Market Research Report : Online Gaming Market in China 2012

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Online Gaming Market in China
March 2012

Executive Summary
 China’s online gaming industry has exhibited a rapid growth and development over the past years
Market  Estimated worth USDx bn in 20‐‐, growing at a CAGR of y% from USDz in 20‐‐
 Online gaming user base has grown by p% CAGR over 20‐‐ ‐ 20‐‐
Drivers: Challenges:
‐ Increasing Internet Usage ‐ Fragmented Regulatory Framework
‐ Growth in Broadband Subscribers ‐ Cumbersome Market Entry Procedure
‐ Rising Personal Computer Sales ‐ Demographic Challenge
Drivers & ‐ Growing Revenues from Advertisements ‐ Anti‐game Addiction Program
Challenges ‐ Growth in Mobile Internet Users ‐ Online Gaming Fraught with Cyber Criminals
‐ Diversified Product Portfolio ‐ Poor Intellectual Property Rights (IPR) Enforcement
‐ Human Resource Constraints
‐ Low Internet Penetration Level
Government
 Government’s Key Focus Areas for Online Gaming Sector
Initiatives
 Growth in Pre‐paid Gaming Cards
 Focus on Research and Development
Trends
 Focus on Online 3D Games
 Overseas Expansion

Major Players
Competition Company 1 Company 2 Company 3 Company 4 Company 5

ONLINE GAMING MARKET IN CHINA 2012.PPT 2

•Market Overview
•Drivers & Challenges
•Government Initiatives
•Trends
•Mergers & Acquisitions
•Competition
•Key Takeaways


China’s online gaming market is expected to generate a
revenue of USDa7 bn by 20‐‐
Overview Market Size and Growth
• China’s online gaming market is estimated to grow at USD bn
a CAGR of y% reaching USD a7 bn during 20‐‐ ‐ 20‐‐ 35 a7
 China has the world’s largest internet population, 30
representing x% of the word’s total internet users,  which 25 y% a6
provides a strong consumer base for the growing online 20 a5
gaming industry 15 a4
 As of Jun 20‐‐, no. of online gamers in China reached  b3 10 a3
a1 a2
mn users, growing at a CAGR of z% from 20‐‐ 5
 In 20‐‐, revenue of online games from internet was USDx1 0
bn and from mobile network was x2 bn, up by y1% and 20‐‐ 20‐‐ 20‐‐e 20‐‐e 20‐‐e 20‐‐e 20‐‐e
y2% respectively from 20‐‐
– In 20‐‐,  no. of independently developed national online games China Online Gamer Base
had exceeded p, which was q more online games than the
previous year No. of gamers Utilization Ratio
• Utilization ratio refers to the share of online gamers
No. of users Utilization Ratio
amongst the total internet users in China mn z% %
 As of Jun 20‐‐, c3% of the total internet users indulged in 400 b1 80
b2 b3
online gaming declining from c1% in 20‐‐
300 60
– However, the remaining c4% of the total internet population c3
200 c2 40
can be viewed as the potential online gamers indicating the c1
huge scope of growth for the Chinese online gamer base 100 20
0 0
20‐‐ 20‐‐ Jan‐Jun 20‐‐


Players across the market have adopted different business
models capitalizing upon the growing market opportunities
Business Models

Model 1 •Finding 1




Online gaming industry offers a wide spectrum of games
catering to different segments in the market
Types of Online Games

Type 1 Type 2

• Finding 1 • Finding 2

Type 3

• Finding 3

Type 4 Type 5

• Finding 4 • Finding 5


Drivers & Challenges
Challenges
Fragmented Regulatory Framework
Drivers
Cumbersome Market Entry Procedure
Increasing Internet Usage Demographic Challenge

Growth in Broadband Subscribers Anti‐game Addiction Program

Online Gaming Fraught with Cyber
Rising Personal Computer Sales Criminals
Limited Intellectual Property Rights
Growing Revenues from
(IPR) Enforcement
Advertisements
Human Resource Constraints
Growth in Mobile Internet Users
Low Internet Penetration Level
Diversified Product Portfolio


Growing number of internet users in China coupled with
time spent online…
Increasing Internet Usage (1/2) Impact
• Finding 1
 Sub‐finding 1
 Sub‐finding 2
– Sub‐finding 3
• Finding 2
 Sub‐finding 4

Internet Population Break‐Up of Weekly Hours Spent on Internet

No. of users No. of users Penetration Penetration Video or music Gaming
mn % Chatting and instant messaging Social Media
800 a6 60 Online shopping Reading News
x%
600 a4 a5 0 5 10 15 20
a3 c6 40
400 a2 c5 hrs
a1 c4 20
200 c3
c1 c2
b1 b2 b3 b4 b5 b6 b
0 0
20‐‐ 20‐‐ 20‐‐ 20‐‐ 20‐‐ 20‐‐e


…creates business opportunities for the online gaming
market in China
Increasing Internet Usage (2/2) Internet Penetration – Rural and Urban
• Finding 1 % Urban Rural

 Sub‐finding 1 80 c5
60 c4
• Finding 2 c3
d5
40 c2
c1
d3 d4
20 d1 d2

0
20‐‐ 20‐‐ 20‐‐ 20‐‐ Jun 20‐‐e

Popular Internet Activities* Items Purchased Online*

0 10 20 30 40 50 60 70 80 %
%
Online researching/ 45 b1
a1 b2
shopping
Watching video clips a2 30

Playing games a3 Finding 3
15
Download films/DVDs a4
Download music/ 0
a5
podcasts Virtual currency Online games
Phone/video calls a6 ( for online
games )


Rising broadband penetration will drive online gaming in
general and massive multiplayer online games
Growth in Broadband Subscribers Impact
• Finding 1
 Sub‐finding 1
 Sub‐finding 2
• Finding 2

Broadband User Base
Average Internet Access Speed – Top 5 Province
No. of users Penetration
Download Speed
Ranking Provinces
No. of users x% Penetration (Kbps)
mn %
a2 a3 1 Province 1 x1
600 a1 100
2 Province 2 x2
400 3 Province 3 x3
b2 b3 50
b1 4 Province 4 x4
200
5 Province 5 x5
0 0
20‐‐ 20‐‐ 20‐‐


Increasing penetration of PC’s will lead to rising demand for
online gaming
Rising Personal Computer Sales Impact
• Finding 1
• Finding 2
 Sub‐finding 1
• Finding 3
• Finding 4
 Sub‐finding 2

Rising PC Sales Volume PC Online Gaming Market Size*

mn units USD bn
200 a3 8 y%
b2
150 x% 6 b1
100 a2 4

50 a1 2

0 0
20‐‐ 20‐‐e 20‐‐e 20‐‐ 20‐‐


Rising popularity of in‐game advertising will allow operators
to generate incremental revenues
Growing Revenues from Advertisements Impact
• Finding 1
• Finding 2
• Finding 3
 Sub‐finding 1

Online Advertising Market

USD bn
a4
10
x%
8 a3
• Finding 4 6 a2
 Sub‐finding 2 a1
4
2
0
20‐‐ 20‐‐e 20‐‐e 20‐‐e


Rising mobile subscribers and the growth in mobile internet
users will drive the market in the future
Growth in Mobile Internet Users Impact
• Finding 1 Usage of Mobile Applications (20‐‐)
 Sub‐finding 1
• Finding 2 0 10 20 30 40 50 60 70 80
 Sub‐finding 2 %
Instant messaging b1
Online news b2
Search b3
Online music b4
Online literature b5
Social networking website b6
Growth in Mobile Internet Users Microblog b7
BBS b8
mn
Online games b9 Finding 3
400 x% a4 E‐mail b10
a3
300 Online video b11
a2
Online payment b12
200 Equivalent to
a1 ~y% of the total Online bank b13
100 population Online shopping b14

0 Travel booking b15
20‐‐ 20‐‐ 20‐‐ 20‐‐ Group buying b16


Diversified interests of domestic players leads to the
availability of affordable online gaming
Diversified Product Portfolio Impact
• Finding 1
 Sub‐finding 1

Diversified Interests of Domestic Players

• Result 2 • Result 1

Result 3

Result 4


Multiple regulatory bodies associated with the online
gaming sector
Fragmented Regulatory Framework Impact
• Finding 1
• Finding 2
• Finding 3
 Sub‐finding 1

Structure

Government body 1 Government body 2 Government body 3 Government body 4

Finding 1 Finding 2 Finding 3 Finding 4


Entry barriers is a major challenge faced by the foreign
players…
Cumbersome Market Entry Protocols (1/2) Impact
• Finding 1
• Finding 2

Challenge 1

Date Description Impact

11th Dec
•Regulation 1
20‐‐ •Result 1

•Result 2

•Result 3
3rd Jun
•Regulation 2 •Result 4
20‐‐


…who intend to enter the Chinese online gaming industry

Cumbersome Market Entry Protocols (2/2)
Publication Permits for Imported Games
Date Description Impact

•Result 1

•Regulation 3 •Result 2
20‐‐
•Regulation 4
•Result 3

•Result 4

Update Permits for Imported Games
Description Impact
•Result 1
•Regulation 5
•Result 2


Declining school‐age population casting a shadow on the
online gaming market in China
Demographic Challenge Impact
• Finding 1
• Finding 2
 Sub‐finding 1
• Finding 3

Declining Share of School‐Age Population

mn
1,500,000 a b c School age population is
a1 a2 a3 expected to decline from x
b2 b3
b1 mn in 20‐‐, representing
0 to 4 Age group 1,000,000 b1% of the total population
5 to 19 Age group to y mn by 20‐‐,
Age above 20 years c2 c3 representing b3% of the
500,000 c1
total population in China

0
20‐‐ 20‐‐e 20‐‐e


Anti‐game addiction program is expected to be detrimental
to the growth of online gaming market
Anti‐game Addiction Program Impact
• Finding 1

Policy Description

Jul 20‐‐ • Policy 1

Apr 20‐‐ • Policy 2

Finding 2


Rise in cyber crimes will limit the number of consumers
accessing the gaming sites
Online Gaming Fraught with Cyber Criminals Impact
• Finding 1
• Finding 2
• Finding 3
 Sub‐finding 1
– Sub‐finding 2
 Sub‐finding 3
• Finding 4

Three routes to steal online game
Route 1 Route 3
passwords used by hackers
have been identified

Route 2


IPR challenge and human resource constraints are serious
problems for the game developers in China
Poor Intellectual Property Rights (IPR) Enforcement Impact
• Finding 1
 Sub‐finding 1

• Finding 2
 Sub‐finding 2
 Sub‐finding 3

• Finding 3

Human Resource Constraints Impact
• Finding 1
• Finding 2

• Result 1
Finding 3
• Result 2


Low internet penetration level hinders market expansion of
online gaming industry
Low Internet Penetration Level Impact
•Finding 1
 Sub‐finding 1
•Finding 2

Internet User Base ‐ Major Countries (20‐‐) Internet Penetration – Major Countries (20‐‐)

0 100 200 300 400 500 600 0 10 20 30 40 50 60 70 80 90
mn %
China a1 Korea, South b1

United States a2 United Kingdom* b2

India a3 Japan b3

Japan a4 United States b4

Brazil* a5 Russia* b5

Russia* a6 China b6

United Kingdom* a7 Brazil* b7

Korea, South a8 India b8

World average a9 World average b9


Government of China aims to promote the online gaming
industry while implementing key measures
Government’s Key Focus Areas for Online Gaming Sector

Focus area 1

Focus area 2

Focus area 3

Focus area 4

Focus area 5

Conclusion


Trends ‐ Summary

Overseas Expansion Growth in Pre‐paid Gaming Cards

Key Trends

Focus on Research and
Focus on Online 3D Games
Development (R&D)


Rise in pre‐paid gaming cards sold through retailers towards
providing easy access to online games
Growth in Pre‐paid Gaming Cards
• Finding 1
Players using it
• Finding 2 as a tool for
branding and
sales

Type 1 Pre‐Paid Cards Type 2 Pre‐Paid Cards

• Description 1 • Description 2

Pre‐Paid
Gaming Cards

Conclusion
Conclusion


Growth in technological advancements through increased
R&D investments favors market growth
Focus on Research and Development (R&D)
Technological
•Finding 1 advancements a
priority to
compete

Investment
Date Description
(USD mn)

Mar 20‐‐ ‐ •Description 1

Dec 20‐‐ ‐ •Description 2

Nov 20‐‐ ‐ •Description 3

Jul 20‐‐ ‐ •Description 4

Jun 20‐‐ ‐ •Description 5

May 20‐‐ ‐ •Description 6


Online 3D games will become more mature in the coming
years
Focus on Online 3D Games
• Finding 1
 Sub‐finding 1 Online 3D games
• Finding 2 consistently
becoming popular

Date Description

•Description 1
Feb 20‐‐
•Description 2

Jan 20‐‐ •Description 3

Dec 20‐‐ •Description 4

Nov 20‐‐ •Description 5

Sep 20‐‐ •Description 6

Jul 20‐‐ •Description 7


Domestic players are expanding their share in the
international…
Overseas Expansion (1/2)

Revenues Earned from Exports of Online Games
USD mn
x%
400 a3
a2
200 a1

0
20‐‐ 20‐‐ 20‐‐
• Finding 1
• Finding 2
• Finding 3 Domestic majors are pursuing overseas
 Sub‐finding 1 expansion
• Finding 4
• Finding 5 No. of Chinese Online Games Exported

no.
y%
150 b2
100 b1
50
0
20‐‐ 20‐‐


…online gaming market, with increasing support from the
Chinese government
Overseas Expansion (2/2)
Growing overseas expansion activities adopted by the domestic online gaming companies
Growing overseas expansion activities adopted by the domestic online gaming companies

• Description 1

• Description 2

• Description 3

• Description 4

Support from the government will further drive overseas expansion of the Chinese game developers
Support from the government will further drive overseas expansion of the Chinese game developers

Regulation description


Mergers & Acquisitions (M&A) (1/2)
Size
Announced Date Closed Date Target Buyer/Investors Sellers
(USD mn)
‐ ‐ ‐ ‐ ‐ ‐

‐ ‐ ‐ ‐ ‐ ‐

‐ ‐ ‐ ‐ ‐ ‐

‐ ‐ ‐ ‐ ‐ ‐

‐ ‐ ‐ ‐ ‐ ‐

‐ ‐ ‐ ‐ ‐ ‐

‐ ‐ ‐ ‐ ‐ ‐

‐ ‐ ‐ ‐ ‐ ‐


Major Domestic Public Companies – Summary (1/2)
Net Profit
1,500
Size of the Bubble represents Market
1,400
1,300
Capitalization in USD mn
1,200 m1

1,100
1,000
900
800
700
600
500
400
m3
300
200 m6 m2
m4
100 m5
m8 m7
0 Total Income
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600 2,800 3,000 3,200 3,400

Company 1 Company 4 Company 7
Company 2 Company 5 Company 8
Company 3 Company 6


Major Domestic Public Companies – Summary (2/2)

Total Income and Profit for Major Domestic Companies of 2010
0 500 1,000 1,500 2,000 2,500 3,000 3,500
USD mn
a1
Tencent Holdings Ltd.
b1

a2
NetEase.com, Inc.
b2
a3
Shanda Games Limited
b3

a4
Sohu.com Inc.
b4
a5
Perfect World Co., Ltd.
b5
a6
Giant Interactive Group, Inc.
b6
a7
Kingsoft Corporation Limited
b7

a8 Total Income
NetDragon Websoft Inc.
b8
Net Profit


Domestic Company – Company 1
Company Information Locations – China

Corporate Address Address

Tel No. xxx‐yyy‐zzz
Fax No. xxx‐yyy‐zzz
Website www.xxx.com
Year of Incorporation 19‐‐
Ticker Symbol ‐‐‐
Stock Exchange Hong Kong Stock Exchange (SEHK)

Products and Services Headquarters
Other Offices
Category Products/Services
Category 1 Product 1, product 2, product 3,product 4, Key People
product 5, product 6 and product 7
Name Designation
Category 2 Product 8 Person 1 Principal Founder, CEO
Category 3 Product 9, product 10, product 11, product 12, Person 2 President and Executive Director
product 13
Person 3 Chief Administration Officer
Person 4 Chief Information Officer


Financial Snapshot Key Ratios
y‐o‐y
Total Income Total Income Profit Particulars change 20‐‐ 20‐‐ 20‐‐ 20‐‐
USD mn USD mn (20– 20‐‐)
Profit / Loss
4,000 1,500
Profitability Ratios
a4 Operating Margin ‐ ‐ ‐ ‐ ‐
3,000
a3 1,000 Net Margin ‐ ‐ ‐ ‐ ‐
2,000 Profit Before Tax Margin ‐ ‐ ‐ ‐ ‐
a2 500
1,000 a1 Return on Equity ‐ ‐ ‐ ‐ ‐
0 0 Return on Capital Employed ‐ ‐ ‐ ‐ ‐
20‐‐ 20‐‐ 20‐‐ 20‐‐ Return on Working Capital ‐ ‐ ‐ ‐ ‐
Return on Assets ‐ ‐ ‐ ‐ ‐
Financial Summary Return on Fixed Assets ‐ ‐ ‐ ‐ ‐
Cost Ratios ‐ ‐ ‐ ‐ ‐
• The company earned a net profit of USD b1 mn in FY 20‐‐, as
Operating costs (% of Sales) ‐ ‐ ‐ ‐ ‐
compared to net profit of USDb2 mn in FY 20‐‐
Administration costs (% of
• The company reported total Income of USDa4 mn in FY 20‐‐, Sales) ‐ ‐ ‐ ‐ ‐
registering an increase of a3% over FY 20‐‐ Interest costs (% of Sales) ‐ ‐ ‐ ‐ ‐

• The company reported an operating margin of x1%in FY 20‐‐ an Liquidity Ratios ‐ ‐ ‐ ‐ ‐
Current Ratio ‐ ‐ ‐ ‐ ‐
increase of x2 percentage points over FY 20‐‐
Cash Ratio ‐ ‐ ‐ ‐ ‐
• The company reported debt to equity ratio of x3 in FY 20‐‐, an Leverage Ratios ‐ ‐ ‐ ‐ ‐
increase of x4% over FY 20‐‐ Debt to Equity Ratio ‐ ‐ ‐ ‐ ‐
Debt to Capital Ratio
Financial Summary Interest Coverage Ratio
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
Indicators Value (6/03/20‐‐) Efficiency Ratios ‐ ‐ ‐ ‐ ‐
Market Capitalization (USD) Fixed Asset Turnover ‐ ‐ ‐ ‐ ‐
‐
Asset Turnover ‐ ‐ ‐ ‐ ‐
Total Enterprise Value (USD) ‐ Current Asset Turnover ‐ ‐ ‐ ‐ ‐
EPS (USD) ‐ Working Capital Turnover ‐ ‐ ‐ ‐ ‐
PE Ratio (Abs) (9/03/20‐‐) ‐ Capital Employed Turnover ‐ ‐ ‐ ‐ ‐

Improved Decline


Key Business Segments Key Geographic Segments

Others Segment 2 Other Regions PRC
Segment 1 Segment 3

100% b1 a1 b2 a2 a3 b3 b4 a4 100% y4
c2 c3 c4
c1
50%
d4 50% z1 z2 z3 z4
d1 d2 d3

0% 0%
20‐‐ 20‐‐ 20‐‐ 20‐‐ 20‐‐ 20‐‐ 20‐‐ 20‐‐

Key Recent Developments

Description News
• Company 1 is the largest and most used category a in China
Overview • Company 1 games is a online game developer and operator and is known as the largest online game
community in Country 1
• In Dec 20‐‐, company 1 laid the foundation for Cloud Computing Data Center in province 1
Business Expansion
• In Nov 20‐‐, company 1 laid the foundation for Company 1 regional Building
Strategic Alliance • In May 20‐‐, company 1 acquired ~x% of the outstanding share of company 2 for USDy mn
• In Sep 20‐‐, company 1 had plans of partnering with company 3, in order to develop cross‐border online
Overseas Expansion
payment services


Online gaming market is expected to grow at a CAGR of x%
to reach USDa7 bn by 20‐‐
Online gaming industry is largely driven by the world’s largest no. of online population consumer base in China

Opportunities in the Market Size Government
Market USD bn Initiatives
40
Increasing internet usage a7 Government has been
30 x% implementing various
coupled with growing a6
broadband consumer base 20 a5 policies and regulations
a4 associated with the
act as a major driver for the 10 a3
a1 a2
online gaming sector
online gaming industry in 0
China However, presence of
20‐‐ 20‐‐ 20‐‐e 20‐‐e 20‐‐e 20‐‐e 20‐‐e
multiple government
Rising personal computer bodies associated with
sales and growth in mobile the jurisdiction of the
internet users provides online sector, creates
bureaucratic conflict
opportunity for growth in the Challenges between the regulatory
online gaming sector
• Fragmented Regulatory Framework bodies
• Cumbersome Market Entry Procedure
Growing revenues from • Demographic Challenge Government is taking
advertisements and • Anti‐game Addiction Program initiatives for supporting
• Online Gaming Fraught with Cyber Criminals
diversified product portfolio the sustainable
• Limited Intellectual Property Rights (IPR) Enforcement
provides support for further development of the
• Human Resource Constraints
development of the industry • Low Internet Penetration Level online gaming industry


Thank you for the attention
Online Gaming Market in China report is a part of Netscribes’ Information Technology Industry
Series.
For more detailed information or customized research requirements please contact:
Jitendra Punjabi
Phone: +91 33 4064 6215
E‐Mail: jitendra.punjabi@netscribes.com

About Netscribes
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Market Research Report : Online Gaming Market in China 2012

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