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Big changes on the horizon will be welcome news for anyone who has ever braved the sub-zero temperatures of a holiday release date just so they could be the first on the block to get the Nintendo Wii – but it could mean trouble for traditional video game and console developers, as well as retailers.

In the West, a plethora of gaming companies are claiming to have the solution to the digital distribution and revenue issues which have so far plagued the movie, television and music industries. Ironically, the basic solutions being marketed by these companies have been common in China for several years.

As anyone who grew up with a Nintendo knows, the gaming industry can be a very bricks and mortar one. Expensive consoles such as the Sony Playstation, Microsoft Xbox, and the Nintendo Wii are coupled with CDs carrying the latest games which can be bought at any retailer. Games are purchased for a one-time payment, with video game releases set to coincide with the holiday season for the simple reason that these periods see the largest spending sprees of the year.

The entire industry, however, is gearing up for a revolution in the way video games are distributed and monetized. Frank Yu of China-based start-up Shouji Mobile elaborates. "The industry trend is soft consoles . . . meaning developing a console via software and not hardware like the Xbox. In another light, even the iPhone is a killer hardware-based console."

CHANGING LANDSCAPE

Last March at the Game Developers Conference in San Francisco, a company called OnLive debuted its idea for a business. The company offers a service whereby high-quality video games can be streamed to any PC or even TV set with the purchase of a simple console. This means that users would not have to spend money on top-notch hardware such as video cards and large micro-processors in order to experience high-quality games. Rather, the OnLive system would host all the games and information on its own servers and then stream the games directly into homes.

OnLive is betting on the development of an entirely new distribution system, but it is one with inherent technological and geographic limitations. The massive amount of information OnLive streams requires it to be within 1,600km of the user in order to give the optimal experience. While the company is still in internal beta development until next summer, and has therefore not released pricing information to date, it is likely to charge industry standard prices for games, with consumers experiencing significant savings due to the fact they will not have to buy an expensive console.

In addition, social networking sites such as Facebook are already established distribution points for games online. As Yu points out, "Browsers and social networks qualify as soft consoles since developers just need to drop in their game."

These online communities, and their integration with games, have been the driving force behind changes in the way games are monetized. A game hosted on a remote server has entirely different characteristics than a game hosted in one's own home, as Ludovic Bodin, co-founder of of China-based gaming start up CMUNE, explains, "Both game portals and social networks are becoming very strong distribution and entertainment channels. An important change for traditional game production is the evolution from game-as-a-product to game-as-a-service, especially connected to the ‘virtual goods' business model."

Traditional game developer EA Games recently announced significant losses and the lay-off of 1,500 employees (16% of its total work force) simultaneously with a USD 300 million bid for viral social networking game developer PlayFish. "It's no coincidence that we simultaneously announced a cost reduction in connection with the acquisition of PlayFish, because that represents, in our mind, a very important shift to digital direct," said EA vice president and CFO Eric Brown at the BMO Capital Markets 2009 Annual Digital Entertainment Conference in New York in November. PlayFish, like Zynga and other leading viral social game developers, monetize their products mostly through advertising business partners and the micro-payments model whereby players pay a relatively small amount for gaming credits or extra abilities.

EMERGING GAMERS

The move towards remote hosting of games as well as micro-payment models is an example of the gaming industry's attempts to learn from the rampant piracy which has plagued the music and movie industry for years. This has been a particular problem in emerging markets, where lax IP enforcement has led to a proliferation of street vendors selling everything from movies to albums and games. Chinese technology observers may find themselves asking what's so special about this whole phenomenon?

With rampant piracy in the Chinese market, Chinese gaming companies have never had the option of simply printing out game DVDs and selling them through traditional retail channels. Rather, Chinese Internet and gaming service companies had to find innovative new ways to monetize products which could not be copied, and whose consumers had very low average earnings. The model which most companies settled on was exactly this "micro-transaction" model based on virtual goods now being heralded as the salvation of the Western gaming industry.

TencentQQ, China's largest Internet company, built an empire off of its wide array of services (including thousands of virtual goods categories) coupled with an online currency, the Qbi, which can be bought in any number of ways, including specially developed Qbi cards. QQ has massively popular game offerings such as the casual game QQPet and its array of MMORPG games.

The model which seems to dominate in China is the "free-mium" model, whereby users can play a game for free but will have to buy credits in order to gain extra powers or new weaponry and equipment. In the case of QQPet, animals, which live on the users computer desktop, must be fed, educated and cured when sick, all of which QQ charges for. In the case of Romance of the Three Kingdoms-style fantasy role-playing games, users need to shell out money for extra weapons or powers that will help them move up a level.

A CHINESE CHALLENGE

The familiarity of Chinese developers with these revenue and distribution models makes China an ideal place for gaming companies working in what is a new business environment in the West. One current example is CMUNE, the Beijing-based developer of a "platform to rapidly produce, distribute and monetize 3D multiplayer web-games," says co-founder Bodin. CMUNE made a name for itself with Paradise Paintball, the first 3D game on Facebook. The game has, to date, been downloaded 1.5 million times and has been a regular fixture on the most downloaded web-widget on the Apple Store dashboard.

Bodin founded the company back in 2007, along with Shaun Lelacheur Sales, and says he chose to develop in China because, "among the top 10 online gaming companies in the world, seven are from Asia and five specifically from China." He suggests that the knowledge and operational excellence is in Asia today. "The West is just starting to catch up on ‘free to play' models, while 3D browser-based games are only just emerging worldwide."

Another company taking advantage of this phenomenon is Beijing- and Silicon Valley-based start up XPD media. The company has received significant investment from large industry players and plans on becoming a "global publisher" of social games.

XPD CEO Robin Chan explained how the system works. "Publishers handle financing, distribution, marketing, and general development of a portfolio of titles," he says. "[They] develop a select number of titles internally, but also work with other developers to make additional titles." Chan notes that, while social networking sites occasionally build their own games, "with the sophistication of game development rising, these companies will seek partners that can invest more resources on higher quality, deeper gameplay products."

When asked why the American born-and-bred founders chose China as a base to launch a "global" social gaming enterprise, Chan states it plainly: "China is the world's largest market for online gaming, with an experienced labor base familiar with making free-to-play virtual goods-based games." As a result, XPD's development team is almost exclusively Chinese, with only a few foreigners on staff in mostly managerial and marketing positions – marketing of viral social games being one area in which the West still has something to teach China.

As more and more gaming businesses shift to emerging markets, China's unique business environment is turning out to be a strong advantage for companies basing themselves in the country. As Bodin points out, "The [Chinese] virtual goods market of 2009 is five times larger than the US market." It should be obvious to anyone involved that this added level of saturation can offer unique skills, fostered by the Chinese marketplace, to help worldwide gaming companies get ahead.

As the digital distribution of games demonstrates, sometimes the tail can wag the dog.

Date

Wednesday 16 Dec 2009 - Tuesday 16 Mar 2010