China's Online Games Market: Grab a Joystick and Enjoy the Ride

by: Pearl Research

The year 2007 was a banner year for China’s online games industry and 2008 is expected to be just as robust. China’s online games market raked in an impressive $1.66 billion in 2007, up 60% according to Pearl Research’s latest estimates.

Online gaming continues to be the top revenue generator among the digital media companies in China. The top two gaming companies, Shanda (NASDAQ:SNDA) and Netease (NASDAQ:NTES), generated $338 million and $265 million in revenues respectively. Their online gaming revenues eclipse the revenues of search engine company Baidu (NASDAQ:BIDU) with $239 million and media firm Sina with $246 million.

Online games, which consisted of massively multiplayer online games such as Blizzard’s World of Warcraft and casual games are one of the most popular past times for Chinese Internet users. Nearly 60% of online users in Pearl Research’s surveys played online games.

Successful online games can be highly profitable. Game operator Giant Interactive (NYSE:GA) generated the majority of its $209 million in revenues from one title, “Zhengtu Online.” Pearl Research believes revenues in 2007 were driven by compelling and diverse game content, free-to-play games, and rising demand for leisure and technology products.

Companies to watch in this space include:

  • Shanda with revenues up 49% in 2007 to $338 million
  • Giant Interactive up 274% to $209 million in revenues
  • The9 (NASDAQ:NCTY) with revenues up 30% to $175 million, mainly due to its operation of US publisher Blizzard’s World of Warcraft
  • Media company Sohu (NASDAQ:SOHU) also scored a major hit with its TianLong Babu game, based on a Chinese novel. The title generated $22 million for Sohu and is expected to be a consistent performer in the next quarters.

Coinciding with this revenue growth was a wave of initial public offerings (IPOs) by game operators Giant, Perfect World (NASDAQ:PWRD), NetDragon and KingSoft, making 2007 a busy year for game operators. In light of these successes, Tom Online has announced that it will invest up to $20 million to develop an online gaming business.

Pearl Research believes the market will continue to grow, forecasting the online games market in China will exceed $3 billion in 2010. Based on our interviews with Chinese consumers, online games are a fun and “sticky” leisure activity, which contributes to their popularity and growth. In 2008, a major trend to watch is the arrival of Electronic Arts' (ERTS) FIFA Online game as it tries to capture a share of the growing Chinese market.