China's Online Gaming Industry Strategy Management- 03 Batch Competitive Intelligence Group Presentation

AN OPPORTUNITY ANALYSIS

Contents

China's Online Gaming Industry: Porter's Diamond Model Factors Demand Related and Supporting Industries Firm Strategy, Structure, and Rivalry Recommendation Appendix

Group Details- Strategy Creators Blore

Anup Kumar Bose (eEPSM-03-004) Arindam Sarkar (eEPSM-02-004) Ashwin N Nair (eEPSM-03-005) Samayita Choudhuri (eEPSM-03-024) Shaheed Khan (eEPSM-03-026) Upal Roy (eEPSM-03-032) Venkatesh K V (eEPSM-03-033)

China's Online Gaming Industry: Porter's Diamond Model1-2

Easy access to capital Venture capitalists are actively searching for opportunities in the market

Shanda Interactive Entertainment

Operational Excellence Cultivation of Player Loyalty Franchise Building Game Development Capability Effective distribution networks

Skilled labor, capital and infrastructure Densely Populated Urban Environment Chinas One-Child Policy Education and Parental Pressure

China's Online Gaming Industry

Domestic demand Lack of Affordable Entertainment Facilities Unique Household Structure Sense of Community

Upstream: Animation and the movie industry Downstream: firms that manage the distribution and operation of game titles An Efficient Way to Become Piracy-free Neo-liberal paradigm government Tax reduction schemes in support of creative industry

Source: 1. Chung, P. & Yuan, J. (2009). Dynamics in the Online Game Industry of China: A Political Economic Analysis of Its Competitiveness, EPTIC On Line . Journal of Political Economy of Information and Communication Technologies. 2. Lei Wang.(2005) Chinas Online Gaming Industry. Thornburg Funds,Investement. 3 http://www.thornburginvestments.com/research/articles/pdfs/TH738_OnlineGame.pdf Accessed on May 07, 2011

Factors
Factors or conditions which have helped the online gaming industry in China to rise on the international platform

China has become the second largest internet user in the world and after the pre liberalization in the early 90s following domestic factors have helped the local players to perform in the international

Government regulations that limit foreign imports and transnational capital thus promoting local companies for innovation and development then promoting online games marketing in local and global market The creative industry in China has quickly adapted to global demands for online game . At most emphasis on achieving economic goals makes local new media firms concentrate on quickly achieving technology transfer and leading to acquire more R&D skills from international media companies. The innovation lies at the distribution level rather than the conceptual level Intense competition from vigorous domestic rivalry encourages innovation in product development and marketing, cost efficiency, and quality improvement, as well as efforts to explore new markets domestically and internationally Chinese online game companies gain easy capital, especially those that are listed on overseas stock markets. These companies have adequate financial resources for corporate development and expansion. Combination of the online game industry with other traditional media leads to the production of cultural content that can appeal to the overseas market.

Factors
Factors have evolved over time? Are these inherited?
In the case of china Marshall arts have been part of the culture and the characters in the online gaming have evolved over time from the traditional heros of the folk stories and these cultural inheritances has lead to evolution of gaming industry is a a cultural industry which is till date is not driven by economic. Influencing factors such as

Collectivistic culture: The collectivistic culture is the particular interpersonal relationship with which the Chinese perceive themselves in relation to others and which defines their social obligations in Chinese society Decentralized economy: transformed Chinese society. China's contemporary cultural features have changed from a single, authoritative voice to multiple voices, from hegemony to plurality The one-child policy

These factors have been in shaping the social and cultural trends that led to the rise of online game industry in China.

Factors
Have influences like political initiatives, technological progress or socio-cultural changes helped in shaping national factor conditions? If yes, how?
We have observed that the following points as discussed in the paper such a action in terms of political initiatives, technological progress, socio cultural changes have led to a boom in gaming industry in china

The government policies that promote creative industry also result in the success of local products that can be successfully exported to international markets to meet the needs of global consumers. The political factors which influencing the industry include the one-child policy, government tax reduction schemes in support of creative industry, the Internet Addiction Prevention System, and the most importantly media censorship. Strong consumer demand for media content that is relevant to local culture. Chinas culture is collectivistic, as individuals identify themselves in terms of their obligations to and relationship with others. In addition Chinas transition from a centrally-planned economy to a decentralized market-driven economy offers a freely competitive environment for the local online game industry to grow.

Demand

Demand of Online games as per their

Their mixture (the mix of customers needs and wants)

China had a total of 137 million internet users thus being the second largest in terms of internet usage , with more than 70% of the said users under the age of 30, In this case we have observed that Chinese online gamers are mostly young people ranging in age from 18 to 30 and this population comes from the generation which has been under the influence of the one-child policy. These only children have cultivated a growing obsession with consumerism and belong to a better-educated generation than their parents and with better global exposure their demand for more innovative games lead to more demand in the gaming industry

Their scope and growth rate

From 2004 to 2006, the internet population in China grew at double digit rates, rising from 18% in 2004 to 23% in 2006. according to iResearch report around 100 new users are added into the internet population every minute in China. In 2007 alone there were a total of 210 million online subscribers in China, with 32.6 million gamers by the end of 2006. The number of gamers is expected to double to 69 million by the year 2011. With CAGR of 16.18%

Demand

Demand of Online games as per their

The mechanisms that transmit domestic preferences to foreign markets

Four concepts are used to understand the basic application of Porters Diamond to the online game industry of China: production, distribution, supporting industries and firm strategy. Due to attributes such as factors, demand, supporting industries and firm strategy. These attributes include Skilled resources and advanced online game technology base due to high demand from one child policy generation The rapid growth of the number of internet users The emerging market trend toward entertainment Fast broadband development The support of the Chinese telecom industry & media policies by government The easy availability of internet cafes

Theses conditions have attributed to the preference of domestic market in comparison to foreign markets

Demand

How have home demand conditions influenced the shaping of particular factor conditions? Analyze their impact on the pace and direction of innovation and product development. Domestic demand is considered as the single most powerful determinant of competitiveness in service industries. Firms in gaming industry in china are facing a sophisticated domestic market thus they are more likely to sell superior products because the market demands high quality and places more pressure on firms to innovate. Porter describes market size and growth, the sophistication of local buyers, and the linkage of local buyers to global trends as the three major attributes of demand conditions. That is, as market growth encourages the expansion of firms, the sophistication and demands of local buyers push the firms to provide better products or services.

Related and Supporting Industries6,7

10

The Chinese online gaming industry is already large and is continuing to grow It was recently estimated by China's Internet administrator, China Internet Network Information Center ("CNNIC"), to be worth RMB 25.8 billion (US$3.9 billion) In 2009, CNNIC estimated that online gaming customers in China numbered more than 265 million, up 41.05% from 2008 Following the rapid penetration of ICTs, the country became the second largest market with the number of Internet users reaching 211 million by the end of the year 2007, second only to the US (CNNIC, 2007) and 420 million internet user by June 30, 2010 The number of people using the Internet is growing at a rate of 100 people per minute (CNNIC, 2007)

Internet users in different age groups

41-50, 8.20% 36-40, 10.40% 51-60, Above 60, , 0.90% 6.20% 2.20% 18-24, 17.20%

31-35, 19.70%

25-30, 35.20%

35.20% of the Internet users age falls in a range of 25-30 and 19.70% falls in an age group of 31-35 which was previously identified as active adult gamers age

Source: 6. Deng X, Murphy M. (2011). Recent Developments in the Regulation of Online Games in China. Bloomberg law reports Asia. 7. Chung, P. & Yuan, J. (2008). Dynamics of online game industry in china an application of porters model. 108. China Internet Network Information Center (2007). Statistical Survey Report on The Internet Development in China

Firm Strategy, Structure, and Rivalry2-3

Shanda Interactive Entertainment 1. Operational Excellence Shandas initial success lay in its design of an easy-to-use payment system that overcame the hurdle of low credit card penetration in China Shanda also built-up a highly efficient customer relationship management (CRM) platform which allowed multi-title access via a single account 2. Cultivation of Player Loyalty A large and loyal player base also gives Shanda an advantage when launching new games 3. Franchise Building Shanda has successfully built up name recognition among gamers in China as a quality game provider, offering MMORPGs, casual games, networked PC games, chess & board games, and entertainment literature

Based on internet averages, snda.com is visited more frequently by males who are in the age range 25-34, i.e. Adult gamers have no children, are college educated and browse this site from work

Source: 2. Lei Wang.(2005) Chinas Online Gaming Industry. Thornburg Funds,Investement. http://www.thornburginvestments.com/research/articles/pdfs/TH738_OnlineGame.pdf Accessed on May 07, 2011 3. Alexa.com 11

Firm Strategy, Structure, and Rivalry2-3

Shanda Interactive Entertainment 4. Game Development Capability
Shandas R&D strategy is more

balanced than its competitors

Online gaming is a hit or miss business,

similar to the film industry

Shanda takes a realistic approach to

this issue: while it is beefing up its internal R&D team by recruiting talent, it also recently announced the acquisition of Actoz Soft, a leading South Korean online game developer
The move has helped secure Shandas

new game pipeline for the foreseeable future Traffic rank data demonstrated continued popularity of Shanda online gamming
Source: 2. Lei Wang.(2005) Chinas Online Gaming Industry. Thornburg Funds, Investement. http://www.thornburginvestments.com/research/articles/pdfs/TH738_OnlineGame.pdf Accessed on May 07, 2011 3. Alexa.com 12

Firm Strategy, Structure, and Rivalry3-4

The9 Limited
The9 Limited is an online game operator

and developer in China

The9 directly, or through affiliates,

operates licensed MMORPGs including Soul of The Ultimate Nation, Atlantica and Kingdom Heroes 2 Online in mainland China
The9 has also obtained exclusive licenses

to operate other online games in mainland China, including Seoyugi, Planetside 2 and Free Realms
In addition, The9 operates its proprietary

MMORPG World of Fighter, and web and SNS game Winning Goal, in mainland China and overseas

Based on internet averages, the9.com is visited more frequently by males who are in the age range 25-34, are college educated and browse this site from work. Get complete site demographics

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Source: 3. Alexa.com Accessed on May 07, 2011 4. The9 Limited. http://www.the9.com/en/companyoverview.html Accessed on May 07, 2011

Firm Strategy, Structure, and Rivalry3,5

NETEASE
NetEase operates a leading interactive

online and wireless community in China and is a major provider of Chinese language content and services through online games, wireless value-added services and Internet portal businesses

Based on internet averages, netease.com is visited more frequently by males who are in the age range 25-34, have no children, and browse this site from work.
Source: 3. Alexa.com Accessed on May 07, 2011 5. NetEase.com,Inc. http://corp.163.com/eng/about/overview.html Accessed on May 07, 2011

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Chinas Online-gaming Market

1
Adaptive & Collective culture

Market Attractiveness Grid: Key Insights

Demand Conditions
Growing obsession with consumer products Rapid growth of internet users The emerging market trend toward entertainment Fast broadband development The support of the Chinese telecom industry & media policies by government

Factor Conditions
Friendly government regulations Adaptation to global demands Intense competition from vigorous domestic rivalry encourages R&D innovation Easy Access to huge finances for Business startup Collective culture

One child policy Gen Need for innovative product and trend towards need for products for Entertainment

Related and Supporting Industries

Promotion of Development of Upstream and Downstream suppliers
Numerous opportunities for related and supporting industries to facilitate the formation of industry clusters. The supporting industries including computer hardware, manufacturers, game and animation developers, telecom operators and Internet cafs

Firm strategy, structure and rivalry

Strong governmental regulation causes high entry barrier for foreign companies thus allowing fierce competition only among local game companies Those local companies who have been evolving with innovative game products were able to cross entry barrier in local competition

High entry barrier for global companies but domestic market has oligoploidy conditions existence

There is a potential market for entry but as the local companies have evolved over time to be in standards compared to global online gaming companies , we recommend Mr Aggarwal to first identify the company for Joint venture , or licensing as these local companies are themselves cash cows and it s not advisable that he should go for stake holder ship. So we recommend him to go for JV/partnership or licensing deal

Recommendation

Appendix

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Chinas Online-gaming Revenue

Chinas online-gaming revenue is likely to rebound this year

Source: 9. CLSA. (2011) China online gaming Sector outlook. Analyst report

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China Online-gamers Growth

Growth of online gamers peaked in 2008

Source: 9. CLSA. (2011) China online gaming Sector outlook. Analyst report

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Age demographic of Chinas internet users

CNNIC surveys showed that those between 10-29 years old, the major gamer demographic, declined 3% YoY to 57% of total internet users last year, while those between 30-49 years old increased 4% YoY to 36%
Source: 9. CLSA. (2011) China online gaming Sector outlook. Analyst report

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Market share, 2010

NetEase overtook Shanda to become No.2 in 2010 Tencent and NestEase stand out in most top-10-games charts in China

Source: 9. CLSA. (2011) China online gaming Sector outlook. Analyst report

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Chinas Online-gaming Forecasted Revenue

Chinas web-games market to see a 28% CAGR to RmB 5bn by 2013

Source: 9. CLSA. (2011) China online gaming Sector outlook. Analyst report

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Chinas Online-gaming Market Landscape

12,000 10,000 8,000 6,000
5,235 4,807 9,795

8,669
7,894

9,149

7,224 5,660
5,604 4,505 2,817 1,708

6,779 5,888 5,252

6,518

4,000
2,000 0

3,823
3,158 2,029 405 2,234 437 2,144 1,304 1,333 268 2,470

3,877

327

480

09A

10A

11CL

12CL

13CL

Giant Interactive Revenue (US$m) Perfect World Revenue (US$m) Shanda Interactive Revenue (US$m)

NetEase Revenue (US$m) Shanda Games Revenue (US$m) Changyou Revenue (US$m)

It is estimated that NetEase will continue to be market leader till 2013

Source: 9. CLSA. (2011) China online gaming Sector outlook. Analyst report

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