Define China

Niko Partners' Lisa Hanson offers a snapshot on the enigmatic, but crucial, fast-growing games market

Continuing our look at the videogames markets around the world, next up is China, an enigmatic if numerically dizzying country which for many will hold the key to the future of games in the next decade.

To find out if conventional wisdom was an accurate assessment, we sat down with Lisa Hanson, managing partner at Niko Partners and an expert on the Chinese videogames landscape.

Q: Give us a snapshot of the videogames market in China.

Lisa Hanson: China's market is predominantly PC online game-driven. By the end of 2008 the total revenue was USD 2.75 billion for PC online games, and that marked the first time it surpassed the US PC games market, which was USD 2.5 billion.

For 2009 we're forecasting USD 3.65 billion in revenue, moving all the way up to USD 8.8 billion in 2013, from online game revenue - which is a hefty increase. We're going from about 60 million online gamers, which some people are telling me is an underestimation of the picture now - but it's all a matter of definition.

Our definition is somebody that's played an hour of games in the last 30 days, and that doesn't include the mobile segment - so they can't have just played five minutes of mobile game per day at the bus stop.

We think that will go to 100 million gamers by 2013, and within those 100 million gamers probably at least 50 per cent of them will be paying, whereas right now we have about 30-35 million gamers pay. So it's a greater absolute number of paying users overall.

Q: Why the increase in the numbers of paying users?

Lisa Hanson: It's actually a decline in the ratio of paying users to total numbers - from 35 million out of 60 million paying now, to 50 per cent in the future.

Q: That's still a huge jump in revenue - what are the drivers for that growth?

Lisa Hanson: On a compound growth rate it's only about 19 per cent, and we've had huge growth over the last few years. 2008 over 2007 was something like 73 per cent, and the year before that was about 70 per cent. This year versus last year it's about 35 per cent growth - and that's with World of Warcraft being offline for a while.

As we have slowing growth, basically to keep our forecast reasonable we're pulling down the growth as much as we can. By 2013 we're sub-20 per cent for the revenue growth, but we still have this big boom in internet users. So the sub-segment of total internet users who will be gamers is about 100 million.

Those are people that play through social networking sites, web games, casual games - but there'll be a widening of the game genres to accommodate more people beyond just today's definition or demographic profiling of a gamer.

Presumably there'll be some additional models that can capture revenue from these other areas that are, by and large, entirely free segments. The 40-50 year old women who are playing Popcap games at home - if Popcap figures out a way to monetise those users then that's one way to gain more revenue in the market place.

These are still hypothetical, but if the web games turn into revenue-generating rather than what they are now - and the same with social network games... and by 2013 consoles will either be legal and using console games, or they won't be anywhere at all.

That forecast includes online game revenue that might be derived from the console game platform, because there will be an online distribution model for console games.

Q: How likely do you think it will be that consoles will be legalised in China? If they were, how much difference would that make?

Lisa Hanson: Well there are about 2-3 million units sold illegally at full market prices now for consoles - and those people have to seek them out.

Q: Are they PlayStation 2 or PlayStation 3 level?

Lisa Hanson: PS2, PS3, Xbox, Xbox 360, Nintendo Wii, GameCube... it all exists. The PS2 is very popular because there are so many games available for it that are pirated. PS3 is less popular because it's more expensive and it's more difficult to get the pirated games, but Wii outpaced PS2 last year - I think we estimated 750,000 Wiis were sold in 2008, along with 625,000 Xbox 360s.

This is all lost revenue for Microsoft and Nintendo, and it's also lost tax revenue for the Chinese government. And more importantly to the Chinese government it's a loss of control of the content - so it's really in their best interests to get out the stick.

Q: So potentially, of consoles are legalised the publishers would have an installed base ready to go?

Lisa Hanson: Unfortunately they're not going to be able to use that installed base, because the modifications made to the consoles to allow them to play the pirated games render them useless for the online service. None of those gamers are going to want to take their consoles in to get them fixed as you'd have to.

Q: Maybe they should offer an amnesty... World of Warcraft recently found itself back online after a hiatus of several months - how important was it for them to get back online?

Lisa Hanson: It was critical - they're by far the leading foreign game company there, and they're setting the standard for foreign and domestic games. Chinese companies have long been China-class and not quite world class, and now with the development and operations of some of the MMORPGs they are world class in a small sliver of the game world.

But beyond that sliver they need to learn from other companies, and Blizzard is one of them, EA is another. Some of the giants out there deserve some respect in their approach of developing their companies to be the giants that they are.

I think it's critical for Blizzard, but I think it's also critical for China's continued success, because China would not have been as galvanised to grow quickly had they not been spurred by successful companies that were taking share - such as Blizzard.

They also have a lot vested in this new joint venture now - we'll see a bigger push towards the networked games when the platform launches, with Starcraft... but I think there'll be more content issues, because I understand Starcraft has some ghosts in it... but there's always a content issue.

When World of Warcraft went offline there was all this speculation that other games were going to take its share - but they didn't. So we drew down our annual forecast from USD 3.8 billion to USD 3.65 billion because people were waiting on the sidelines. They were playing it in free mode, and not giving their money to other companies.

There was no other game that stepped up to that level - people had thought perhaps Aion would, from Korea, which is another important foreign title, but that went up and down in a big hurry and it wasn't the replacement game.

Lisa Hanson is managing partner at Niko Partners. Interview by Phil Elliott.

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