NYT: Are Chinese Video Game Makers a Threat to Western Operators?

An interesting blurb in the New York Times in one of the sectors still exhibiting relatively decent (non government) performance in the U.S. - video games.  Electronic Arts (ERTS) just seems to have lost its way - and judging by its stock, it seems to have missed the notice that we're in a new bull market.

• Video game publishers are gearing up to report financial results for the September quarter starting next week, but the industry is facing even more pressure in the year-end period, which will have to produce a lot of sales to make up for a long slump earlier in the year.


• Results for the quarter ended Sept. 30 are largely expected to be solid, given the release of strong titles such as "The Beatles: Rock Band," "Guitar Hero 5" and "Madden NFL." The quarter also benefitted from price reductions on game consoles.


• However, sales in the industry are still down from last year. And analysts are growing more skeptical that a strong holiday season can help the year fully recover.


• He (analyst) now expects sales of game software for the U.S. and Europe to be down 4% in 2009 from the previous year. He had previously predicted a 4% gain in sales for the period.

• According to data from the NPD Group, game software sales in the U.S. were down 12% by the end of September compared to the same period last year.

• Armed with cash from recent listings, Chinese online game makers are gearing up to play in Western markets, challenging the industry’s leaders, Electronic Arts and Activision Blizzard, on their home turf.  Having prospered at home, companies like Changyou and Shanda Games want to join China’s export machine by sending their wares abroad.


• Changyou, which raised $120 million in a Nasdaq initial public offering in April, is in the final testing stage for a martial arts multiplayer online game, Dragon Oath, for the U.S. market. It plans to start selling the game at the end of 2009 or early 2010. The company began testing the game in Europe in August.


• Many game players in the United States still prefer consoles like the Microsoft Xbox and the Sony PlayStation to online play.  However, analysts said a slow but sure shift toward online gaming, which allows for flexible formats and multiple players and can be played at Internet terminals and cellphones, is taking place and should benefit Chinese online game developers.


• “The Western markets are changing; it is a console-driven market but I think M.M.O. games are the next wave,” said Atul Bagga, an analyst at the research company ThinkEquity, referring to what are known as massively multiplayer online games. “E.A. and Take Two Interactive are strong on the console side, but online gaming is a very different animal.”

• With more than 50 million online players, China is expected to have more than 40 percent of the global market by 2011, according to Samsung Securities.


• Where Asian game operators have a head start is in their microtransaction business model, whereby players get the game free but pay small fees each time they want an upgrade for their character, like a map or a weapon. This differs from the business model in the United States and Europe, which is subscription-based.  (not sure if that business model will go over in the States)


• Analysts said Chinese computer game companies like Changyou and Perfect World have the operational expertise and business model to take on global rivals. In September, Shanda Interactive spun off its gaming unit, Shanda Games, to expand overseas.


• The U.S. console market makes up about half of the global gaming market, with console software set to bring in an estimated $26 billion in revenue in 2009, according to Samsung Securities and UBS.


• The online game sector is growing rapidly, with revenue expected to grow 21 percent to more than $13 billion in 2010, according to Samsung Securities.


• South Korean game makers like Nexon and NCsoft have had success in overseas markets, but Chinese companies may find it tougher because of the competitive landscape, high entry costs and cultural baggage.


• “The issue with most Chinese gaming companies is that the games they have are very Asian-themed, so for the Western audience it is difficult for them to associate with,” said Mr. Bagga of ThinkEquity.  Unfamiliarity with Western gamers’ tastes is also a potential pitfall for the Chinese companies in that they will have to spend much more than they do in China to promote their products in those markets.