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The China Angle: Rumors And Regulations
The China Angle: Rumors And Regulations
April 17, 2007 | By Shang Koo

April 17, 2007 | By Shang Koo
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Gamasutra's latest China Angle column sees Pacific Epoch's Shang Koo taking a look at major movement in the Chinese in-game ad industry, rumors of EA buying a stake in China's WoW operator The9, and the regulatory landscape 3 years on, with government controls on TV game ads and limits on online play.

Acquisition Rumors

Chinese out of home LCD advertiser Focus Media plans to acquire Shanghai based in-game advertising platform operator InGameAd Interactive (IGA, no relation to the West's own IGA Worldwide), according to various rumors this week. Focus Media operates a monopoly advertising network of LCD screens in office and apartment building in China.

The company's stocks have quadrupled in value since listing on Nasdaq in July 2005, and Focus has used its new found muscle to aggressively acquire rivals as well as advertising firms outside of its core LCD business. Focus' latest acquisition is China's largest Internet advertising agency Allyes, in a deal worth up to US$300 million if Allyes meets performance targets.

So far, Focus has only acquired mature companies with existing revenue streams, thus acquiring a new company like IGA seems far fetched, but Focus' choices for Chinese in-game advertising platforms is limited.

IGA was formed in early 2006, but has already finished development on their dynamic ad delivery platform and signed several game partners. IGA is working with Tianchang Networks for Tianchang's Datang, a fantasy MMORPG. Datang's fantasy setting makes the game a difficult platform for in game ads, although that has not detered Tianchang from partnering with a myriad of brands for joint promotion and in-game advertising.

IGA's biggest potential is CCP's Sudden Attack, a first person shooter MMO similar to Counter-Strike that currently ranks first in South Korea. Sudden Attack is in closed beta testing in China. IGA previously was close to cooperating with SnailGame for its online games, but negotiations fell through because IGA was unwilling and/or unable to pay advances for the ad spots in SnailGame's games.

China's best known in-game advertising company is Captiv8, founded by former ESPN China advertising executives in 2004. The company recently received its first round of venture capital funding, and has already proven its advertising platform in real life tests.

In September 2006, Tencent's QQ Game casual game platform used Captiv8's platform for advertising when QQ Game hosted China E-Sport Games (CEG). Tencent's instant messaging platform QQ regularly sees over 25 million concurrent users and its integrated QQ Game platform saw 3 million peak concurrent users in March.

China's godfather of online games Shanda Entertainment also has plans for in-game advertising. Shanda jumpstarted China's online game industry in 2001 with the introduction of Legend of Mir 2. In 2005, Shanda let an industry wide shift from hourly charging method for MMORPGs to a free to play, charge for virtual items based revenue model.

In 2007, Shanda hopes to catalyze another business model revolution with in-game advertising. Shanda president Tang Jun claims the company is currently developing an in-game advertising platform. According to rumors, Shanda will soon partner with a 4A advertising agency to form a joint venture for its in-game advertising business.

EA And The9

Also in the acquisition rumor mill, Electronic Arts and China's World of Warcraft (WoW) operator The9 have reached an initial agreement for EA to purchase a stake in The9. The rumor traces back to a conversation between EA and The9 executives overheard by a hotel staff member who waited outside their meeting room.

While no percentage or dollar amount is known, speculation placed the stake at 19 percent - the same as EA's deal with Neowiz, thus placing the dollar amount at around US$200 million, using The9's stock valuation the day of the rumor. The9 has been the main topic of acquisition rumors for some time. In late 2005, The9 was rumored to be an acquisition target for Vivendi Universal, Blizzard's parent company.

Regulations, 3 Years Later

In 2004, China's State Administration of Radio, Film, and Television (SARFT) placed a blanket ban on video game content on Chinese television broadcasts. At the time, online games were becoming mainstream and the social changes brought by the new entertainment media were beginning to become noticeable. Online games still lacked the audience to appear on TV through programming or ads at the time of the ban.

Instead, the ban shut down several E-sports TV shows focusing on LAN based game competitions. The most famous was produced by China's most powerful media conglomerate China Central Television (CCTV). The weekly show aired on CCTV's sports channel CCTV-5, covering the latest E-sports news of the week.

As online games gained prominence in the last three years, online game operators and their partners tried their best to bend SARFT's 2004 ruling. Coca Cola launched WoW themed advertising on TV in 2005, but no other game has found a partner brave or powerful enough to test SARFT's patience. Casual music game operator 9you has sponsored several music related talent shows on TV, but no game content ever appeared on TV other than 9you's company name.

At the end of 2006, the first real test of SARFT's resolve for its 2004 regulation was made by CCTV. CCTV-5 aired the finals for an international E-sports competition for street basketball game Freestyle. CCTV claimed it was an important international event; SARFT did not object.

Since SARFT's ban in 2004, E-sports related programming found a new home in P2P video streaming sites. While many of the E-sports programs are broadcast live on the P2P services, SARFT has not complained due to the limited audience and murky supervision boundary.

On April 12, China's second most influential media group Shanghai Media Group (SMG) launched an E-sports program called "G-League." The program airs on SMG's paid digital TV network SiTV, placing the program in a gray legal area under the supervision (and argued over) by SARFT and several other rival government ministries. G-League will include competitions in Counter-Strike, Warcraft III, soccer games and card games.

Regulations, 2 Years Later

In August 2005, China's General Administration of Press and Publication (GAPP) and seven related government departments including the Ministry of Education and Ministry of Information Industry (MII) announced a fatigue system to limit time spent playing online games. The proposed system affected all players and limited online game playing time to five hours. After five hours, players gain no experience points in the game.

Full implementation was scheduled for early 2006, but with game operators crying foul and online gamers screaming for blood, GAPP decided to delay the system and neuter it by limiting it to only minors. In 2005, the system was also unmanageable as few online game operators could support a nationwide control system and gamers could easily get around the system with multiple playing accounts.

GAPP is convinced their new system is finally ready for implementation. A nationwide ID system is close to reality. Game operators have no more excuses for integration problems between their games and the new system. The fatigue system and an online game real name ID system will be implemented in all online games in operation on April 15. The system will be in development phase from April 15 to June 15 and testing from June 15 to July 15, with formal operation set for July 16. Online game operators that do not implement the systems will not be allowed to operate their games.

This time, the operators are ready. Most game operators have followed Shanda's lead and switched to a free to play charging model. Games like WoW that still uses charges hourly fees mostly cater to older audiences. Also, while the new system may be advanced enough to require real IDs for registrations, no one has yet figured out how to guarantee the ID used for registration belongs to the actual gamer. In 2005, stock prices for Nasdaq listed Chinese online game companies plummeted when news of the system was announced. None of the stocks were affected this year.

Two days after the start of development phase for the re-launch of the system, all games continue to operate as before. "Development phase" is open to interpretation, after all.

[Shang Koo is an editor at Shanghai-based Pacific Epoch, and oversees research and daily news content on China's new media industries, with a concentration in online games. Pacific Epoch itself provides investment and trade news and publishes a number of subscription products regarding the Chinese technology market. Readers wanting to contact him can e-mail shang.koo@pacificepoch.cn.]


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