The China Angle: Chinese MMO Publishers Go Public

[In the latest of Gamasutra's regular China Angle columns, Pacific Epoch's Shang Koo looks at the latest major Chinese game companies, Giant Interactive and NetDragon, going public, with fascinating details on the big players in the Chinese MMO market.] China is receiving closer attention from Wall Street as two Chinese MMORPG developers prepare to go public next week. Shanghai based Giant Interactive will list on the New York Stock Exchange on October 31 under the ticker "GA". The company will raise over US$800 million for a market capitalization of over US$3 billion, making it the largest online game company in China. Fujian based NetDragon has filed to raise up to HK$1.42 billion (US$1=HK$7.8) on the Hong Kong stock exchange. NetDragon is expected to begin trading on November 2 under the stock ticker "8288". Giant Interactive's Prospects Giant Interactive operates the second most populous game in China, Zhengtu Online. Zhengtu was quietly launched in early 2006 but quickly gained traction, recording over 1 million peak concurrent users by May 2007. Part of the reason behind the game's success is Giant Interactive's owner Shi Yuzhu, who also runs one of the most successful health supplement business in China. Shi took the same marketing and distribution juggernaut that turned a melatonin product into one of the most recognized brands in China and applied it to online games. While marketing health supplements to seniors has some differences from marketing to gamers, China's gamers were unprepared for Zhengtu's massive marketing spending. Giant Interactive's sales and marketing spending in 2006 was nearly 20 percent of its revenues. In comparison, China's World of Warcraft operator The9 spent less than six percent of its 2007 revenues on sales and marketing while Shi's health supplement business spends around 30 percent of revenues on sales and marketing. Zhengtu Online is also reputed to be the most expensive game in China, despite using a free to play, pay for virtual items business model. The game is often the name behind wild (although likely true) stories of players selling their apartments to satiate their online game habits. Shi Yuzhu is one of the causes behind this reputation as well. Shi is an avid Zhengtu player. As the 15th richest person in China (according to the 2007 Hurun report) with over US$3.7 billion, Shi can outspend any other player in the game, setting the bar very high for anyone trying to compete in the PK-centric game. NetDragon's History, Plans NetDragon (TQ Digital) will list two days after Giant Interactive. The company is one of the oldest online game developers in China, but has only recently seen success with Eudemons Online, a 3-D MMORPG that has recorded over 570,000 peak concurrent users in China. Before Eudemons Online, Netdragon was best known for exporting its low cost MMORPGs overseas, including free to play MMORPG Conquer Online for the North American market. Near term growth for NetDragon is uncertain as user growth for Eudemons Online is leveling off. However, NetDragon has an ace in its 2008 pipeline with Heroes of Might and Magic Online, currently being co-developed with Ubisoft. Heroes of Might and Magic the PC game is Ubisoft's best selling title in China. Earlier versions of the game are ubiquitous in all Internet cafes. Yet Another Licensing Lawsuit The recent success of Chinese online game developers is casting doubt to the game licensing business in China. Aside from World of Warcraft, all other top five games operating in China were in-house developed. Operators with in house developed games don't have to depend on the developer for new content to keep the game fresh. They also don't have to worry about legal trouble from their license partners. Last week, Korean online game developer MGame announced that it has canceled its licensing contract with CDC Games (17Game) for MMORPG Yulgang. MGame said the contract was voided after CDC Games failed to pay royalty fees. CDC responded on October 17, announcing that it plans to sue MGame for breach of contract in Hong Kong. CDC claims MGame failed to offer adequate technical support and protection against pirate Yulgang servers. CDC's legal problem is the third major licensing lawsuit for China's online game industry. China's first and most popular MMORPG Legend of Mir 2 was locked in a long legal dispute for over two years as the game's operator Shanda and developers Actoz and Wemade argued over game piracy and royalty fees. Shanda eventually bought a controlling stake in Actoz and then settled with Wemade. In June of 2007, Chinese casual game operator 9you was forced to abort its public listing less than a week before listing after T3 canceled 9you's license for online dance game Audition, the most popular advanced casual game in China. Again, T3 claims it was owed royalties and 9you cried poor over lack of technical support. 9you eventually made up with T3 after agreeing to a US$45 million contract for a 2 year license extension. [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].]