Comment & Opinion

China 2014: 8 trends that are shaping the world's most dynamic mobile game market

From the eye of the storm

China 2014: 8 trends that are shaping the world's most dynamic mobile game market

Surprisingly, at least to me, I've been attending mobile game conferences in China for 12 months. It seems like much, much longer.

That's partly because there's so much to learn.

After all, scale is the one thing we've come to associate with all aspects of the Chinese experience. Certainly, I'd wouldn't claim to be an expert just yet.

But when it comes to the Chinese mobile games market, more significant than its scale is its rate of change.

Perhaps because it grew at over 100 percent in 2013, the Chinese mobile games market appears to be constant flux as the dominance of key companies rises and falls over mere months.

In this market, today's heroes can literally be tomorrow's zeroes.

And that's what makes China such a fascinating market to try to get to grips with.

So, with that caveat stated, here are the trends that I've been seeing the market during my trips over the past seven months.

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  • 1 Is China's future growth now baked in?

    My previous trips to Chinese mobile game conferences have seen CEOs exultant in the annual triple-digit growth of the domestic market. Now, however, it seem that this level of growth is now 'baked into' - or expected within - the psyche of the Chinese mobile game industry.

    At ChinaJoy 2014, for example, senior figures have been talking about "sustainability", which is a very different concept to "crazy levels of growth".

    One CEO even criticised the industry for its "lack of risk management".

    Perhaps the reasoning behind a more conservative approach is that 2014 is likely to see annual growth in the Chinese mobile game market drop into double digits; very high double digit growth nevertheless.

    Simultaneously, the number of mobile game releases is still rising. Hence while the market's organic growth rate of revenue will drop below 100 percent, the number of game will rise to well over 100 percent.

    As basic economic suggests, this is a case of the supply of games outpacing demand: something will have to give.

    In that context, the rising tide that's been floating all boats is set to slowly reverse as more games fight over relatively fewer new players.

    Now we'll start to see the quality of everyone's swimwear. 

  • 2 Think smarter, cooperate and extend

    One result of this change is that companies are now thinking much smarter about their business, most notably how having a hit game and having expertise in game-making can be extended.

    For a publisher like Chukong, which also includes the Cocos2d-x engine, it's getting into mobile advertising with its new Chance platform.

    Created in partnership with Chartboost - Chukong is reworking the Chartboost platform for the Chinese market including support for all its multiple app stores - and Chinese data company TalkingData, which is providing the analytic smarts, Chance is Chukong's way of generating additional revenue from its high profile games such as Fishing Joy, which has been downloaded over 200 million times.

    But importantly, however, it will be available to all Chinese developers to use, potentially opening up new revenue streams for the smaller studios who are currently squeezed in terms of app store revenue by the big distribution players such as Tencent.

    And, more generally, the nascent Chinese mobile app advertising and monetisation market is due for a bit shake up as well funded and ambitious western UA companies decide how to get their slice - whether via acquisition, partnership or beachhead.

    Of course, Chinese companies aren’t standing still.

    For example, advertising company Focus Media is setting up 100,000 wifi hubs throughout China where people can log on for free, and also get high-speed mobile game downloads, at least for the games selected by Focus.

    A more widespread approach to downloads comes from PC publisher Snail Games, which has become a mobile virtual operator network. It's also done a deal with the big three Chinese operators to zero-rate the cost of downloading mobile games from its new app store, and also offer additional services to mobile gamers.

    Plus it's got its own Xbox Live-type social network and in this way it hopes to comnbine them all and build up its own platform, and work with other game companies to create another distribution channel.

    Again, these moves are examples of what happens as a fast-growth market matures. Companies start to build out their sales channels and extend their business further down the value chain.

    As Singapore-headquartered, China-operated publisher IGG stated, “Games aren’t enough because you can’t predict a second hit”.

    For this reason, despite having a global hit in Clash of Clan-style game Castle Clash, it’s now putting its energy into a social messaging app called Link.

  • 3 Operators, where art thou?

    So, where now for the big three Chinese mobile operators?

    China Mobile, China Telecom and China Unicom still have massive power in the general Chinese mobile market, of course, but moves such as the 19 companies who bought virtual network licences earlier in 2014 are a clear marker of the disruption they face.

    When it comes to mobile games, the operators' power has been in decline for some time as their importance as distribution channels has come under pressure from the likes of Tencent, Baidu, Alibaba, Qihoo 360 etc.

    Tencent and Alibaba, amongst others, have also been eating into their billing business, while the rise of MVNOs, specifically Snail Games as the first game-focused MVNO - brings the challenge right onto their door step.

    China Unicom seems to be reacting quickest to the threat. It's done the deal with Snail Games in terms of being the underlying network that its virtual networks piggybacks.

    Via its WoStore Android app store, it's also leading the charge with the Double 100 Project, which hopes to distribute 100 mobile games from small indie developers that each will generate more than RMB 1 million ($160,000) in revenue per month.

    Technically, all three mobile operators are involved in this project - promoting the selected games - but it’s the more marketing-savvy China Unicome and its WoStore that’s leading the charge.

    As its spokesman at ChinaJoy 2014 pointed out, 79 percent of Chinese mobile developers have 20 or less staff, and less than 3 percent of them are profitable.

    This is a reservoir of untapped talent that needs to find its way to market if Chinese mobile gamers are to be offered something more than variations on well-worn themes such as Journey to the West or Three Kingdoms.

    And early feedback is positive. Hundreds of developers are applying for the Double 100 Project, which has also seen its first wave of games hit their RMB 1 million target, with some already generating RMB 10 million ($1.6 million) in revenue.

  • 4 Cash out or die trying

    Linked to the first two points - although with its own dynamic - is the impact of these structural changes on investor attitudes.

    Companies with a proven track record still find it relative easy to raise tens of millions of dollars from investors. Partly that's because of the industry's 'triple-digit' growth, and partly because other investment opportunities in China, notably property, are being increasingly expensive.

    Nevertheless, this level of investment only happens when there's a strong path to exit, whether in terms of IPO or acquisition. There have been some eye-watering acquistions of Chinese mobile developers over the past 18 months; something that suggests a correction is due at some point.

    Similarly, the local IPO market is also booming, again in a manner some describe as a bubble; notably because many companies aren't formally listing on Chinese markets but reverse-listing into existing floated companies.

    Recent examples include a game company reverse-listing into an umbrella company and another into a flooring company.

    Clearly, this is not a confidence-building measure for the wider market; can you imagine King not directly listing on the NYSE but reversing into a bicycle manufacturer?

    Another worrying sign has been the high profile postponement of Chukong Technologies' plan to IPO in the US. Chukong has claimed it can't gain the company valuation it thinks it deserves. This is because it has a profitable games business combined with an as-yet very low revenue games technology business; the latter being a drag on the valuation of the former.

    A subtle implication from this IPO-freeze follows on from the fact that the standard remuneration package locks key staff into a three year stock vesting period post-IPO. Hence a lot of senior staff now seem to be considering whether to write off potential options that even if they occur won't be liquid for many years to come.

    The result could be a widespread shake-up in this still nascent market, with the smart investment money switching from big C and D series rounds into seed funding for a new wave of multiple start-ups that these impatient executives may form.

  • 5 The world is bigger than China

    Yet, Chinese developers and publishers have been dealing with these sort of structural issues for years. The market is so big, growing so fast and so dynamic that no doubt there will be big winners no matter what happens.

    Still, one telling theme at both the GMIC Beijing 2014 and ChinaJoy 2014 conference in Shanghai was Chinese studios talking about overseas expansion, with Taiwan and south east Asia, including highly lucrative Korea, being the most easy markets to reach.

    Similarly, many companies - including the likes of Snail Games and LineKong - are now planning their entrance into the North American and European markets.

    There are also a surprising number of Chinese-based studios who have taken an export-first approach.

    Some like Beijing-based HappyLatte have done this because they were set up by non-Chinese founders, whereas other companies such as Kabam have combined the Chinese-heritage of their founders with China's lower staff costs to build a large-scale development base.

    Less well-known is FunPlus, which alongside offices in San Francisco and Vancouver has its main development hub in Beijing. The main markets for its casual games such as Family Farm are in Europe and US, and proof of its success came in a recent $74 million investment round.

    As for the potential of the Chinese market, "We'll look at that in 2015," CEO Andy Zhong says.

    After all, the Chinese mobile market is difficult to operate in and 'only' accounts for 13 percent of global revenues. 

  • 6 Battle of the giants

    Twelve months ago, the gossip at ChinaJoy 2013 was about the impact of Tencent opening up its WeChat (known as Weixin in China) to mobile games.

    As previously experienced in Korea, where the similar KakaoTalk mobile messaging service continues to dominate game discoverability and revenues, most commentators expected Tencent - which is also China's dominant PC games platform - to follow in Kakao's footsteps.

    That prediction has proven correct, with recent figures suggesting Tencent's platform accounts for a massive 25 percent of all Chinese mobile game revenues.

    In time, other commentators suggest that Tencent may account for 10 percent of global gaming revenues.

    The company itself has stated that it's passed on RMB 37 billion ($6 million) in lifetime revenue to PC and mobile developers via its various platforms. 

    For developers with a good relationship with Tencent, that's good news. But given that its platform is heavily curated and unlikely to be transparent any time soon, this suggests the company's ability to act as kingmaker can only distort - or even pervert - the market in the longterm.

    Nevertheless, it's hard to see how this situation can change. Thanks to WeChat, Tencent's mobile power is already dominant and anyways, Chinese business mentality is more about preferred partners than meritocracy.

    One company with the muscle - if not yet the expertise - to take on Tencent is ecommerce giant Alibaba.

    It made its mark on ChinaJoy 2014 announcing a $120 million investment in US-Chinese mobile-PC F2P publisher Kabam.

    Clearly, the deal is better for Kabam, which gains cash and another heavily promoted channel to access the Chinese market. Although whether it needs more access to the Chinese market is open to question, given its existing massive global success, notably with western brands such as The Hobbit and Fast & Furious.

    Still, if nothing else, the deal enables Alibaba to demonstrate its continued interest in mobile games, as well as providing it with high quality games to promote through its channels. It's now trying to build up a platform business, combining its Alipay payment service with app distribution, although there's been little mention of that in recent months.

    To actively take on Tencent, however, it will need to spend bigger and closer to home.

  • 7 Big boss - his power, platitudes and new clothes

    In comparison to western developers, there are two diverse (but related) cultural differences in the way Chinese mobile developers operate and position their business.

    The first is the absolute power of the CEO within their organisation.

    In many aspects of Chinese life, there are lots of people doing menial - even pointless - jobs. Even in western hotels in cities like Shanghai, each washroom will have an attendant whose role is to clean the floor and polish the taps. And it's the same for many developers. Even 'small' Chinese developers have hundreds of staff, some of who are doing tasks that either wouldn't be needed in western developers or would be done more efficiently, many by a single - albeit it much more expensive - person.

    Yet, at the head of such multi-layered organisations (in which the most talented people are not always in the higher roles), the CEO reigns supreme.

    His word is law and when he (and it almost always is 'he') asks for a jump, the reply is 'How high?'

    In some ways, this is no surprise. The past years have been ones of tremendous growth and almost all Chinese mobile game developers have found some level of success, no matter how smart (or dumb) they have been. Some CEOs have built hundred million dollar businesses on the back of sheer ambition, hard work and a Clash of Clans clone.

    In every respect, then, these are successful self-made men.

    And more generally, Chinese business culture is neither consensual or flat. It's highly hierarchical even when the boss shows signs of being attained in the Emperor's New Clothes.

    One small example occurred during the developer conference that's part of ChinaJoy 2014 when, apparently, the boss decided he didn't like the widescreen aspect ratio of some of the presentations. That resulted in junior staff calling up the next day's presenters at midnight to get them to rework their slidedecks.

    The knock-on effect was a number of mislaid presentations the following day, resulting in speakers standing silently on the stage, while minions raced from one AV desk to another trying to find their new presentations.

    The second 'very Chinese' aspect of business operations is the popularity of the company slogan, especially when referring to a new business strategy.

    As already detailed, China Unicom's WoStore has its 'Double 100' project, while publisher/developer LineKong has two statements: its 'Double Fist' strategy (it just means developing and publishing); and its '3-5-100' project - 3 years, 100 good games, while the '5' was never clearly explained. (Maybe RMB 5 million to promote each game?)

    Meantime, developer Mokylin went all-out, with a nicely-produced company booklet. Detailing the advantages of working for the company, it proclaimed "We Are Together". Still, I wonder about the more junior employees' attitude towards a photo of the executive car park, which included a Bentley, a tricked out Land Rover, a top-of-the-range BMW etc.

    Yet, this isn't to demean either the attitude of the bosses, success, car pool, or the platitudes they spout. In many ways, this just reflects a wider culture that combines the Five Year central planning of the economy, the idea that despite their billion scale the Chinese people remain one in spirit, and the requirement of unquestioning loyalty to the boss man, be he of company or Communist Party.

    Still, it will be interesting to see over the coming years how this changes in the game industry as more western culture is adopted, especially among China's thousands of small and nimble start-ups.

    Equally, as all Chinese mobile game companies have to work smarter and harder to maintain their growth, it will also be fascinating to see if the absolute power of the CEO comes under pressure - notably from shareholders - if results are less positive than they have previously been.

  • 8 Will developer talent out?

    The biggest structural shift in western game development in recent years has been the explosion in small, independent studios.

    As the retail games business declined, so many 'hundred headcount' studios downsized or closed, resulting in blooming of thousands of new indies. Thanks to transparent and open channels - the App Store and Google Play - these developers have had the opportunity to address a global audience on a relatively level playing field.

    The result is the current UA bottleneck (or should that be 'walletneck'?)

    Indeed, their biggest concern hasn't been barriers to entry but a lack of barriers to entry as too many games chase too few paying (or playing customers).

    The situation in China is different. Certainly there are a lot of indie studios, but they are more inexperienced and haven't developed the same community spirit; perhaps due to the sheer scale of the country.

    A more significant issue, however, is the fragmentation of the key Android ecosystem, which is now closely controlled by a small number of key companies - Tencent, Baidu, 360, UC Browser etc. This lack of a level playing field has made it much harder for innovation to occur, and has resulted in many of these indies looking for their breakthrough in markets outside of China, whether that be Taiwan, Korea or the US.

    Indeed, even some of the relatively large and successful developers have an open distain for the current set up of the Chinese Android ecosystem: its fragmentation and its gatekeepers. For that reason, the App Store remains the #1 app store in China. Despite the relatively small install base of iOS devices, they are the most easiest audience in terms of accessing a high revenue audience without selling your soul.

    In the long run, though, for the Chinese mobile game market to reach its full potential, the key distribution players are going to have to come up with ways of ensuring the small indies get the opportunity to get their crazy, passionate games to market, and the opportunity to be justly rewarded in terms of a share of the revenue.

Contributing Editor

A Pocket Gamer co-founder, Jon is Contributing Editor at which means he acts like a slightly confused uncle who's forgotten where he's left his glasses. As well as letters and cameras, he likes imaginary numbers and legumes.