Gaming Home turf advantage: After years of licensing foreign-made on-line games, China's internet companies are developing their own, with promising results

By Mei Fong in Guangzhou

DENG YINGFENG is finding his dream girl a little hard to handle. With saucer eyes and a short outfit, she's a real charmer -- except the lightning bolts she shoots simply aren't electrifying enough. "She's a little weak," Deng sighs.


The 32-year-old on-line game designer's fingers continue their agitated dance on the keyboard. It'll be another 12-hour working day. Every detail about this virtual heroine, and the game she's in, has to be fine-tuned before Chinese Internet portal NetEase.com launches this yet-to-be-named game in two months' time.


The stakes are high. As much as 80% of the on-line games played in Chinaare foreign-made. But now local companies are shooting some home-made bolts-- hopefully electrifying -- into the $240 million gaming arena in effortsto cut out middlemens' fees and gain market share.


NetEase, one of the most-watched stocks on Nasdaq, is developing threeoriginal games, spending between $1 million and $4 million per game.Shanghai-based game operator Shanda Networking is spending $10 million oncreating its own games. They're not alone. A survey by 17173.com, a Website that follows China's on-line game industry, shows there were 57on-line games either in operation or in the final phases of testing as ofApril this year -- out of which 18 were developed by Chinese companies,including companies in Taiwan and Hong Kong.


There are some signs that consumers are biting: Westward Journey, the firstoriginal game created by NetEase, has attracted 1.2 million subscriberssince it was launched last year. It's one of the few China-made games toregularly make the top 10 list of the most popular on-line games in China,compiled by local magazine Popsoft.


Shanda has launched one in-house game this year, called World of Legend,and plans to launch another by year's end. It'll be no small production:The company has hired award-winning film director Chen Kaige as creativeadviser, and He Xuntian, a professor at the Shanghai Music Conservatory anda contemporary of Crouching Tiger, Hidden Dragon composer Tan Dun, iscreating a full-blown orchestral score.


It's not all play. Most of the Internet portals derive anywhere from15%-30% of their revenues from gaming, and percentages are expected toincrease as demand for short messaging services (SMS), the other bigearner, slackens. At NetEase, gaming revenues make up 38% of total revenue.Though the company will continue to license foreign games, "we're stronglyfocused on developing original content," says Chief Financial Officer DennyLee.


On-line games are an important test for local Internet companies, saysDuncan Clark, managing director of telecoms-research firm BDA China. "SMSis riding a big wave by accident but it's not going to last forever," saysClark. "The challenge is to see how they can use their user-base to developfurther relationships."


Unlike stand-alone console games, on-line games are considered relativelypiracy-proof, since users have to log on to computer servers that canverify if they are paid subscribers. This accounts for the explosive growthof on-line gaming in Asia. According to tech-research firm InternationalData Corp., between 35% and 50% of Internet users in Asia are on-linegamers.


About five years ago, Chinese companies got consumers hooked on to on-linegaming by bringing in more technologically advanced products from Korea andTaiwan. The products were a hit, with Korean import Legend of Mir drawingas many as half a million players at a time. Now local operators want tocut out the high licensing fees paid to foreign partners, which can be asmuch as 50% of profits. NetEase says it has paid between $1 million and $2million up front for the rights to operate popular imports, plus a 30%share of the annual profits for each game. That's "a lot," consideringplayers only pay about $0.03 per hour to play, says Lee.


More than that, by generating their own products, operators own the game'ssource code, which is crucial to running the games smoothly and fixinghacker problems. Without ownership of the source code, operators have todepend on their foreign partners to fix glitches. This can take weeks, sayoperators, causing frustrated patrons to abandon the game in droves.


It won't be easy playing catch-up. In every field from cars to clothes,China has been historically better at production, not innovation. As it is,copyright piracy has stunted China's software industry. "Five years agonobody wanted to be a software engineer," says Beijing-based game designerPersy Zhang. He remembers a time when margins were shaved so thin bypiracy, he had to hand-wrap thousands of copies of his games just to saveabout 5,000 renminbi ($600) in packaging costs.


Game developers, who need to have both creative and technical skills, arein short supply even in more developed markets such as the United States.In China, companies have to invest in training their employees, spawning aclutch of what BDA China's Clark calls "Donkey Kong schools." "A lot ofwhat we do is training our staff from the ground up," says Richard Wallis,chief executive of Beijing-based Object Software. Object, a small softwarefirm that's managed to license games to big international players likeEidos, recently expanded its studio facilities by 50% to accommodatetraining of new hires.


What's more, the Chinese efforts to strike out on their own have led toacrimonious disputes with their foreign partners. Recently Shanda and itsKorean partner, Actozsoft, were locked in a bitter fight over allegationsof unpaid revenue and poor servicing. Among other things, the Koreancompany said Shanda's new in-house game, Legend, was strikingly similar toActozsoft's Legend of Mir, also distributed by Shanda. Still, both partiesrenewed their licensing agreement in September, saying profits were toogood to ignore. But as a protective measure Actozsoft has developed asecurity system that enables the company to effectively shut down a game ifa few keywords, known only to its technicians, are not input monthly. SunnyPark, Actozsoft's overseas division manager, calls this its "nuclearweapon" against defaulting partners.


The home-turf advantage is important. Making almost anything in China ischeaper, and games are no exception. Designers and graphics make up morethan 60% of the cost of developing a game. Designers are paid on average$700-900 monthly, with top-of-the-line developers commanding about $40,000per year. In contrast, U.S game developers start at about $50,000 per year,according to DigiPen Institute of Technology, a school for videogamedevelopment in Redmond, Washington.


Also, Chinese developers say they're more adept at plumbing local historyand myths, which are rich in dynastic battles, swordfights and magic -- allpopular themes in the on-line gaming world. Two of NetEase's new games arebased on the classic tale Journey to the West, which has influenced Chineseculture in much the same way the Greek Odyssey has influenced the West.Prince of Qin, a recent offering by Object Software, is loosely based onreal-life historical figures.


Since games are played in real time, operators can also incorporate localflavour into the games. For instance, during the mid-autumn festival inChina, NetEase gamers were treated to virtual mooncakes and other goodies.


Western-style themes don't always go down well with the local audience.Sony's EverQuest, a fantasy role-playing game based on medieval Europeanlegends, is a massive worldwide hit, except in China, where it has met witha tepid response since its launch last year.


Local operators also say they're more culturally attuned to consumer needs.Shanda's chief executive, Timothy Chen Tianqiao, says he's rejected gameswith cultural no-nos, such as one where players kill pandas, China'snational mascot. "That's completely unacceptable for us," he says.


Ultimately, some industry watchers say, Chinese companies don't have to tryvery hard to be creative. They already have an edge since much of anon-line game's popularity rests on the continuing customer serviceprovided, says IDC software analyst Jun-Fwu Chin. "They can provide thepersonal touch players crave," says Chin. Big gaming outfits like Shandaand NetEase maintain 24-hour call centres staffed with technicians and gamemasters to ensure that games are run smoothly and remain exciting.


One example: During a Friday afternoon, game-master Liang Zibin, 23, ispart of a crew monitoring some 120,000 people playing NetEase's WestwardJourney. Part cheerleader, part nanny, Liang coaxes and cajoles players,sending a virtual bouquet to a player who's not doing well. Then, henotices a player using "dirty language" to scold other players. With a fewkeystrokes, he blocks the profane player's broadcasting abilities. "Youmust keep customers happy," he says.


"Reprinted by permission of Far Eastern Economic Review, Copyright 2003 Dow Jones & Company, Inc. All Worldwide Rights Reserved".

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