JULY 14 , 2007 • In recent years, a great deal of lip service has been paid to the Eastern Asian markets, most notably China and South Korea. Yet it is important to realize that the game market in East Asian countries have as many unique attributes as similarities. This is especially true of comparisons with the market in Japan. This article will present East Asian markets in a larger context, and put each country in perspective by comparing it with other markets to draw parallels and contrasts.
General Characteristics of the Asian Market
While online games have taken off on a worldwide basis, Asia has become the leading region for online games. By 2003 the leading market for online games was South Korea, followed by China and Taiwan. These are countries that have never had a significant video game console business in the way the United States or Japan did. Asian market growth, indeed growth anywhere, is closely tied to growing broadband penetration. Broadband penetration in South Korea is the highest in the world at over 75%. Hong Kong, Taiwan and Singapore also have high broadband penetration. Meanwhile, Japan and China are seeing rapid increases in both broadband penetration and online game usage
The Asian market (outside of Japan) has worked on more of a pay-per-play model then the rest of the world. Much of the usage is done at Internet cafes (called PC Bangs in Korea) where usage is charged by the hour. The key metric for many Asian online games is “concurrent users,” which is the number of people using a service at any given time. The Asian market specializes in getting consumers to pay small sums (often pennies) that add up to significant revenue because of high volume. However, the growing broadband penetration means more at home users and that is expanding the business model opportunities. In South Korea and other Asian markets, companies have had some significant success with selling game items. These “micro-transactions” include custom characters (avatars), weapons and equipment
All types of online game products do well in Asia, but massively multiplayer online games (MMOGs) have had the greatest success. Since 2001, over 50% of the revenue for MMOG games is estimated to come from the Asia-Pacific region, not including Japan. It was only in 2006 that the combined markets of North America, Europe and Japan surpassed East Asia in MMOG revenue. Of course, this was driven almost solely by the massive success of World of Warcraft.
The big challenge for East Asian companies will be fighting for room to grow. The MMOG market is starting to appear saturated. South Korea and Taiwan are the most mature market for online games. The number of online gamers in South Korea is expected to increase from 20 million in 2003 to only 24 million in 2012. In Taiwan the number of online gamers is expected to go from about 9 million in 2003 to 11 million by 2012. This leaves China as the major growth area for East Asia. The number of online gamers in China is expected to grow from about 40 million in 2006 to over 75 million by 2012.
Given this environment the core issues become: 1) can Western companies bring their products to East Asia and 2) will East Asia companies ever find success outside their home territory. It has been very hard for companies to bring game products from the Western market into Asia. Success in Asia requires a partnership with an Asianbased company. It also requires that products be localized to the specific country or region. To try and accomplish these goals, companies often try and find a partner in each specific country. Meanwhile, East Asia companies are trying to find a way to expand on an international basis.
East Asia vs. Japan
The Far East basically breaks down into two groups: Japan and the rest of Asia. China and Korea share only a few characteristics of the Japanese market. The cartooning style known as anime that is a dominant cultural trope in Japan is very popular in both China and Korea as well. This flavors the way a lot of games look. There is another style/cultural trend known as ‘cute’ aka Q that has roots in a lot of the Japanese Pokemon and Hello Kitty series, and other teenage girl products.
Beyond the surface similarities, there is not much that the Japanese and East Asia markets have in common. The video game industry has deep roots in Japan: there has been a console industry in Japan since the 1970s and the latest products often debut in Japan. In fact, consoles almost completely dominate the market; PC gaming has never really caught on. Online gaming, especially of the MMOG variety, has not become the dominant mode of play as it has in many parts of Asia. In short, most comparisons between the Japanese and East Asia game industries are unlikely to be of much use.
On the other hand, Japan does set the trends for much of Asia (kind of like Paris and the west). However, it is important to realize that much of Asia, still harbors lingering resentments against Japan over World War II. One measure of the antipathy towards Japan is the lack of success of most Japanese game developers in China and Korea. Many Japanese game developers have had better success in Western markets than in other parts of Asia. Some of this can be chalked up to resentment of Japan. Of course, it is also true that the PC MMOG world is a very different design paradigm from the standalone console paradigm that has dominated Japan.
China vs. Asia
China is much more like the rest of Asia than it is with Japan and the West. However, there are two main differences to note. One is that the “Asian tigers” surrounding China are more economically developed than China. Despite China’s astounding growth and coming eminence, 25 years ago it was still a mostly agrarian society with few cars.
One key difference from, say, Hong Kong or Korea, is that China’s cities are much less technologically advanced than Hong Kong or Seoul. The other is that China’s governmental systems are very different from Korea’s or Taiwan’s. The Chinese government has much more political and economic control than the rest of the oft-cited comparable governments in the Far East.
China vs. Korea
South Korea is the most frequently cited comparable for China. Despite Korea’s more advanced economic development, different political system, exponentially higher total population density, and far more advanced Internet infrastructure, it is hard to dispute that the market in Korea is, in fact, probably the most similar to the Chinese market.
The key lies in how one views the Chinese and Korean demographic breakdown. Viewed through a national lens, the two countries are startlingly different. Only 35% of Chinese live in cities versus 85% of Koreans. The average Korean population density is 425 people per square km. The average Chinese population density is 121 people per square km. However, a closer look at the Chinese yields some amazing information.
Basically 80% of the population lives in 21.7% of China’s actual land. This 21.7% of the country is actually denser than South Korea, 445 to 425 people/sq.km. So, it is to that country-within-a-country that Korea is comparable. The key take away is that certain conditions are found in both China and Korea: relatively low disposable income, rampant piracy, large urban populations. This led to similar Internet and gaming access mechanisms: Internet cafes, prepaid cards, MMOGs. And, of course, whenever a Korean company begins to make money doing something, Chinese, companies take that revenue, multiply it by 20 and write a business plan. Thus, when Lineage was launched by NCsoft in 1998 and took off, Chinese gaming companies sprang up.
It is important to note, however, that Lineage and Lineage II have not been that huge in China. In short, some of the same general ideas that work in Korea also work in China: pay-to-play MMOGs, pay-for-items, casual games, etc. However, the differences in scale, government intervention, and income levels means that actual implementations in China will be vastly different from those in Korea. Furthermore, just because a product is successful in one of those markets is not a guarantee it will be successful in the other.
Following the example of its little stepbrother, Korea, game companies began to spring up in China in 1999, distributing MMOGs through thousands of Internet cafes in China’s cities. These games prospered as standalone games floundered. To date, any game that does not require an Internet connection to play has been commercially unsuccessful, as Sony found out with its abortive attempt to introduce the PlaysStation 2 console.
Rumors abound that several million consoles exist in China. FIFA Soccer, Counterstrike, and other games are known to be incredibly popular. These console systems have been modified (“modded”) with special chips that allow them to play pirated games. The upshot is that piracy has eliminated the profitability of almost all console game software in China as 100 games can cost as little as $1. One notable exception is Nintendo’s iQue mini-console, an N64 stuffed into a controller. Standalone PC games like The Sims have proven equally as susceptible to rampant piracy as their console brethren. As such, standalone PC games make very little money.
Therefore, online games, with distinctly Chinese business models, have gained ascendancy. There are three types of online games that have generated revenue in China (as well as the rest of East Asia). They are Massively Multiplayer Online Games (MMOGs), so-called casual games, and mobile games. The largest portion of the market is MMOGs. However, a major focus of growth is on what is called “casual games.” It should be pointed out that when a company in China or Korea is talking about casual games, they are usually describing the action, sports and racing games popular on console systems in the Western world. In the Western markets, the term casual games usually refers to the free puzzle type products popular on sites like EA’s Pogo.com.
In 2005 the CEO of China’s leading game company Shanda (with about $200 million in revenue) estimated that casual games would provide 50% of his company’s revenue in the near future (up from 21% that year). However, in 2006 revenue from casual games was actually down 25% to only about 18% of revenue.
Because of piracy issues, the market for casual games in East Asia has generally been limited to a virtual item model where the basic game play is free and revenue is generated from the sell of enhancement items that increase player capabilities. The success of products like Nexon’s Kart Rider show that this is a growing area. Nevertheless, for the leading Korean and Chinese companies like NCsoft and Shanda, MMOGs still provide the large bulk of revenue.
The console system manufacturers are putting their biggest focus on South Korea. Microsoft and Sony have had a strong presence in South Korea for several years. Nintendo setup a Korean division in 2006 and the Nintendo DS launched in January 2007 and the PlayStation 3 launched in Korea this month. Both systems are putting a major focus on online games, the DS via wireless and the PS3 through Korea’s powerful broadband infrastructure. However, they are launching into a South Korean console game market that was actually down significantly in 2006 to only about $150 million.
In short, it is important to watch the markets in East Asia. However, it is necessary to understand the differences between markets and avoid being caught up in the hype. China is the major growth market in the region. The problem is that for most Western companies China’s growth is meaningless to their bottom line. It is easy to say China is a great emerging opportunity, but actually making money in the Chinese market is an entirely different beast.
