Online gaming in China is turning into big business. Leading game operator, Shanda pulled in close to USD 50 million in revenues last year, and gamers spend so much time online that they generate hundreds of millions of dollars in access fees.
As the pie gets larger, online game developers and operators are battling for supremacy with a ferocity matched only by the gamers themselves online. This competition took a new turn as Shanghai-based Shanda launched a new version of 'Legend of Mir II', a game it had previously licensed from Korean game-publisher, Actoz.
'Legend of Mir II' had become one of the most popular Massively Multiplayer Online Games (MMOGs) in China, attracting up to 650,000 simultaneous users during peak times. In order to support this level of traffic, Shanda has set up over 3,000 PC servers in over 30 cities across China.
Despite the success of the game, problems between the two companies emerged when pirated versions of the game's server end programs began to pop up in China allowing gamers to play the networked game without paying Shanda. Shanda blamed Actoz for accidentally leaking out the programs to China, threatening Shanda's exclusive distributor status and its revenues. When Shanda delayed its payment to Actoz for two months in response, the publisher announced that it would terminate its distribution relationship with Shanda on January 24th.
After investing RMB 40 million in an R&D center to develop games in-house, Shanda was ready to go it alone, and on February 17, it announced that it would launch 'The New Legend of Mir II.' The new game is set to go into trials by the end of May.
The launch of the new game raises questions about intellectual property, especially since the games are to be so similar that gamers will be able to transfer their characters from the old Legend of Mir developed by Actoz to the new Shanda version. However, Shanda claims that they have never had access to Actoz source code and that the new game represents their own intellectual property.
If government backing is any indication, Shanda will win any fight over IPR as representatives from the Ministry of Culture, the Shanghai Information Office, and the State Press and Publication Administration all attended Shanda's press conference announcing the planned launch of the new game.
The stakes for Shanda and Actoz are high as they compete with a crowded field of other game developers and operators. Nasdaq-listed Internet portal, Sina, has entered the market through a JV with NC Soft, one of South Korea's largest online gaming software firms. The JV will be the exclusive distributor of NC Soft's products in China and has launched its first game, called "Lineage", which has proven very successful in South Korea. Netease is also active in the market and has launched "Journey to the West", an online game developed in-house.
Whereas traditional games have suffered from rampant piracy in China, online games, especially MMOGs based around massive online communities, are piracy-proof and generate an ongoing revenue stream for operators. The three major sources of revenues for gaming operators are sales of prepaid cards, revenue sharing with ISPs, and online advertising. The majority of revenues come from prepaid card sales, which provide users with credits in order to play the game and purchase virtual items within the game itself. Some game operators also have revenue sharing agreements with ISPs and telecom operators in which they receive a percentage of the revenues from traffic generated by their online gamers. For example, as early as 1999, Beijing-based game operator Our Game signed a revenue sharing deal with Beijing Telecom to split revenues generated through '169' dial-up fees. In comparison with prepaid card sales and revenue sharing, revenues from online advertising have been very limited.
Even as they share revenues with leading game operators, ISP and telecom operators remain the major beneficiary of the growth in online gaming as MMOGs extend the time people spend online, thereby boosting their Internet access business. In addition, web hosting fees paid by gaming operators are a major source of revenue for telecom operators' IDC business. Chongqing Telecom claimed that over 60% of narrowband Internet access is accounted for by online gaming. The boom in Internet cafés driven by online gaming has also fueled the growth of the leased line business. For example, in 2001 online gaming generated some USD 5 million in revenues for Chongqing Telecom alone through web hosting, leased line and dial-up access fees.
