South Korea has for years been considered the capital of online gaming in Asia, if not the world. Both its culture and technological infrastructure have created a country that is one of the most amenable to playing computer games. Over the last five years, a new online gaming giant has been born in nearby China. And although China lacks South Korea's gaming culture, where the best players are treated like sports stars, it already has a huge market that is growing at a phenomenal rate. Within six months, it is expected that the revenue from China's online gaming market will overtake South Korea's annual revenue of US$940 million; and in a few years the number of Chinese people who spend their time online as an elf, orc or wizard will be close to South Korea's real population of 48 million people.

The size of the online gaming market in China is all the more surprising considering how new it is. According to iResearch, a company that specialises in analysing China's Internet industries, over the last five years the number of online gamers has rocketed from 5 million to 31 million. There's been a change in culture too: in 2001 only half a percent of online gamers paid to play their games; now 60 percent of gamers pay for their thrills. As the millions of online gamers grow, so too will the number of paying customers, with iResearch predicting a market worth a staggering RMB14.3 billion in 2010.

Unlike in other countries, where there are a variety of online and offline gaming platforms, in China PC-based online gaming is completely dominant. This is because there are no consoles, since big companies like Nintendo and Sony have been reluctant to release their game platforms for fear of losing out to China's widespread piracy. For the PC, online games provide software houses with a welcome antidote to piracy, because the revenue does not primarily come from selling the software itself, but from the subscriptions that players pay to have access to the games' servers.

Adventures in foreign lands

The most popular games are MMORPGs, which stands for "massively multiplayer online role playing game". These fantasy adventures, where players work together to complete quests in a shared online world, make up about 80 percent of the gaming market and have been an enormous boon to foreign software houses. Game development in China is very much an industry in its infancy, which has allowed foreign software houses to enter the market with games that are of a much higher quality than what is produced domestically - games that have often proven to be successful elsewhere. In fact, the vast majority of MMORGs are foreign-made. The country that has the most games in China is South Korea. Japan, America and Europe are also well represented.

Although there is a lot of potential for foreign game developers to profit from China's game hungry population, entering the market is not straightforward. "The Chinese government has strict regulations against foreign online gaming vendors entering the Chinese market directly," says Bryan Yuan, a senior analyst at IDC China. "Online gaming belongs to the Internet publishing industry, and the government hasn't opened it up thoroughly to foreign software publishers." Yuan, who headed a major report into online gaming, also says that there is a limit to how many foreign games are allowed into the country.

An unequal alliance

So that foreign companies can enter the market, a particular business model has emerged: foreign software houses license their game to a Chinese company which takes on the responsibility of the game's operation in China. The most famous of these relationships is between the American company Blizzard Entertainment - the company behind the extremely successful World of Warcraft - and Shanghai's The9. Whenever a foreign company announces that it is entering the market, the announcement about who will operate their games is never far behind.

Each side of the partnership benefits differently. By having the Chinese company operate the game, the foreign partner is relieved of a huge logistical task that often requires hundreds of staff to ensure that the game's servers run smoothly, and to provide the 24-hour support that customers expect.

The Chinese partner also takes care of marketing the game. "Consumer preferences are diverse across China depending on province, city, and so on. Thus a local partner who is attuned to rapidly changing market conditions can help effectively bring a game to market. An effective local partner will not only help localize the game linguistically but will also culturally localize the game so that it will appeal more to Chinese gamers," says Allion Luong, managing director of Pearl Research, a market intelligence company that focuses on providing information on online gaming in Asia.

The main benefit in operating a game for the Chinese partner is that they get to profit from high-quality games without having to undertake the development themselves, which is costly, time-consuming and risky. In an already crowded market, there is simply no space for mediocre games which are unable to compete with the foreign products that are available.

This can only be considered as a short-term strategy. As time goes by, it is likely that the government will ease the restrictions on foreign companies operating games in China, and they will be able to enter the market directly. By then, they may well feel comfortable enough with the Chinese market, and the regulations that govern it, to operate games on their own, without a partner. If this occurs, Chinese partners would find their core gaming business taken away from them, which is why developing their own games must be a top priority for every Chinese operator.

Home entertainment

There have been some successful Chinese developed games, such as NetEase's Westward Journey games, which for several years have been some of China's most popular in terms of usage. But generally, Chinese games are criticised for simply being not much fun. Whilst acknowledging the current importance of foreign games, Yuan is optimistic about the prospects of Chinese-developed games: "Home-grown games are going to perform better as more and more self-developed games enter the charge phase. Among Western online games, Dungeons & Dragons and Dark and Light promise to be successful, and World of Warcraft is expected to maintain excellent performance in 2006. With the entry of Dark and Light and others, Japanese games are expected to make a successful comeback. Korean games, on the other hand, may plateau with too many blockbusters crowding into China. What is predictable is that unless some overseas games achieve what World of Warcraft accomplished in 2005, the share of home-grown online games will continue to rise in the future."

What is affecting the operators of both foreign and Chinese games is the bite of increased competition. It has become a top-heavy market where a few companies win big, to the detriment of the majority. "The companies in the top five are making money," Luong explains. "However, some of the smaller players are struggling, due to intense competition which results in fewer gamer dollars to compete for. In addition, the glut of games on the market results in higher costs for game operators, as they must aggressively promote their games to distinguish them from others on the market."

Although a strong presence of foreign games has provided the Chinese gamer with offerings of a quality they would not have access to otherwise, it has left Chinese operators in a state of dependency on foreign developers. Hitherto, foreign developers and their games have dominated the market. But the biggest winners are in the future. Any Chinese developer that releases a blockbuster will accrue the greatest profits, since they will no longer need to pay sizeable royalties for a licence. Developing games may be risky, but there is no better time for Chinese developers to take that risk than now, whilst they are cash-rich from running foreign games.