the R&D of game developers in China is more focussed on the learning curve and aimed at beginning gamers. Most popular MMORPG’s in China are 2D or 2.5D, and according to Rich an advanced 3D game like Quake 4 would be too advanced for most Chinese.

Vietnam, Malaysia, India, and Thailand are examples of countries where GI and Shanda are looking into or have already set up cooperations with local partners. These countries all share the same characteristic: they are up and coming so the gaming markets of these countries are quite similar to China’s market. As Vivien from Shanda puts it: “we think that the Indian market is in the same stage as China’s 3 years ago.” So because GI and Shanda have experience in China’s developing Internet market, they are confident to succeed in other developing countries with comparable market environments.

A first step?

Both Shanda and GI are in the stage of licensing and looking for local partners to collaborate with in different developing markets. Shanda for instance has just announced a partnership with Zapak, India´s leading full-service gaming company. They granted Zapak the right for operation of Shanda’s self-developed online racing game Crazy Kart which has previously been licenced to Hong Kong, Thailand, and Vietnam. According to Vivien, a goal of the partnerships is to learn about the Indian market and what games are popular there.

Interestingly both GI and Shanda are also operating and expanding their operations in South Korea. According to Rich the Korean MMORPG market has a lot of potential not only because it is growing fast and very popular, but also because the lifecycle of games in Korea are relatively long. He explained that gamers in Korea care less about the graphics compared to western gamers. For example the 2D game Starcraft has been around for 10 years and is still extremely popular in Korea!

Why not expanding to U.S. or Europe

There are plenty of differences between the the developed Western and developing Chinese gaming market that make it unlikely for Chinese MMORPG companies to start any significant operations in the U.S., Japan or Europe soon. For instance the technology in China is still less developed. When you consider the amount of R&D that is done on 3D grapics and more high end games the West is ahead. There is no way China could compete technologically in these markets. Furthermore Chinese gaming companies have no experience in the console market which is very different than the Chinese free-to-play market. According to Vivien there are two main reasons why there is no console market in China: firstly consoles are too expensive for most Chinese and secondly piracy makes it very hard to be profitable.

Another reason why it is unlikely that Chinese MMORPG companies will expand to developed countries has to do with the important role of the Internet cafés. In China the mass of the Internet users can not afford their own computer with Internet at home and therefore most people go to Internet cafés. Besides cooperating with the government these cafés are closely working together with online game marketeers. These marketeers are emphasizing people to play their games for free, sell game credits, and even organize gaming events. GA has over 500 offices spread out all over China to promote its games in Internet cafés. This marketing strategy is based on the whole Internet café culture which hardly exists in Western countries.

After these interesting interviews I am looking forward to my meetings in Beijing and finding out how other online game companies such as Netease and Perfect World see their international future.