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Welcome to the jungle: 10 challenges and opportunities in the Chinese mobile game market

GMGC 2014 raises a fist to your ear
Welcome to the jungle: 10 challenges and opportunities in the Chinese mobile game market

Every trip to China is an experience. How could it be anything else?

This is a country that's moved from being a majority rural community to the world's manufacturing hub and its second biggest economy in a generation.

it's also the world's most populous nation, making China the place with the most extreme challenges and opportunities for any industry.

In other words, the normal rules don't apply, which makes it a fascinating place to visit, even if that fascination is woven through with daily difficulties like the Beijing smog, which during the recent Global Mobile Game Congress 2014 (GMGC) was at Hazardous levels according to the World Health Organisation's scale.

This defines the level of PM2.5 particles, which are so fine they pass directly from the air in your lungs into the bloodstream.

Perhaps it's a metaphor for how Chinese developers will impact global markets in 2014...

#1: How big is big?

Unlike conferences in the west where market value is a subject reserved for VCs and analysts, in China everyone talks about the size of the local mobile games market.

Of course, no one knows exactly. There are half a dozen companies who release estimates and they all disagree: some highlight their conservative approach as if embarrassed by their low predictions, although leaving the assumption open that their rivals are getting carried away.

But what seems to be the situation is that the mobile game market grew 150 percent in 2013 to account of around 15 percent of the total Chinese game market - that's RMB 11-14 billion ($1.8-2.2 billion).

This is smaller than Japan, Korea and the US (and western Europe), but when you're in a country in which 500 million smartphone are expected to be sold over the next 12 months, things can change very quickly.

The value of China's mobile games market is expected to double in 2014 to around RMB 25 billion - that's $4 billion.

#2: Mind the gap

As previously stated, the mobile games market remains a small segment of the overall Chinese game market, which is still dominated by PC client and web online games.

Yet, with mobile games growing so quickly, the big PC games companies find themselves in a difficult situation. Browser games are cheap to develop so can be massively profitable but aren't high quality. They're already seeing their market share eaten away by mobile games.

Meanwhile, PC games are more expensive to make and operate, but their play patterns are very different to mobile games, making them a good hedge.

Either way, all PC game companies in China are struggling to deal with the rise of mobile in a manner that would make a brilliant chapter in an updated version of The Innovator's Dilemma.

This is because of interface and usage differences, it doesn't really make sense to convert even successful online PC games to mobile. Equally, expertise in PC games doesn't convert directly to mobile, although some skills - notably operational experience - are useful.

This situation underpinned many talks at GMGC 2014, with pure mobile companies such as LineKong (originally a pure PC play) telling the industry to give up on PC games, while other hybrid companies explained how they hope to run businesses that will be 50:50 in terms of their sales split.

This transition will remain the key issue for much of the Chinese game industry during 2014.

#3: How hard are you?

Related to the PC-to-mobile transition is the structural issue of which audiences Chinese mobile games are targetted at?

There was broad consensus at GMGC 2014 that mobile games are currently for casual players, but that the Chinese mobile gaming market is going to get more hardcore, partly because so many PC gaming companies are attempting to bring their hardcore PC games to mobile.

Mixed in with this is talk about building a portfolio and ensuring you're covering all genres. For example, the most successful Chinese mobile game of 2013 was LocoJoy's I AM MT, which like GungHo's Puzzle & Dragons is a card-based hardcore RPG.

So, as has happened in Japan, many Chinese developers are now accelerating development of hardcore card-collection games in the hope of breaking into this small but highly lucrative market.

#4: Be different: The growing value of IP

One of the mysteries of Chinese mobile games for non-Chinese players is the prevalence of games set in the Middle Kingdom period (aka Romance of the Three Kingdoms) and those based on the 16th century novel Journey to the West (aka Monkey).

This, combined with a volume approach to releases and the acceptance of generic characters - as pointed out in my article '43 reasons why differentiation is the key challenge for Chinese developers', makes original IP a key issue for Chinese mobile developers.

As Yinhan's CIO Xiaohui Kuang argued at GMGC 2014, "IP will be a new driving force in the market, but IP won't guarantee success.

"We need better design as well. Content design around IP will be key," he said.

"Mobile games at the moment are very light [casual], because of fragmented play time, but in future, they will be more hardcore. How can we keep these games continuously attractive? This requires better content based on IP."

On the other hand, it seems that most Chinese mobile game companies will be releasing more games in 2014 than 2013. Something has to give.

#5: Where's my plushie?

Linked to the drive for better IP is a move to create new ways to monetise games.

Partly because China has always been a free-to-play market, the latest figures suggest that 9.7 percent of Chinese mobile gamers are also payers; a percentage that's much higher than in the west.

Yet despite this and its growing userbase, the most savvy Chinese developers are thinking ahead to the wider impact that foreign brands such as Angry Birds experienced in China.

One such is Qi Lin, the CEO of online and mobile developer Youzu. At GMGC 2014, he argued, "We need to focus on the development of game IP so we can release auxiliary products.

"Chinese companies are not very good at this. But this is where the opportunities are. This is growth that isn't based on more users."

His point is that a really successful original IP game can generate significant value outside of app stores.

#6: Hanging up on operators

Because of the way the Chinese mobile and internet market has developed, the big three Chinese operators - China Mobile, China Telecom and China Unicom - have always had a lot of power in the mobile games market; much moreso than their western counterparts.

Yet at GMGC 2014, while there were speakers from the big three, particular on topics such as 4G, it appears their power in the content market is slipping, being replaced by app stores and other platforms.

Yet, they remain big beasts in the ecosystem and will likely react to try to regain their market share.

#7: House of credit cards?

Money is a big concern for Chinese mobile games companies, especially in terms of corporate development.

Surprisingly, the majority of the big PC game publishers are already listed, many on US NASDAQ exchange, although Giant Interactive was recently taken private in a buyback move; something that also looks likely to happen to Shanda Games.

China's mobile game companies aren't as big or as mature, but over the past two years, many of them have also listed, often on Chinese or the Hong Kong exchanges.

But it seems that market confidence is changing. At GMGC 2014, the VP of Shenzen-floated Ourpalm (SHE: 300315) Jia He said that Chinese game companies only had a six month window to list successfully.

"The market is cooling," he said. "2015 will be more risky. If you can't list in 2014, I think you need to look at M&A instead."

Certainly, this is an area in which Ourpalm has been active, spending over $600 million in 2013, acquiring developers Playcrab, Shang Game and Dovo.

Other companies have accessed stock exchanges in more unconventional manners.

Back in 2013, Youzu was purchased by the Shenzen-floated Susino Umbrella Company (SHE: 002174) in a deal that valued the developer at over $600 million. But since then, all its umbrella-related assets have been sold off, effectively making the deal a reverse-listing for Youzu.

Zeus Interactive has made a similar move, albeit more transparently, reverse-listing into wood flooring outfit Dalian Kemian Wood Industry (SHE: 002354) a deal worth over $400 million.

The upshot is that the corporate side of the Chinese mobile game industry is both messy and in many cases over-inflated. Companies are being bought and sold in a complex manner that says little about their underlying value.

Expect there to be plenty of pain in 2014 as the situation starts to unravel and return to proper market conditions.

#8: In the living room

There's wasn't much talk about smart TV at GMGC 2014, but there was more than I expected.

As in the west, lots of smart TVs are now being sold, but it's not clear whether consumers understand what a smart TV is, or how to use it.

Some developers were talking about the format being a filler format between browser games and mobile games, while China Telecom has a fund to encourage people to make games for smart TVs. Maybe the two issues are related.

#9: Outside the box

Given the level of growth in the Chinese market, it was interesting to hear that some Chinese developers are also looking for international growth.

Companies such as Tap4Fun, Koramgame (part of Kunlun) and IGG (see Castle Clash) are particularly focused on the low-hanging markets in southeast Asia, such as Taiwan and Macau, and Malaysia, Vietnam and Indonesia are also mentioned.

Indeed, Koramgame VP Jun Yan said it was active in South Korea and Japan. It already has a 100-strong service team in Korea and says it's generating around $4 million a month in sales outside of China.

#10: The 800lb gorilla in the room

With a market capitalisation of $130 billion, Tencent is the biggest and most powerful internet company in China.

It's not the only big player in the market, of course. There's also the likes of Alibaba, Baidu and Sina, but when it comes to games and the internet Tencent is the market leader. Indeed, it's reckoned to have around a 50 percent market share in terms of the Chinese PC games market.

And it's gunning for that sort of power in mobile games too.

As with PC games - a market it owns thanks to its QQ platform - so with mobile games, Tencent is looking to dominate the market with a platform play.

Initially this was based on its WeChat mobile messaging network (called Weixin in China). However, it's since uprated this into the Tencent Mobile Games Platform, which combines WeChat and QQ with its MyApp app store and its billing system.

The platform is expected to launch with over 40 games, mainly from thirdparty developers, although there is some concern from developers that over time Tencent will look to focus on internally-developed titles. For example, there's only one thirdparty game on WeChat at the moment, and that's EA/PopCap's Plants vs. Zombies 2.

However, their bigger concern is that they won't get onto the platform at all; meaning that Tencent has massive power in the market, even though it only has a 15 percent market share in mobile gaming.

Other companies are reacting. At GMGC 2014, Alibaba announced it was "ready for game developers and publishers" to join its competing platform, which combines the Alipay payment system and Aliyun server technologies.

Similarly, key app distributors such as Qihoo 360, Baidu and Wandoujia have significant market share that they're not going to give up without a fight. But you have think that during 2014, the success of the Chinese mobile games market - and by default its developers and publishers - will be controlled by Tencent's decisions.