Warcraft Experience

Boy you learn something new every day. I didn’t realize that WoW was licensed in China. Thanks Gaming Steve for clearing that up.

World of Warcraft China Examined

Considering all the recent talk on how World of Warcraft actually functions in China I thought it would be interesting to take a much closer look at this little understood topic.

First and foremost it’s important to understand that Blizzard doesn’t actually run World of Warcraft in China. They have licensed WOW China to the company The9 which is one of the leading online game operators in China. In addition to running WOW, The9 also run several other MMORPGs including “MU”, “Mystina Online”, “Granado Espada”, and “Joyful Journey West”. I’m sure that most of you probably haven’t even heard of some of these games but they are extremely popular I assure you.

Just to give you an idea of how popular MMORPGs are in Asia and China the game “MU” first launched in February 2003 and very shortly reached a player base of over 15 million registered users. MMORPGs are a huge business overseas and completely dwarf the American and European MMORPG market. Even your “average” MMORPGs in Asia have over a million registered users (meanwhile Everquest is proud of having nearly 500,000 users at their peak).

The9 and Blizzard launched WOW in China on June 7, 2005 and in less than one month the game exceeded 1.5 million paying players and continues to grow at an breakneck rate. Financial analysts expect WOW China to easily reach over 10 million registered users if not more.

Perhaps the most interesting thing about The9 is that it’s a public company and traded on the NASDAQ market exchange. What that means is that The9 has to publicly disclose their business operations to anyone who might be interested in investing in the company. They do this by publishing quarterly reports every three months as well as an extremely comprehensive annual report at the end of each year. If you have never read an annual report because it sounds boring you might be surprised what you can find in there, including some very interesting information on how an online gaming company is run in China.

All of the following information can be found in The9 2004 Annual Report which may give you a better understanding of how WOW functions in China. All items in quotes are directly from the report and I have provided the page number within the report for easier reference. This is just a small overview of some of the more interesting and relevant items. Make sure to read the entire report to get a true understanding of just how unique the Chinese MMORPG market is compared to the States (details follow the jump).

Concerning the WOW license agreement with Vivendi Universal Games (VUG)and Blizzard (Page 11)
“We are obligated to pay royalties equal to 22% of the face value of WoW prepaid cards and online points sold by us by making recoupable advances against royalty payments in an aggregate amount of approximately US$51.3 million over a four−year period commencing from the commercial launch. We paid VUG an initial non−refundable license fee of US$3.0 million in 2004 and the first year minimum royalty guarantee of US$13.0 million in 2005. We are also obligated to commit no less than approximately US$13.0 million in the marketing and promotion of WoW in China during the term of the license agreement. To meet this obligation and to promote WoW in China, we have agreed to conduct a joint marketing campaign with Coca−cola (China) Beverages Limited, or Coca−Cola China, to promote WoW in China.”

Concerning online game operators in China (Pages 13-14)
“There are over 100 online game operators in China. We expect more companies to enter the online game industry in China and a wider range of online games to be introduced to the China market, given the relatively low entry barriers to the online game industry. Our competitors vary in size and include large companies such as Shanda Interactive Entertainment Limited, Netease.com, Inc. and Sina Corporation, many of which have significantly greater financial, marketing and game development resources and name recognition than we have.”

Concerning SARS and MMORPG gaming (Pages 20-21)
“In early 2003, several economies in Asia, including China, were affected by the outbreak of SARS. During the height of the SARS epidemic in the second quarter of 2003, we experienced a decline in the number of concurrent users of MU in China, which we believe resulted largely from the Chinese government’s decision to close Internet cafés in Beijing and elsewhere to prevent the spread of SARS. Most of our online game players can only access MU at Internet cafés. A renewed outbreak of SARS or another widespread public health problem in China could have a negative effect on our operations. Our operations may be impacted by a number of health−related factors, including, among other things, quarantines or closures of our offices which could severely disrupt our operations, the sickness or death of our key officers and employees, closure of Internet cafés and other public areas where people access the Internet, and a general slowdown in the Chinese economy. Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our business and results of operations. We have not adopted any preventive measures or contingency plans to ensure the safety of employees and minimize disruptions or other adverse effects on our operations that may occur due to a recurrence of SARS, or similar adverse public health developments in China.”

Concerning online games and regulation by the Chinese government (Pages 23-24)
“The online game industry in China is highly regulated by the Chinese government. Various regulatory authorities of the Chinese central government, such as the State Council, the State Press and Publication Administration, the Ministry of Culture and the Ministry of Public Security, are empowered to issue and implement regulations governing various aspects of the online games industry.

We are required to obtain applicable permits or approvals from different regulatory authorities in order to provide online games. For example, an Internet content provider, or ICP, must obtain an ICP license in order to engage in any commercial ICP operations within China. In addition, an online games operator must also obtain a license from the Ministry of Culture and a license from the State Press and Publication Administration in order to distribute games through the Internet. If we fail to maintain any of these required permits or approvals, we may be subject to various penalties, including fines and the discontinuation or restriction of our operations. Any such disruption in our business operations would materially and adversely affect our financial condition and results of operations.”

Concerning the regulation of Internet cafes in China (Page 24)
“Internet cafés, which are currently the most important outlets for online games, have been criticized by the general public in China for having exerted a negative influence on young people. Due primarily to such adverse public reaction, some local governments in China have tightened their regulation of Internet café operations through, among other things, limiting the number of the new operating licenses to be issued and further reducing the hours during which the Internet cafés are permitted to open for business. Also, local and higher−level governmental authorities may from time to time decide to more strictly enforce the customers’ age limit and other requirements relating to Internet cafés as a result of the occurrence of, and the media attention on, gang fights, arsons or other incidents in or related to Internet cafés.”

Concerning the regulation and censorship of information in China (Page 25)
“The Ministry of Culture has issued a notice reiterating the government’s policies to prohibit the distribution of games with violence, terror, cruelty or other elements that may have the potential effect of instigating crimes, and to prevent the influx of harmful cultural products from overseas. The notice requires, among other things, the review and prior approval of all the new online games licensed from foreign game developers and related license agreements. We have obtained the necessary approvals from the Ministry of Culture for operating MU and WoW in China. We will submit new games licensed from foreign developers for the required review in due course. The Ministry of Culture may find the content of our new licensed games objectionable, and we may otherwise be unable to obtain the approvals for these games in a timely manner, or at all. If this happens, we will not be able to launch our new licensed games within the expected timeframe or at all, and our business and results of operations could be materially adversely affected.”

Concerning Internet service in China (Page 28)
“Although private sector Internet service providers currently exist in China, almost all access to the Internet is maintained through state−owned telecommunication operators under the administrative control and regulatory supervision of China’s Ministry of Information Industry. In addition, the national networks in China connect to the Internet through government−controlled international gateways. These government−controlled international gateways are the only channel through which a domestic Chinese user can connect to the international Internet network.”

Concerning payment for online games (Page 37)
“To use our fee−based online games, a customer must register an account in our Pass9 system. Once registered, the customer may log into our network, select and activate the desired games and the game districts where the customer wishes to play, and then charge his account with a prepaid card or prepaid online points sold by Internet cafés or given by us through our promotional events that enable the customer to play for a specified period of time.

Each customer needs to maintain only one Pass9 account, which provides information regarding the customer’s available prepaid game playing time for each selected game district and payment history. A customer can purchase game playing time through any of the following methods:

Prepaid Cards. A customer can buy prepaid cards at retail outlets including convenience stores, supermarkets and bookstores all across China. Each prepaid card contains a pass code representing game playing time offered by the card based on its face value.

Prepaid Online Points. Over 120,000 Internet cafés across China have used our self−developed eSales System, which is part of our Pass9 system and enables an Internet café to buy prepaid online points from our distributors and sell such points to their customers.

Online Payment. A customer can buy game playing time online by charging payment directly to a credit or debit card. In addition, we offer free online game playing time to our new registered customers and users of our SMS service. We have also included free game cards in our marketing materials to attract new customers. Our integrated membership management and payment system also incorporates a variety of community−building features, such as chat rooms which provide registered users a platform to interact in real−time groups or one−on−one discussions, and bulletin boards which allow registered users to post notes or inquiries and respond to other users’ notes or inquires. We believe these features encourage user congregation on our site and facilitate player interaction for the games we offer.”

As you can see, WOW and all other MMORPGs in China face completely different challenges than those in the States and Europe. Which makes WOW even more interesting as with most MMORPGs the developer simply has to worry about gameplay balance, server stability, community management, billing options, 24-hour maintenance and few hundred other items. When you then factor in government regulations, language and cultural differences, and even SARS, it makes what WOW has accomplished that much more impressive.

Whether or not Blizzard can continue this delicate balancing act between countries and cultures remains to be seen, but it is extremely interesting to view the unique challenges facing Blizzard when maintaining and expanding WOW over the next couple of years.