When I served on a China panel at Berkeley’s Haas School of Business last month, I met Dan Maas, who asked me for my thoughts on what had been happening to World of Warcraft in China. It took me about ten seconds to figure out Dan knew far more about what was happening on that front than I did. I was fascinated by what he was telling me and I asked him to write a post on it. What so interested me was that what was happening to World of Warcraft in China was what so often happens to smaller foreign companies in China that operate in industries in which the Chinese government would prefer not to see foreign companies. It also nicely encapsulates how China’s government employs the law to favor foreign companies. Lastly, it illustrates something my law firm’s China lawyers always tell our clients and that is that securing approval from one governmental entity in China does not mean you are free and clear.
China generally considers online gaming to constitute publishing and foreign companies are not allowed to go into China publishing other than as a China joint venture. This means foreign companies wanting to engage in publishing in China must partner with a Chinese entity, which as the following so nicely points out, can itself create issues.
First, a bit about Dan Maas: Dan founded an Emmy Award-winning special effects company, Maas Digital, whose projects have included creating photorealistic 3D animation for the Disney IMAX documentary Roving Mars, and developing production technology for the upcoming 3D adventure film Quantum Quest, starring Samuel Jackson and William Shatner. Dan is fluent in Mandarin and he spent two years consulting for an animation studio in Taipei, Taiwan. He is currently pursuing an MBA at Stanford’s Graduate School of Business and he seeks “to continue pushing the envelope of film and interactive gaming technology, particularly in Asia, after graduation”
Here is Dan’s Post:
China has become a major battleground in the online gaming market. Chinese players make up over half the customer base of the world’s most successful subscription-based online game, World of Warcraft (WoW) by US developer Blizzard Entertainment, which alone pulls in over $1 billion in annual revenue. WoW faces fierce competition in China from locally-developed games such as Kingsoft’s JX Online series and other imported titles like Aion Online from Korean developer NCSoft.
China is a uniquely challenging market for foreign online game companies because government regulations require foreign games to be licensed through local Chinese operators, rather than offered directly by the developer. Friction between government regulators, overseas developers, and Chinese licensees can have a huge impact on the competitive landscape. For example, Blizzard suffered a harsh setback last year when WoW was knocked off-line for several months amidst a license dispute and unexpected regulatory shifts.
Blizzard had successfully brought WoW into the Chinese market in 2005 through a license agreement with local game developer The9. The relationship turned sour last summer when negotiations to renew the license bogged down in a dispute over division of profits. Blizzard ultimately decided to terminate The9’s license and shift WoW’s China operations to another local company, NetEase. (The9 responded acrimoniously, filing suit against Blizzard and announcing development of its own sword-and-sorcery game called “World of Fight”). WoW was knocked off-line for over three months during the transition, leaving a gigantic vacuum in the market which competitors rushed to fill. Kingsoft, Shanda, and other gaming companies stepped up promotional efforts to lure former WoW players to their own games. Blizzard previously had the upper hand in China thanks to its comparatively ample resources and high production values — but for the moment, it was knocked out of contention.
The story got even more interesting in fall of 2009 as NetEase was just about to re-open WoW to Chinese gamers. The Chinese General Administration of Press and Publication (GAPP) unexpectedly announced new regulatory powers over on-line gaming in China, and put NetEase on notice that WoW had not received permission to operate there. This came as a surprise given that WoW had already been approved by China’s Ministry of Culture, and the GAPP had not previously asserted authority over on-line games.
Some observers speculated that GAPP was engaging in bureaucratic posturing against the Ministry of Culture to stake out regulatory turf over the increasingly lucrative on-line game market. But the timing of the GAPP’s announcement was particularly advantageous for Chinese game companies, since it disrupted the re-entry of foreign juggernaut WoW into China. NetEase and Blizzard were forced to stop accepting new game subscriptions for several additional months while they fought to resolve the GAPP’s complaint (an effort further delayed by The9’s ongoing legal action).
The crisis was finally resolved and WoW fully re-opened by early 2010, but the damage had already been done. NetEase and Blizzard had been unable to accept new subscribers for seven months, an eternity in the fast-moving game industry. Local competitors had made inroads against the foreign entrant’s market share.
The conflict rages on, as U.S. and Korean developers bring more game development experience and higher production budgets to China, but must contend with royalty sharing and an unclear regulatory atmosphere. At the same time, Chinese game companies can bank on their better understanding of the local market, and practical advantages like smoother payment systems and looser regulatory oversight. Will local competitors be able to match the success of games like WoW, and perhaps even export their titles successfully to Western markets? Whatever the outcome, it will be a fascinating contest to watch.
For more on the World of Warcraft in China story, check Warcraft row: An industry game-changer in China.