Shanda Games Buys Mochi Media; Are US Game Companies Ready For The Chinese?

January 12 2010 by in Listed Firms, Online Games, Regulation, Social Gaming |View Comments

Shanda Games ($GAME) purchased Mochi Media, a flash game distribution and advertising platform, for a reported $80m. It is Shanda’s first move into the US market. Several of the other leading Chinese game firms are already operating in the US or have announced plans to enter the market. Perfect World ($PWRD) operates English versions of some of its games and already has milions of dollars per quarter in US revenue. Tencent ($HKG:0700) has invested in or purchased several studios, launched at least one Facebook game and is planning to launch localized versions of its MMOs in the US. Netease ($NTES) has said they are coming into the market as well.

These are fast-growing, extremely profitable companies with hundreds of millions of dollars or more in annual revenue, hundreds of millions of dollars on their balance sheets, and increasingly talented and experience online game development teams, all competing in a home market worth over $4B in 2009.  Of all the game companies in the world, the Chinese ones are the best positioned to dominate the global shift to online, social gaming driven largely by a transactional virtual item model. That is how they make their money in China, unencumbered by legacy models like consoles and retail games sales.

Meanwhile US game firms like EA ($ERTS) and Take-Two ($TTWO) are seeing their businesses decline, precipitously. They are blaming the weakness on the struggling US economy, and no doubt that has an impact. But as the economy recovers, will their traditional retail business come back, or will their customers have already moved on to US firms like Zynga and Chinese ones like Tencent? In part to stem the decline they knew was coming, EA has tried and failed several times to enter the China market; their $160m+ investment in then- World of Warcraft operator may go down in history as the single worst investment in China by a US digital media firm.

The move into the US by the Chinese firms may also increase trade frictions with the US. In October 2009 Chinese government officials explicitly stated that in addition to the existing restrictions on foreign games operating in China, “foreign investment into its lucrative online games industry” is banned.  So from a US policy perspective, assuming the US game industry lobby cares about this issue, it seems like an easy argument to make to USTR and the Congress that while China is blocking American firms from a $4B+ market (and growing 30%+/year), the Chinese are piling unrestricted into the wide open US market and have a very good chance of gaining real share.

I am not advocating a trade war. In fact, if I were advising the Chinese regulators, I would suggest that they drop the barriers. Other than WoW, I can think of no US games that would likely take meaningful share from any of the existing Chinese leaders. The Chinese firms know the market, know their gamers, and create games that the Chinese want to play. Even if Xbox were allowed in China, the current retail box sale model would get nowhere, and not just because of piracy. I have no illusions that Chinese regulators will back down, but I believe doing so would be fairly risk-free, and in fact could defuse what from a monetary perspective should be a much larger point of friction in US-China trade relations than steel grating or piping.

What do you think? Please let me know in the comments.

Related posts:

  1. What A Downgrade of Tencent Says About China’s Online Gaming Sector
  2. New Report On China’s Online Game Industry-$3.6B in 2009 Revenue, $9.2B By 2014
  3. Update On Netease and World of Warcraft in China
  4. Chinese Online Game Giant Perfect World Buys Majority Stake in US-Based Runic Games
  5. Is GAPP About To Drop The Hammer On Netease and World Of Warcraft?
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  • It is really no point to worry about.
  • so does your logic then lead to the conclusion that the US should also declare the game industry like TV, since it is media, and block Chinese participation?
  • Yes I agree with you I think it would be fairly risk-free, and would defuse what from a monetary perspective should be a much larger point of friction in US-China trade relations than steel grating or piping. Anyway nice insight.

    www.addicting-games.cc
  • Eric
    You recognize that US gaming companies would have difficulty gaining market share in China, an assertion with which I agree. Why then do you believe that Chinese gaming firms would so easily gobble up market share in the US? It's far more likely that it will take many years for Chinese gaming firms to understand the market and develop a product that will work for the US market. Chinese gaming companies' business models are extremely fine-tuned to the tastes and spending habits of Chinese consumers, and very specific types of Chinese consumers at that (unemployed young rural Chinese who spend most of their ample free time in internet cafes playing games, for example). These business models have little relevance to the US market.
  • You made good points. No question there are potential cultural pitfalls that may impede the success of chinese games in the us. but they have enough money to buy and build, and having been involved in the china game industry for almost 5 years now i can only say that the good firms are amazing in their speed of learning and in their improvement of development quality. us firms underestimate at their own risk
  • nli
    If you wanna talk about underestimating, I'll say your calling consoles and retail a "legacy" system is probably the biggest underestimation in this entire post. With all due respect, you might have been in China for too long. Those are not going away anytime soon (retail probably faster, but consoles, don't bet on it). Internet is one thing, games is another, if you wanna comment on flash games and social games, fine, but that is but the tip of the iceberg (and usually the only one you "net pundits" see).

    Oh and of course, to prove your point, you give EA and Take-Two as examples of a "systemic" problem (when it's really 2 different issues at 2 different corporations), but conveniently leave out Activision-Blizzard, Sony Computer Entertainment, NINTENDO, Capcom, Epic, Bethesda, Ubisoft, Square Enix, and more, and more, who are doing quite fine, thank you.

    Eric was absolutely right, and I'm gonna add that extra coat: Chinese developers have a LONG way before they understand, let alone be competitive, in the AAA market, which IS more lucrative (and growing year-on-year, even in '09) than the social flavor-of-the-day.

    Just making sure we understand what we're talking about here and not comparing apples and oranges, as is often the case on this topic.
  • Thanks for the comment. $4b growing to $5B in revenue for online games in
    China is substantial, and the US developers and operators all know this.

    As for the US market, you are correct that console sectors still dwarfs
    other types of gaming. But look at the growth rates in terms of both revenue
    and users. And look at where developers are going--15-30m budget console
    games are out of reach for all but a handful of developers.

    Thanks for calling me a "net pundit". I wish I could make a living as one of
    "those". I have run a game company in China and invested in several others.
    I would not want to be building or selling console games right now, even
    with other people's money.

    Are you in the console games business?
  • nli
    Here are the 2 keyphrases that are always thrown around, and you happened to say both:

    - "look at the growth rates in terms of both revenue and users" : yes. any successful new business model will obviously have an amazing growth rate; it's NEW. Do I really need to add more to this?

    - "And look at where developers are going--15-30m budget console
    games are out of reach for all but a handful of developers." : yes, and that seems to be a major source of frustration for the other developers. There's constant undertones of jealousy in many "social game" developers' argumentation, but of course no one will ever admit that (even to themselves).

    - What company do you run, are you at liberty to say ? As for my background, I happen to do both console, and social, in equal parts so far (you'd be surprised what social games I've worked on!). The main difference is whether you see the game industry as purely another industry in which to invest in and make money, or whether you recognize and appreciate it's creative and cultural value as well. If it's the latter, it's hard to take social too seriously so far, beyond the money, and even more so in China. Just like movie or music producers are rarely in it JUST for the money.
  • so does your logic then lead to the conclusion that the US should also declare the game industry like TV, since it is media, and block Chinese participation?
  • Peter
    While you acknowledge that you have no illusions that Chinese regulators will back down, you fail to acknowledge that the Chinese online game industry is regarded as part of the “media sector” by Chinese authorities and is regulated as such. As you also know, media markets around the world are typified by barriers to foreign entrants.

    When the FCC removes restrictions on foreigners desiring to own television properties in the US perhaps then the USTR can make a justifiable case for US companies desiring unimpeded access to the Chinese Online game market.
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