Micro-Entertainment

+8* ABL Column China Japan KoreaPublished March 25, 2009 at 10:46 am Comments Off

+ This article is a monthly column written for the Chinese business magazine Asian Business Leaders and Interfax TMT News in March 2008 +

Observing the evolution of a product over a long period of time is often full of surprises: growing in size, shrinking, getting color variations, becoming cheap, expensive, trendy, out of fashion, changing business model and sometimes disappearing to be replaced by or merged into a more complex one.

Mobiles are for sure an interesting product to look at, but after meeting numerous video game companies in Japan, Korea, China and the US in the past few months, this article will look into video games.

From hardware to software

From wood, earth and stone to metal, toys have come in all shapes and forms. When two American scientists found they could make a simple game of tennis they named “Cathode-Ray Tube Amusement Device” back in 1947 , little did he know their little game would spark the creation of a multi-billion dollar industry and revolutionize the world of toys.

In 1977 , Atari released its Atari 2600 game console, which initiated console gaming as we know it.
In 1985 , twenty-six years ago, the Russian programmer Alex Pajitnov created what is possibly the most famous video game of all times: Tetris.
In 1994, Sony ventured into game consoles and its PlayStation ended up selling over 100 million units.
In 2004, Nintendo brought a new paradigm with its portable touch-screen DS console, selling also over 100 million devices.
In 2006, Nintendo again showed that video games could entertain a demographic that was not limited to young boys by launching it Wii console, selling about 50 million consoles in a mere 2 years and beating both Sony’s PS3 and Microsoft’s Xbox 360 in worldwide sales.

While Japan and Western countries were exploring the path of packaged software with dedicated hardware, Korea was following a different track.

Korea was in a special situation: as many developing economies, it suffered from rampant piracy, making console and PC game makers unlikely to promote their products. However, Korea had a special characteristic: an early deployment of broadband Internet. Some Korean game enthusiasts decided to leverage this advanced infrastructure by making online games, as the necessity of connecting to a server would prevent piracy. In 1996, Nexon released Nexus: The Kingdom of the Wind, its first 2D MMORPG, marking the beginning of a new era.

From software to service

Korea was among the first countries to take the step from packaged product to game-as-a-service. In addition to start a new paradigm in gaming – online games now represents over 75% of Korea’s entire video game market . In 2008, its market was worth over $2 billion, about $50 per Internet user. Inspired by its neighbor, China stepped into online gaming in the early 2000. Partnering at first with Korean publishers, several companies moved into creating and publishing their own games.

Could you tell which the most successful gaming companies in the world are? Activision Blizzard with World of Warcraft and Electronic Arts are the most well-known in the West but few know that in China, Shanda, Netease, Perfect World and Giant Interactive had revenue of several hundred million dollars in 2008, profit margins above 50% and market capitalization above a billion for three of them – getting close half that of industry veteran Electronic Arts. Even companies whose main business is not online gaming have ventured into it: China’s largest IM provider Tencent made close to $90 million (33% of their revenues) from online games in 3Q08 and Sohu – China’s second largest portal – is now deriving about half of its income from its gaming business. In Korea, Nexon’s games have such a global appeal that it managed to grow successfully in the US market with Maple Story, a 5 years old product, leveraging their experience and advance.

Due to the inertia of their production and distribution systems, Western and Japanese publishers have been slower in embracing this structural change. Could you name a successful Japanese online gaming company? Most large publishers missed the train and in most cases, successful players are new entrants, nimble and pragmatic.

From bills to coins to small change

While the main apparent change has been to go from offline to online, there is another key ingredient in this secret sauce: its business model in association with payment systems.

The traditional business model has been: you buy the game, it’s yours. End of story. Alright, maybe we’ll sell you a sequel. It looked more and more like movie production, with its hits and flops. This model works well when you don’t need maintenance, support and evolutions for the game. Of course, it is not viable for most online games. Korean companies initially tried to offer monthly subscriptions but the market became so competitive that customers would not pay without a trial period, and most would drop out later when asked to pay.

Instead of abandoning a game that had lost its users, several Korean companies realized many users were interested in buying in-game assets: weapons, clothes, you name it. Another shift happened: the free-to-play (also called freemium or MTG for Micro-Transaction Game) model was born. No package, no subscription, you pay when you want to in order to enhance your gaming experience.

Micro-entertainment

In March, I was in Silicon Valley meeting with various content providers developing game content on Facebook’s platform and Apple’s iPhone. If both types of publishers were generally run by just one or a few people, some of them have already grown to over a hundred staff.

Instead of products taking a year or more to produce a game like most MMOs, or weeks and months like casual games, many were creating bite-sized entertainment – some of the games produced in a matter of days. Two elements were particularly interesting:

Their revenues came from bite-sized advertising, bite-sized affiliate marketing, bite-sized direct payments. All those making money from bite-sized games offering bit-sized entertainment; or bite-size interruptions requiring bite-sized attention.
Instead of “games units sold” and “sequels” they were talking about “K-factor” (an indicator of virality for social applications), “conversion rates” (a metric familiar to direct marketers) and “A/B testing”, which describes the process of making small adjustments to design, wording or game mechanics to enhance its spreading or stickiness. The process is closer to stock trading than software publishing.

Overall, it looked like game production had moved from planning a war, with strategy and logistics, to sending special operatives with light-weight equipment who could easily react, improvise and modify plans on-the-go.

It is difficult to predict how the gaming market will be structured in a few years time, but the move to online and “social gaming” is a rather clear trend. Most packaged software publishers are having a hard time moving to online and even more integrating with social platforms. Will established players – including currently successful online game companies – be able to embrace this new change?

Sorry, the comment form is closed at this time.