An industry upsurge motivated by self-innovation
China computer game developers have been working for foreign game developers to make a living for a long time. However, several years of hard working and accumulated know-how eventually brought about a significant change. Numerous domestic developers have started to spring out based on self-innovation. In-house, self-developed games already account for 64.8% market share of the Chinese online game industry.
Here are some statistical data that indicate fast growth of this industry:
-
Number of newly developed games hit 218 in 2006
-
In the Chinajoy Exposition of July 2007, the number of new games on-show portrayed was 380, indicating a 74.3% increase for 2007 already
-
Total revenue for the industry was around 6.5 billion RMB in 2006. This figure is estimated to reach 11.3 billion RMB in 2007, representing an increase of 73.5%
-
General gross profit was 3.7 billion RMB in 2005, almost 6 billion RMB in 2006, representing an increase of 62%. Some of the industry leaders, like Shanda and NetEase, are cranking out a gross margin of 90%.
IPO boom around the world
The high profit margin promoted an IPO boom of Chinese online game developers after 2004. It's been Hong Kong, the Nasdaq and the stock exchanges of Tokyo that Chinese online game developers made inroads.
Based on the most recent 2007 data:
-
On July 26th, Perfect World Co. began its trading on Nasdaq and raised $106 million;
-
On Oct 9th, Kingsoft raised HK$ 626 million in Hongkong market;
-
On Nov 1st, Giant raised US$887 million in NYSE;
-
On Nov 2nd, Wonglong’s IPO in HKE raised HK$ 1.4 million for the company.
When “online game industry” became synonymous with “giant profit industry” in people’s idea, some may asked why these companies bother to IPO overseas? Some sources stated that maybe it’s a good way to create a personal career legend, after all, nearly every success IPO of these newly listed companies was accompanied by the appearance of a new billionaire, normally their CEO. However, more precisely speaking, it’s because the severe competition in this industry causes the huge capital reserve needed.
Competition requires strong capital reserve
As stated before the Chinese online game industry is experiencing a resurgence as numerous new companies coming to light. However, the number of listed companies with significant market share is not more then ten:
Data Source: www.iresearch.com.cn
Pressure from competitors and high risks of new game introduction require significant capital. Key is a continuous game development to fill new games into the pipeline every six months. One of the requirements to do so is to attract and retain talented developers. The executive managers of Shanda arrange a open day on 18th each month to meet the game creators, claiming that they would like to offer funds to every talented developer. Another example is Kingsoft's first step after a successfully “making money” from a Hong Kong IPO was recruiting game developers and inventing new games.
Barrier of entry is ever increasing, requiring significant capital to enter the fray. It took Shanda a mere $300,000 to become an agent for a Korean developed game in 2001, a cost that would surpass $10 million today.
Positive competition bring about development potential
While the high entry barriers to some degree limit the industry’s new players, they promote positive competition among existing companies.
The Giant Interactive IPO, one of the most popular online game developers of China today, recently generated $887 million in a NYSE plus:
·Created a giant demand;
·Realized a final price above initial range;
·Listed as the largest IPO by a Chinese private sector company in the U.S.;
·Valued Giant at a premium to most of the other Chinese online gaming companies;
·Brought its CEO’s wealth to be top one in China IT industry.
While proceeds from this IPO will fund the launch of Giant's second and third MMO games in the fourth quarter this year, it also generates exciting news that will sure to stimulate its competitors and followers, creating a huge potential for investors.