Seekingalpha.com had an interesting article recently that discussed some key points on how western game studios can best establish themselves in the Chinese market, particularly pointing out some of the pitfalls that come with establishing companies in a new market. I thought the following points were especially interesting to read. Take point 2. particularly closely, as this one reaches into all areas of foreign investment and business establishment in China:
1. In addition to the major players the author mentions, other publicly listed companies that deserve a mention are Tencent, the leader in the casual games space with its QQ Game platform, and CDC Games, who have been quite successful operating "Yulgang" through their 17game subsidiary. They also recently announced that they have licensed the MMOG, "Lord of the Rings" [LOTR], which should launch in China later in 2007 or early 2008.
2. One of the reasons why the western publishers such as Electronic Arts (ERTS) struggle in China is that due to regulatory issues they can't directly publish online games so they need to work with a local partner. Korean companies such as NC Soft who have licensed numerous games to Chinese companies are worth looking at. The game consoles (ie: Microsoft's (MSFT) Xbox, Sony's (SNE) PS3 etc) has too many issues at this point (regulatory, piracy, business model) so the market will continue to be PC-game dominated for the foreseeable future.
3. A big issue for the Chinese games industry is the shortage of quality game developers, especially game designers, and low level of game developer education. While Netease (NTES) has been successful at developing their own 2D/ 2.5D titles no Chinese company has managed to develop a quality 3D title. Imitation still rules over innovation with many copycat games being developed.
4. I would expect all of the Chinese game companies, including Netease, to license foreign titles in the future. This is partly due to the poor state of the local game development industry as mentioned above, and also because WoW has shown that a lot of money can be made from licensing a blockbuster title even if royalties have to be paid out to a foreign party. Due to the risk averse nature of many of these companies they will try to secure western titles that have reached open beta testing or have already launched in the west, or are being developed by famous developers who already have a track record. While this lowers their risk it also means that they will likely have to pay higher licensing and royalties for these titles.
5. Expect to see more games operated on a "play for free, pay for items" model compared to the traditional subscription model. The Korean games industry has already moved in this direction and Shanda (SNDA) and CDC Games/ 17game have shown that it is a viable model in China.
The9 (NCTY) has had a good run with WoW and has licensed numerous upcoming titles but it is not obvious how a company that has essentially been operating one game could expect to be successfully operating up to six games within the next 18-24 months. Their strategy may be more to do with "locking up" as many of these titles as possible. While this may suit The9 it isn't good for their licensing partners, which makes them a poor "Chinese partner of choice".