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A Journal of a GameMaster (GM), an IMMortal (IMM), and a DungeonMaster (DM).

Mother becomes addicted to Internet, elopes with cyber boyfriend
Here's another. The negative effects of the Internet (and online gaming). Sad but true. And I was a victim for many times already before.

Source: The Korea Herald
(April 21, 2004)

Korean developers flourish in Middle Kingdom, but forced to go on defense

For the past three decades, countless foreign companies have seized upon the huge China market - and struggled to make a small dent.

But with minimal fanfare, Korean online game companies have grabbed China on a scale and speed that has few parallels.

By 2003, less than five years after their arrival in China, the Korean companies controlled more than 70 percent of the Chinese online game market last year in terms of revenue, according to the government-run Korea Game Development and Promotion Institute.

Of the 74 online games operated in China by the 38 service providers through April of last year, Korean games accounted for 36 of the titles, with "Mu," "Legend of Mir," "Navy Field" and "Fortress" finishing among the top five in popularity.

"China's current situation is similar to what Korea's was at the late 1990s, where the rapid spread of high-speed Internet secured the supremacy of online games over PC and console-based games," said Lee Soo-jin, a Chinese market expert at the game development institute.

"Being the most mature operators of the online game sector in the world with nearly a decade of experience, Korean companies were in a position to develop a brand new foreign market at their advantage," said Lee.

While the rapid ascent suggests a case study on how foreign companies can grab the elusive China market, it is also shaping up to be a litmus test of how much success Chinese officials will tolerate by outsiders against local interests.

China plans to announce new guidelines next month that will boost Chinese game companies. The guidelines are expected to corral the Korean companies, limiting their scope in one of the most dynamic areas that any Korean industry is enjoying in China.

Revenue stream

China is the Korean game industry's largest foreign market, accounting for 30 percent of its total exports and more than 53 percent of the exports of online game products. The KGDPI estimates the foreign revenue of Korean online and mobile game companies will reach $270 million this year, a jump from last year's $210 million.

Although figures vary depending on sorting methods, as some survey conductors include mobile games and network PC games as part of the online sector, it is estimated that China's online game industry generated more than $157 million in revenue last year. The number is expected to jump 26.9 percent by the end of the year to $199 million, according to a report by Chinese consulting firm CCW Research.

It is difficult to guess how much the Korean game companies collectively earned in China last year since many of them avoid releasing specific figures, citing their sensitive relationships with local business partners and state authorities. However, Lee estimates that Korean companies earned around $150 million in China and Taiwan in the sectors of the online game and closely related mobile game industry.

The extensive success of Korean game software developers mostly lies in China's rapid increase in Internet users. More than 22 million Chinese subscribed for Internet access last year, pushing the number of online users close to 70 million. The number of China's Internet users is expected to pass 150 million by 2006, overtaking the United States as the world leader.

Riding on a tidal wave of Internet connections, online gaming in China has grown at an annual rate of 160 percent since 2001, with the number of subscribers passing the 14 million mark last year, a nearly 60 percent increase from 2002. But with China's low per capita broadband penetration, only 17 million in 2003, the game industry is still in its adolescent stages..

Online games also seem to have a substantial advantage in distribution. With the games running on computer servers and fees collected from pre-paid billing cards, the Korean software developers do not have to worry about selling compact discs and game cartridges or building local distribution networks. This frees the Korean companies from piracy and inventory worries, two factors that have haunted other foreign businesses in China.

Korean entries

Recovering from disappointing performances in the U.S. and Japan in the late 1990s, Actoz Soft was the first Korean software developer to enter China, agreeing to sell its role-playing game "1000 years" to local Website Asia Game.com in 2001.

"1000 years" became an instant success, garnering more than 1 million subscribers in the first five months of operation and earning the company close to 1 billion won in license fees and royalties.

China is now the company's main revenue source. Actoz Soft earned more than 33 billion won of its 46.4 billion won revenue last year in China, with its popular role-playing series "Legend of Mir" raking in 29 billion won. The company expects a 50 percent increase for Chinese sales this year.

"It could be said that the success of '1000 years' was the starting point of the fierce international competition over China's online game industry. Online games were a minor presence before that, with Taiwan's 'Stone Age' being the only to garner success," said Lee Jin-ho, director of Actoz Soft's strategic planning division.

The competition came mostly from its Korean rivals. Webzen's 3D role-playing game "Mu" was the hottest new release in China last year, racking up around 9 billion won in earnings.

Korea's largest online game company, NCsoft, which had more than 166 billion won in revenue last year, also had a solid start, with the role-playing game "Lineage" garnering more than 3 million subscribers.

NCsoft hopes that its huge success in Taiwan, which earned the company 25 billion won last year, will extend to the mainland..

Another notable competitor is Nexon, the operator of the popular online game platform "Crazy Arcade." The company exported its popular role-playing games "Asgard," "Tactical Commander" and online video game "BnB" in China last year.

Although company officials declined to give out figures of its Chinese sales, Nexon earned 10 billion won of its 65 billion won revenue last year through its overseas business in Japan and China, according to the company's report to the Financial Supervisory Service. The company expects its overseas sales to double this year.Mixed outlook Combined with the fact that the major PC and console game manufacturers, such as Sony or Microsoft, remain reluctant to commit heavily in China due to piracy and distribution concerns, industry insiders believe that the Chinese online game industry will enjoy extensive growth in the future riding the quick penetration of high-speed Internet services.

"With the Chinese government not providing licenses for console games as of yet and PC game companies falling to generate huge profits, online games are expected to be the industry standard in China, especially with the Internet population increasing as it is right now," said KGDPI's Lee.

"With distribution costs being close to the minimum, the profit margin for online game developers will stay high. The fact that most Korean role-playing games are based on historical adventures, fantasy and martial arts could also explain the Chinese consumers' quick acceptance of Korean games," she added.

However, with China's online game market growing beyond expectations, the Korean companies anticipate Chinese government protectionism.

Apparently concerned that the more than 70 domestic online game companies have just 10 percent of the market, Chinese officials are considering measures that could hinder further licensing of foreign games.

China has said that it would release administrative guidelines on the online game industry in May, with an eye toward accelerating the growth of domestic companies.

Industry insiders believe that the Chinese government will limit the activities of foreign companies without local business partners, thus forcing them to share their techonolgy advancements by establishing joint ventures. But the worst-case scenario would be a quota on the import of foreign games, according to some analysts.

This is not the first sign of intervention.

Last July, China's Ministry of Culture imposed a new regulation on "Internet culture supervision," which forces online games and all other programs transacted via the Internet to be reported to the ministry for content supervision.

The regulation virtually doubled the screening process for foreign Internet content providers, which were required to earn an ICP (Internet content provider) license from China's General Administration of Press and Publication before applying to the Culture Ministry for business approval.

Licensing, adjusting

Since last September, only to Korean online games, Actoz Soft's "A3" and Gonusoft's "Gayax," both companies with local business partnerships, were granted licenses by the Chinese government. NCsoft has not received its license for "Lineage II" as of yet.

"The Chinese government's effort to foster their domestic industry has been evident for sometime now, as it's becoming harder for foreign companies to get a license," said Park Yoo-shin, director of Webzen's international marketing division. The licenses, said Park, are being granted only to Chinese companies or joint ventures.

"It would be impossible for Korean online game companies to do business in China without forming joint ventures from now on," said KGDPI's Lee.

Anticipating the barriers, the Korean companies have formed partnerships quickly.

Actoz Soft established its joint venture, Oriental Interactive, with China's SeaRainbow Holding Corp., the operator of Asiagame.com and China's largest online game portal ourgame.com.

NHN, Korea's second-largest Internet portal group and the operator of popular online game portal Hangame, also established a joint venture with SeaRainbow Holding, which is tentatively named as Ourgame Assets.

NHN, which earned 160 billion won in revenue last year, invested 120 billion won into the venture, which is the biggest overseas investment by a Korean Internet firm ever.

Webzen is currently providing its "Mu" services through 9Webzen, a joint venture the group established with China's The9 Online. NCsoft is allied with China's most popular portal group, Sina, providing "Lineage" to Chinese players.

Dual effects

"The recent market developments in China will likely have a dual effect on the Korean companies," said analyst Lee Wang-sang at LG Securities.

"Companies such as Actoz Soft or Webzen, who established business partnerships with domestic companies and were granted licenses, will be left to collect the benefits of the rapidly growing market. The losers will be the firms that came in halfway or not at all, as licenses will be harder to get. Such is a concern for groups such as NCsoft, although striking a partnership with Sina was a smart move," he added.

Although establishing joint ventures may give Korean companies an advantage in winning licenses and allow them to be more market responsive, some fear that it could hurt their competitiveness in the long run since their core technology is transferred to Chinese software developers.

China's Shanda Networking, has enjoyed huge success in the past years as the service provider of the "Legend of Mir" series. It earned more than $97 million in revenue last year and is seeking a listing on the U.S. Nasdaq market.

But the company is being sued in a Beijing court by Actoz Soft, which claims that Shanda's role-playing game "The World of Legend" infringed on its property rights.

"The Chinese software makers are nearly reaching the level of their Korean counterparts in terms of graphic skills and other technical aspects at least in the case of the conventional 2D games. What they lack is a decent business model for generating profits, which they expect to learn from their business partnerships with Korean companies," said Lim Chang-kyu, an analyst at Samsung Investment Trust Management.

"The Korean companies' level of success in China will depend on how they build up the relationships with their Chinese partners in terms of finding business models that benefit both sides."


By Kim Tong-hyung



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