Net game producers head for slowdown

PUBLISHED : Tuesday, 08 January, 2008, 12:00am
UPDATED : Tuesday, 08 January, 2008, 12:00am

Fewer IPOs expected from saturated market

Following breakneck growth over the past two years, the mainland's online gaming industry is expected to slow this year because of a glut of free games and as attention turns to the Beijing Olympic Games, analysts said.

As a result, investors should expect few initial public offerings this year from domestic online game developers, they said.

'There was no new star game last year,' said Bryan Yuan, an analyst at market research firm International Data Corp (IDC).

Mainland online game companies, which have actively developed original products, have relied heavily on releasing free software - particularly massively multiplayer online role-playing games (MMORPGs) - to attract new consumers and enlarge the domestic online gaming population.

'That is why we have witnessed extraordinary growth in the last two years,' Mr Yuan said. 'The first major free game, ZT Online, was launched in 2005. Nowadays, almost every new game is free.'

Industry estimates show the mainland now has about 40 million online gamers, about 40 per cent of whom are paying customers.

Dick Wei, China internet sector analyst at JP Morgan, said the impact of free games would start to wane this year.

According to JP Morgan, the domestic MMORPG segment is projected to grow 37 per cent this year to US$1.54 billion, slower than the 54 per cent growth achieved last year.

The casual gaming segment is expected to increase 43 per cent to US$293 million, down from last year's 56 per cent growth.

'Overall, [industry] growth will be driven by the usual factors, such as internet user growth, broadband penetration, economic growth and inflation,' Mr Wei said.

He also predicted that the Olympic Games could serve as a distraction for the domestic online gaming community.

'During the [football] World Cup, users spent less time on games,' he said by way of example.

Four mainland online game makers listed shares last year, raising a total of about US$1.3 billion from investors: Beijing Perfect World, which listed on the Nasdaq in New York, Kingsoft Corp on Hong Kong's main board, Giant Interactive on the New York Stock Exchange, and NetDragon on Hong Kong's Growth Enterprise Market.

Nineyou, the mainland's biggest casual games provider, is widely expected to try for an initial public offering this year after resolving differences with South Korean developer T3 and distributor Yedang. Their previous disagreements concerning the game Audition scuttled its share offer drive last year.

It was also reported that Shenzhen Domain Network, which launched the game Huaxie Online last year, would go public this year, seeking to raise about US$200 million.

Other potential initial public offering candidates from the mainland's online game sector include Shanghai Post and Telecommunications Technology's, which operates the popular game Popcart, and T2CN, which provides the game Freestyle.

In 2004, online game companies Shanda Interactive Entertainment and The9 listed shares on the Nasdaq, raising a total of US$250 million.

Mr Wei said sport-based games were expected to be a new trend in the mainland gaming sector. Leading the way is The9, which will launch Fifa Online this year on the mainland, in partnership with United States-based video game giant Electronic Arts.

Movie-related games are also seen as a growth trend. Perfect World's Chi Bi and NetDragon's Tou Ming Zhuang Online are based on movies of the same names.

'The movies help promote the games. However, they might have a shorter life cycle as the popularity of the movies fade,' said Mr Wei. 'Perfect World has the best system in place for game development. It took them only half a year to launch a new game.'

In-game advertising is also expected to pick up this year. Shanda has established a separate division for selling advertisements within online games.

New titles that are expected to be popular on the mainland this year include Audition 2 and Fantastic Melody Online from The9, Chinese Paladin Online from Nineyou, JX 3 from Kingsoft, Giant Online from Giant Interactive, and Zhuxian, Wulian 2 and Chi Bi from Perfect World.

For investors interested in the online game sector, but unsure which company to invest in, Mr Wei suggested Sohu, the mainland's second-largest online portal.

'As game companies raised a lot of money from their initial public offerings last year, they will be willing to spend huge amounts marketing their games this year,' said Mr Wei. 'Sohu will benefit as it owns the most popular game portal, Also, the success of Sohu's self-developed game TLBB is beyond industry expectations.'