China’s Online Gaming Revolution

I pointed out that the online gaming industry is a sunshine industry.

The recent milestone record of online players in mainland China seems to be confirming such trend.

From Shanghai Daily:

THE number of Chinese online game players has surged to a new high after the upgrading of China's broadband speed and Internet service, the world's major game maker said yesterday.

More younger players, especially students, are taking part in online games in China, Alex Tai, managing director of Blizzard China, said at the sideline of the world championship series of "StarCraft II" in Shanghai.

"China has developed a good environment for online games as many foreign games are introduced and also due to the fast development of broadband service," Tai said.

There are 120 million online game players in the country, up 4.6 percent from last year. The mainland has 538 million Internet users. The value of online games has hit 55.7 billion yuan (US$8.89 billion) on the mainland, up 20 percent annually, Analysys International said.

Sunshine Industry: Video Games Media

One of the likely fastest growing applications of the information age would probably the video game industry.

From the Economist, (emphasis added)

OVER the past two decades the video-games business has gone from a cottage industry selling to a few niche customers to a fully grown branch of the entertainment industry. According to PricewaterhouseCoopers (PwC), a consulting firm, the global video-game market was worth around $56 billion last year, and has grown by over 60% since 2006, when the Nintendo Wii console was launched. The gaming industry is more than twice the size of the recorded-music industry, nearly a quarter more than the magazine business and about three-fifths the size of the film industry. PwC predicts that video games will be the fastest-growing form of media over the next few years, with sales rising to $82 billion by 2015. The biggest market is America, whose consumers this year are expected to spend $14.1 billion on games, mostly on the console variety. Consoles also dominate in Britain, the fifth-largest gaming market. In other parts of Europe, and particularly Germany, PC games are more popular. China has overtaken Japan to become the second-biggest market, and is one of the fastest-growing, with sales rising by 20% last year.

How will the growth of video games be facilitated?

Again from the same article, (bold emphasis mine)

Now the ever-increasing computing power of mobile phones has put the means of playing games into the pockets of people who would never think of spending hundreds of dollars on a dedicated console or a PC. The simple games that came pre-loaded onto the mobile handsets of a decade ago have evolved into a subset of the industry in its own right, appealing to a more casual crowd who play them on trains, in airport departure lounges or while waiting for the washing to finish. Today’s smartphones pack far more computing power than the original PlayStation, and games are a big part of their appeal: the two most popular kinds of software on Apple’s App Store are games and entertainment.

The internet has played a crucial part in the rise of video games, enabling developers to get their products into their customers’ hands without the need for traditional shops or publishers. That has allowed small, independent developers to compete with the big firms who might spend tens of millions of dollars on developing a single title and as much again on marketing it. As a result the industry is becoming increasingly fragmented as its markets become more differentiated.

The internet has also become a games platform in its own right, making the hobby truly sociable by electronically linking gamers the world over. Millions of people spend many hours each week playing and working (sometimes the distinction is not clear) in virtual places such as “World of Warcraft” and “EVE Online”. Hundreds of millions more play free, simple, sociable games on Facebook, such as “Lexulous”, which is a bit like Scrabble, and “FarmVille”, a game with an agricultural setting. Increasingly the games themselves are free, but the virtual goods available in these online worlds—a stable for one’s electronic horses, say, or a particularly pretty shirt for one’s digital alter ego to wear—cost real money.

The internet will likely remain a hub for the introduction of many innovative applications due to its largely free market setting.

And video games, mobile commerce, mobile banking and digital healthcare or telemedicine are likely major growth application areas for consumers that will be powered by the rapidly exploding mobile internet platform as manifested by tablet sales.

How Videogames Flourish Under Free Markets

Former hedge fund Kessler argues that Videogames will inspire many of the most important innovations in the coming years which would overshadow government’s influence.

Mr. Kessler writes, (bold highlights mine)

But without gaming, this technology would be expensive, one-off stuff that never sees much use. Much as keyboards and mice and fast graphics have driven corporate productivity for 40 years—killing carbon paper and Correcto Type—the next decades will be driven by tools that can harness voices and gestures.

All it takes is one application. High-margin industries like finance usually deploy these things first: The early adopters could be traders in commodity pits signaling like crazy folk. The rest will follow.

Videogames will influence how next-gen workers interact with each other. Call of Duty, a military simulation game, has a mode that allows players to cooperate from remote locations. In World of Warcraft, players form guilds to collaborate, using real-time texting and talking, to navigate worlds presented in high-resolution graphics. Sure, they have funky weapons and are killing Orcs and Trolls and Dwarves, but you don't have to be a gamer to see how this technology is going to find its way into corporate America. Within the next few years, this is how traders or marketers or DNA hunters will work together. No more meetings!

Even the entertainment and media businesses will be transformed. In 1985, Neil Postman of New York University wrote a book, "Amusing Ourselves to Death," disparaging the media for ruining discourse. Postman died in 2003, but I wonder what he'd think today: Online ad sales are now more lucrative than newspaper advertising, as marketers follow their customers. Netflix video streaming will change the cable TV business. The videogames Rock Band and Guitar Hero have taught the media how to package something that's at least 30 years old, in this case music you play along with, and sell it as if it were new.

The mass expansion of videogames only reflects on how specialization via technology has swiftly been diffusing into the highly competitive marketplace. The videogames industry today is estimated at $21 billion, according to Venturebeat.com and is expected to balloon to $68 billion, according to arstechnica.com. (includes the graph below)

And part of this growth will come from social network gaming.

According to Red Herring,

Farmville and other social games won't be needing Farm Aide support for 2011. According to a recently released eMarketer report, social gaming will reach a billion dollar business this year.

Not that the techsphere is reeling from the news. Considering the massive growth of Facebook and Zynga platforms for social gaming lately, this impressive statistic is hardly surprising, though it's nice to have the numbers to back it up.

According to the report, nearly 62 million Internet users, making up 27 percent of the online audience, will engage at least one game on a social platform monthly this year, a sizable increase from the 53 million who did so in 2010. US consumers will spend $653 million on social gaming for 2011, a hearty boost from the $510 million they spent last year.

Count me as one of the free riding game players (presently active in Knights of Camelot and Napoleonic wars but am rethinking if I should continue)

I think the idea that video games will serve as one of the most important source of innovation is spot on. That’s because video games seems emblematic of free market forces at work where competition drives innovation through the technology platform, where game developers tap the specialty market segments through various genre of games, which has been rapidly growing along with explosive growth of web usage.

While Mr. Kessler rightly attributes the origins of some of the past technological innovations to the government, it is important to point out that the market, and not the government, has fuelled the widespread use.

As rightly Peter Klein explains, (bold highlights mine)

But technological value is not the same as economic value. That can only be determined by the free choice of consumers to buy or not to buy. The ARPANET may well have been technologically superior to any commercial networks that existed at the time, just as Betamax may have been technologically superior to VHS, the MacOS to MS-DOS, and Dvorak to QWERTY. (Actually Dvorak wasn't.) But the products and features valued by engineers are not always the same as those valued by consumers. Markets select for economic superiority, not technological superiority (even in the presence of nefarious "network effects," as shown convincingly by Liebowitz and Margolis).

In short, those cited figures—billions in dollars—account for as the economic value of these videogames. It’s not just the game, but how people spend for it which sustains and grows the industry and at same time satisfying millions of users.

From the investment perspective, surging video and online social network games seem as one great area to explore.