Game companies must temper expectations for Chinese market

"Our attitude doesn't have to be wild, aggressive enthusiasm for everything that happens." -- Rami Ismail, Vlambeer

We can all agree that the games market is unique. But it does not exist in isolation from a larger economic context. So game companies who consider entering the Chinese mobile games market would do well to take a step back and get a broader sense of what's going on.

Its economy has been going through a rough patch, as overall growth has started to weaken, reaching the lowest it has been in the last six years. A large luxury company like Burberry reported "double digit declines" in their Hong Kong-based stores. Worse, over the past few weeks, a slew of economists and financial analysts have contested the health of the larger Chinese market. Following a 150 percent ramp up in the past year, the Shanghai Stock Exchange experienced a 26 percent correction over the last month. China, to say the least, proves to be a volatile market.

Business first.

In terms of growth, the Chinese games market seems to be fine. In April we reported that China is about to pass Japan in terms of who's leading the Asian market for digital games. Our most recent figures indicate that Chinese gamers are on track to spend $12.6 billion by the end of the year. More telling, PC gaming has long been the platform of choice in China, but based on the data we've collected in the first half of this year, mobile gaming will overtake PC gaming in China by the end of 2015.

Even so, after several years with spectacular growth, we're seeing the first signs of an anticipated declining growth rate: in 2015 the mobile games market will grow an impressive 19 percent, but still down from 44 percent in 2014.

So we can all relax, right?

Nope.

In her annual Internet Trend Report, Mary Meeker recently pointed toward a massive difference in spending power: Chinese GDP is roughly one-third of that in the US. To capture comparable revenues from China means gaining access to three times as many gamers, assuming they all convert at the same rate (which they don't).

Here's where things get murky: there's a difference between traffic/downloads and revenues. So when we read reports on the size of the addressable market or how it's become the biggest market for iOS downloads, it is important to remember that this is not the same as earnings. Like all other business decisions, the enthusiasm for the Chinese games market needs to be backed by fundamentals.

If we take World of Warcraft as a proxy for a moment, since it lends itself so well with an almost even split between the eastern and western operations, we see that generating revenue differs greatly.

The observation that China is a large games market is not new or unique to mobile gaming. Previously, other companies have tried to enter by developing entirely localized versions of their hit titles at home. Zynga, to name another example, tried to expand its footprint with FarmVillage, specifically designed for China but decided late last year to retire the game and shut down its Beijing operations.

China is not open for business.

Doing business in China means going through some kind of gatekeeper. A good example of what market entry looks like is Activision's release of Call of Duty: Online. Here's one of the biggest publishers in the world, who has had to both develop a tailored version of one of its most powerful franchises for the Chinese market and team up with China's biggest publishing house Tencent. That's a pretty epic combination. Setting up shop in the backyard of these big incumbents means to either cut them in or don't get in at all.

Mobile publishers that have done well in North America and Europe are expanding operations but do so with the understanding that it will likely only contribute 10-15 percent to their bottom line. And after all the gatekeepers are paid (e.g. Tencent, Apple) less than half is left.

Now, don't misunderstand me: as everyone else in this industry, I want and expect the industry to do well. But setting up shop in China means answering a few critical strategic questions.

And just because you're big doesn't mean you get a free pass. In fact, consoles were only recently legalized and allowed into China. With big fanfare did we hear earlier that Microsoft and Sony were now, finally, permitted to sell their consoles in mainland China. But just last week Niko Partners reported on the initially disappointing sales of consoles in general. It stands to reason, of course, that console gaming isn't all that popular in China, but that overlooks the fact that there exists a sizable grey market of bootleg devices.

An enthusiasm for the new is currently fueling much of the momentum behind the Chinese mobile games market. It's always easier to fall in love than it is to stay in a relationship. This applies equally to people as it does to businesses. As the mobile games market in the US has started to saturate, raising both marketing and development costs, it is much more exciting to look to the horizon for opportunity.

So what do we make of it? The companies that are most likely to benefit from the growth of the Chinese market are Chinese.