Chinese Online Gaming Market Soars to $2.8 Billion in 2008

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Includes: ATVI, CYOU, GA, NCTY, NTES, SNDA
by: Pearl Research

China’s online games market raked in an impressive $2.8 billion in 2008, up 63% according to Pearl Research’s latest estimates. Online games, which consist of massively multiplayer online games such as Blizzard’s World of Warcraft and quick and easy-to-play casual games, are one of the most popular past times for Chinese Internet users.

Online gaming continues to be the top revenue generator among the digital media companies in China, even surpassing those of search engines and portals. The top two gaming companies, Shanda (NASDAQ:SNDA) and Netease (NASDAQ:NTES), generated $522 million and $436 million in revenues respectively in 2008. Their online gaming revenues exceed those of search engine company Baidu (NASDAQ:BIDU) with $469 million and media firm Sina (NASDAQ:SINA) with $369.6 million in revenues.

Approximately 70% of China’s 298 million Internet users are under the age of 30. This group is most likely to seek out online entertainment, including games, music, and chatting, which Pearl Research believes will drive revenues for the online gaming market. Nearly 65% of online users in Pearl Research’s surveys played online games.

We believed that online game revenues in 2008 were driven by compelling and diverse game content, free-to-play games, and rising demand for leisure and technology products.

Game operators in China experienced strong revenue growth in 2008. Six game operators, Tencent, Changyou (NASDAQ:CYOU), The9 (NASDAQ:NCTY), Netease, Shanda and Giant (NYSE:GA) crossed the $200 million revenue mark.

China’s most popular online game, Netease’s “Fantasy Westward Journey” accumulated 1.8 million peak concurrent users, followed by Giant’s “Zhengtu Online" with 1.5 million users, Tencent’s “Dungeon and Fighter” at 1.2 million users, and Blizzard’s “World of Warcraft” at 1 million.

Media company Sohu (NASDAQ:SOHU) also scored a major hit with its TianLong Babu game, based on a famous Chinese novel. The title generated approximately $200 million for Sohu in 2008 and resulted in the spinoff of its gaming unit, Changyou in April 2009.

Trends to track in 2009 include the growth of social networking sites in China, with over 55 million users, and their cross-pollination with games. One overall concern is the lack of diversification with many game operators relying on a single title for the bulk of revenues. In addition, a glut of content with more than 200 games on the market, makes releasing a breakout hit increasingly difficult.

Many Chinese game operators continue to be optimistic in 2009, stating that the worldwide economic downturn has had little effect on their business. Games constitute a small-ticket item and users have not cut back as much on this type of discretionary spending

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