The Chinese online games market has proven to be resilient in the latter half of 2008, but the outlook for 2009 remains uncertain. In Q3 2008, revenues for the top five game publishers (Shanda, Tencent, NetEase, The9, and Perfect World) were up 15% quarter-over-quarter and 63% year-over-year. These five companies generated a combined RMB 3,036 million ($433.7 million). Still, growth rates have slowed down from the 70% seen in 2007, according to Pearl Research’s latest analyses.
The overall market grew due the appreciation of the Chinese currency against the US dollar, strong new releases such as Tencent’s Dungeon and Fighter, and expansion pack updates for popular titles such as Sohu’s TLBB. Those online game publishers that under-performed (such as The9 and NetDragon) cited factors such as the seasonal impact of school summer holidays, lack of new releases, the Beijing 2008 Olympics, pirate servers, and the negative effect of the global financial crisis.
Pearl Research believes that the market is beginning to see a shift as companies with stronger game portfolios are beginning to rise above the competitors with weaker game portfolios. As a result, online game companies are rushing to acquire new licensing opportunities and to increase development capabilities—while searching for opportunities to license games to overseas game operators, especially in the U.S. and Vietnam.
Key Highlights:
• Media company Tencent achieved an exceptional third quarter with the success of its titles
Dungeon and Fighter, QQ Dancer, and online shooter Crossfire. The company grew its online
game revenues by 50% quarter-over-quarter to 679.9 million RMB ($99.7 million) as a result of
the strong performance of these titles.
With the global financial crisis, the company was expecting the fourth quarter to be weaker.
Tencent’s online advertising unit was expected to face a greater impact than its online games
unit, due to online advertising’s low average spending per user and per transaction.
• Game operator The9 (NASDAQ: NCTY), best known for operating Blizzard’s World of Warcraft in China, had a challenging quarter in Q3 2008. The company is still continuing its strategy of aggressive diversification in order to wean itself away from its dependence on World of Warcraft, which accounts for more than 90% of its revenues. It is quickly filling up its pipeline with in-house and licensed titles while preparing for the expansion pack World of Warcraft: Wrath of the Lich King. The eagerly-awaited expansion pack is expected to boost revenues for The9. Net revenues for The9 stood at 408.4 million RMB ($60.2 million), a decrease of 10% quarterover- quarter and an increase of 29% year-over-year.
• Game operator Shanda (NASDAQ:SNDA) continued play its role as the top online games company with a steady quarter of growth. The company released 42 new expansion packs for its large portfolio of games along with two new MMORPGs and two new casual games. In December 2008, the company continued to expand by investing in two webgame community operators. Revenues from casual games were RMB 119.7 million ($17.6 million), an increase of 46% year-over-year and 11% quarterover- quarter. Revenues from MMORPGs were RMB 771.8 million ($113.2 million), an increase of 40% year-over-year and 11% quarter-over-quarter.
• Chinese media company Sohu (NASDAQ: SOHU) produced a strong quarter with the help of its overseas market growth combined with the revitalization of Blade Online. The company’s flagship title, TLBB, has been licensed in Taiwan, Hong Kong, and Vietnam allowing Sohu to increase its overseas game revenue by 25% quarter-over-quarter to RMB 18.5 million ($2.7 million). A major expansion pack for the four year old game Blade Online was also released, giving the company a slight overall boost in revenues. Sohu garnered online gaming revenue of RMB 374.3 million ($54.6 million), up 330% year-on-year and 14% quarter-on-quarter. The game TLBB represented 94% of Sohu’s online games revenues.
• NetEase (NASDAQ:NTES) is continuing to ride the success of Fantasy Westward Journey series. With the recent acquisition of operating rights to Blizzard’s Starcraft 2, the company is expected to lessen its dependence on the aging Fantasy Westward Journey. During the quarter, NetEase also released Legend of Westward Journey, an item-based version of the popular Westward Journey series for open beta.
Revenues from online games were RMB 675.1 million ($99.4 million) for the third quarter of 2008, up 14% quarter-over-quarter and 44% year-over-year.
In conclusion, the Chinese online games market is starting to bifurcate. Game operators The9 and NetDragon had a difficult quarter due to their lack of new content and succumbed to the external pressures of recession and unfavorable exchange rates. Other online game companies such as Shanda and NetEase were still able to post quarterly growth increases with the help of new titles and expansion packs.
Pearl Research believes the Chinese online game industry has displayed resilience due to the free-to-play and micro-transactions business model. The low cost of micro-transactions means that users are less likely to cut back on a relatively low expense. In addition, gamers are less likely to abandon the MMORPGs to which they are loyal. However, like their US counterparts, game operators in China are tightening their belts, watching their expenses closely and planning for a slower 2009.
* * *
Allison Luong is the Founder and Managing Director of Pearl Research, where she is responsible for the overall management and strategic direction of the San Francisco- and China-based research and consulting firm. She leads Pearl Research’s ongoing analysis of the interactive entertainment, gaming, wireless, and Internet markets. She is also the executive editor of RedlineChina.com, Pearl Research’s news portal dedicated to China’s technology markets. Allison graduated from the University of California at Berkeley. You can reach her at allison.luong@casualconnect.org.
