'The China Angle': A Risky Business

The latest edition of Gamasutra's regular 'The China Angle' column sees Pacific Epoch's Shang Koo discussing the Chinese government cracking down on gambling/virtual currency trading, Netease's results, testing for Korean MMOFPS Sudden Attack Online, and Shanda's offline plans. Ministries Crack Down On Online Gambling China's instant messaging and Internet portal behemoth Tencent was the center of attention in China last week as Chinese government ministries announced plans to restrain online gambling and virtual currency trading in China. China's Ministry of Public Security (MPS), Ministry of Culture (MOC), Ministry of Information Industry (MII) and General Administration of Press and Publications (GAPP) jointly announced on February 25 that the government will inspect and regulate online games that involve gambling in the next three months. The ministries will forbid game operators from charging virtual currency commissions on gambling winnings from online games and forbid players from transferring game points between game accounts. Ministry of Culture is the leader in frowning upon gambling in China for moral reasons, thus gambling is illegal in China, with the exception of state operated lottery systems. Unorganized gambling thrived for decades, but even (especially) retirees have found their way online to China's online casual game platforms for online Mahjong games. Tencent, with the largest online casual game platform and the most widely used virtual currency, have received most of the media attention over the ministries' announcements, but the company's game platform has already been modified to meet the new standards. Tencent's Q Coins have been accused of affecting China's currency management regulations. There are over 100 million active Q coin users, many of whom sell Q coins for profits, according to an insider from People's Bank of China. One Q coin is sold for one Yuan on Tencent's site, and can be traded on third party sites at a discount. Q coins are used to purchase game points, which are in turn used to "bet" in skill based games. Until recently, Tencent also allowed its gamers to convert game coins into Q coins, but has discontinued the service in anticipation of the government rulings. Tencent has also shifted its charging method for skill based casual games from commissions on winnings to flat table fees. The Chinese government also plans to prohibit trading of virtual currencies on third party trading platforms, According to another joint announcement from the People's Bank of China, Ministry of Information Industry (MII), Ministry of Culture and Ministry of Public Security. Virtual currencies will still be able to be sent between individual users. Netease Earnings Beat, But All Eyes On New Game China's largest online game company by users Netease (Nasdaq: NTES) released 2006 fourth quarter results recently. Netease's fourth quarter revenues were US$69.2 million, a decrease of 5.5 percent from $72.4 million in the previous quarter. Netease's online game revenues were $57.9 million for the quarter, down 3.5 percent from the previous quarter, but considerably better than its earlier guidance of 6 to 9 percent decrease quarter on quarter. Netease' flagship game Fantasy Westward Journey hit a road bump in the third quarter, but has steadily regained lost users in the fourth quarter, recording new peak concurrent user number of 1,335,000 in late December. Even with the resurgence of Fantasy Westward Journey, investors continue to take a wait and see attitude as Netease launches its first 3D MMORPG Tian Xia 2. Netease announced Tian Xia 2 in August 2004. In April 2005, Netease said that it would start closed beta for Tian Xia 2 in August of that year, but the game did not start closed beta until the end of December 2006. Tian Xia 2 started unlimited open beta testing on March 1, but Netease has only opened 16 server groups for the game - a relatively low number for China's MMORPG market that tends to see over 100,000 peak concurrent users or more on the first day of open beta testing for a new game. So far, user reaction has been positive, although many have complained about log-in problems and long queue times. CCP Tests MMOFPS China Communication Company's online game subsidiary China Cyber Port (CCP) started open beta testing of Korean MMOFPS Sudden Attack Online in China recently. Sudden Attack was developed by Korean game company GameHi and is one of the most popular FPS games in Korea. Other game operators are anxiously watching the performance of Sudden Attack, hoping the game gains traction against Valve's Counter-Strike, which has a monopolistic hold on China's FPS market. Counter-Strike continues to record around 100,000 peak users on Shanda's LAN game network Haofang. Sudden Attack recorded 7,000 peak concurrent users (PCU) during the Chinese New Year holiday, according to Chinese online game portal 17173. And Now For Something Completely Different Online game company Shanda is looking to steal some of the shine from Chinese test preparation and training company New Oriental, which has been the darling of Wall Street the last few months. Shanda is branching into offline education, as its online literature site Qidian (www.cmfu.com) partnered with the Shanghai Academy of Social Sciences and the Union of Shanghai Writers to offer offline training courses to online novelists starting in April. Enrollment for the first sessions will be limited to 40 writers. The training sessions last 40 days and costs 21,000 Yuan (8 Yuan = US$1) per student. Hong Kong based financial information provider Finet Group announced last Monday that it is seeking investment opportunities in China’s Internet industry. Finet Group said it is currently in negotiations to acquire a Chinese online game company. Finet Group acquired a 50 percent stake in China Business Press Release Newswire last November. Finet Group runs the financial information portal E-finet.com. In a completely unrelated event, a day after Finet Group announced its planned expansion from financial information services to online games, China's domestic stock market indexes fell nearly 10 percent. China's stock market gained around 150 percent in 2006. It is still unclear which is more overheated in China - online games or stocks. [Shang Koo is an editor at Shanghai-based Pacific Epoch, and oversees research and daily news content on China's new media industries, with a concentration in online games. Pacific Epoch itself provides investment and trade news and publishes a number of subscription products regarding the Chinese technology market. Readers wanting to contact him can e-mail [email protected].]