Western games developers told "Learn from China"

For the last 20 years China's economic and industrial mantra can probably be summed up as follows “Look at what the West is doing, then implement it with Chinese characteristic”.

For the most part this has work. China has become an economic power house feeding the Western world's seemingly insatiable desire for plush novelty toys, cheap DVD players, and all of the other things that appear so vital to a consumer based capitalist society.

However, the one area where China has been less than successful has been in the area of innovation.

In a few notable cases Chinese companies have produced new and innovative products, but in most cases they have taken foreign ideas and either improved upon them in small ways or have paired them down and optimized their manufacturing so that they can be produced for less and sold for less.

With this said, it would appear that there is one market in which Chinese companies are rapidly being seen as innovators, to the point that Western companies are now being advised to look to them to see what they can lean. The market: video games.

Video Games?

Admittedly, China is not exactly known as video came producing powerhouse. In fact most people outside of Asia would be hard pressed to name even a single Chinese video game, let alone to name one that they've actually played. None the less, Western companies were recently given a stark warning during one of Europe's premier entertainment conferences: Learn from Chinese companies if you want to grow. Or, in some cases, survive.

The Market?

Visitors to the UK's “Edinburgh Interactive” conference were, this month, warned that the classical Western model of video game production and distribution was heading down a blind ally, and was fast becoming unsustainable. Potentially to the point that it may soon no longer be viable for many companies to pursue.

During a presentation titled “Today’s Games Industry– The Search for Profits” Edward Williams, of the US based BMO Capital Markets, warned industry insiders that despite the Western games market seeing a year on year rises in sales - equal to $US30 Billion over 4 years - actual company profits were stagnating. With companies expending greater and greater amounts of time and money developing and marketing games, and brining in greater amounts of capital from sales, but chasing thinner and thinner profit margins on each unit sold.

Williams further warned that this failure to obtain acceptable margins came before 2009 figures had been taken into account. Figures which  analysts suggest will see a fall in sales of over 30% from mid 2008 levels.


In contrast Williams noted that Chinese games manufacturers were comparably more successful than their Western counterparts despite their limited market exposure, and that they enjoyed far higher profit margins per game developed than their Western counterparts because of their more innovative approaches.

The Big Four?

According to Williams Western companies are suffering from 4 key ailment that leave them trailing their Chinese equivalents in terms of innovation and margins:

• Project Burden
• Market Fragmentation
• Franchise IPR
• Outdated Distribution Models

Project Burden?

Western companies typically attempt to push their games as visual spectacles. Often developing them as if they were interactive feature films: an extension of/replacement for the theatre experience.

They attempt to make their products stand out from other games by pushing technical boundaries and graphical realism. For example, introducing complex mathematical models to handle in games physical, or building high definition photo-realistic environments. Both of which are costly in terms of time and expertises. Leaving Western companies spending more money than ever, and more time than ever, creating games that do not bring in proportionally increasing amounts of revenue.

In contrast, Chinese games companies often dedicate themselves to building less visually spectacular games with more innovative game play, and games where gaming longevity and replay value are based on character development, and plot structure or game play, rather than levels with large physical layouts.

This approach allows Chinese companies to produce games faster and more cost effectively while still standing out from the crowd. It also allows for games to develop a broad and loyal fan base whose primary goal is to advance a character with whom they can relate, or to see how a story develops, rather than to clear one level and proceed to the next.

The problem for Western companies is made worse still by games that become too expensive and run out of funding before completion, or which become outdated before their release and have to be abandoned. Costing the industry millions of dollars, and burdening companies with products that they have paid for, but which they never finish. With their shorter development times and less reliance on being considered “cutting edge”, Chinese companies rarely suffer from this problem.

To some extent the realization of lower powered consoles such as the Nintendo WII, as well as hand held gaming such as the GameBoy DS, not to mention gaming on cell phones, may offer Western companies a way out of Project Burden and the “bigger is better” arms race with competing developers. Offering Western companies platforms on which it is seen as being acceptable for a game not to be  cutting edge, and where game play is seen as being more important than graphics.

Market Fragmentation?

A second factor impacting on Western games developers is the highly fragmented nature of the market. With Western gaming taking place on multiple home consoles such as the Xbox 360, Nintendo WII, and Play Station 3, as well as on numerous legacy consoles and hand held devices.

This fragmentation often forces companies produce games for multiple hardware systems in the hope of gaining a wide enough potential customer base to make it worth while. An approach that can be a costly because each hardware platform has its own specifications and capabilities: Often requiring games to be partially redeveloped for each console that it is released on. But also because games developers must pay royalties to the owners of each platform that they develop for in order to be allowed access to the platform. Adding yet more additional costs to the development process.

Those who do not, or cannot afford to, develop for multiple consoles must concentrate on a single system in the hope that reduced development costs will compensate for reduced coverage. Sometimes this pays of, buy other times it leads to games failing to move beyond a particular niche market.

In contrast China's games industry is much more concentrated. Consoles have made very little headway in China, often due to their high price or due to IPR fears meaning that they are never released on the Mainland. As such, most game playing time in China is spent on PC. Often in internet cafes or other public facilities where the game player is not necessarily the platform owner.

Having fewer proprietary platforms to cater for allows Chinese companies to hone their skills and to concentrate their expertise in a way that most Western companies cannot do. While having less competition between platform owners means that companies do not get involved in industry politics as much, and do not have to pay multiple royalties to foreign platform owners.

Franchise IPR?

One of the most notable costs that the Western video game developers absorb is the cost of franchise IPR: The cost of purchasing the right to tie a game into an existing product or entertainment line. For example, the fees paid to a sports federation to allow the developer to use federation logos, or to include federation sports personalities, or the fees paid to a movie studio to allow a company develop a game based on a hit movie.

In some cases franchise fees, such as royalties boost games sales by allowing the product to ride on the publicity surrounding a film or sporting event, or to pick up an existing fan base. But in other cases the fees can be so high as to wipe out significant amounts of capital in exchange for a few logos or a pre prepared plot that can limit the game developers creative avenues.

Chinese companies, for their part, typically pay considerably less to use Chinese owned IPR as a total percentage of their income, and do not typically produce games based on expensive foreign IPR. They also often draw from cultural or historic themes that are in the public domain. Such as famous stories or legend for which they do not have to pay fees.

Outdated Distribution Models?

Another point raised was the Western games industry's reliance on outdated distribution models.

 The primary criticism levelled was at Western developers had been slow to adopt the digital download distribution models, which are the mainstay for many Chinese developers, and instead relied heavily on retail box sales.

The retail box model was introduced prior to the internet revolution and the introduction of broadband. When downloading was impractical, if not impossible for most gamers, and when the cost of writeable storage meant that games consoles – the mainstay of Western gaming - were not equipped to save games states between games sessions, let alone to save entire games.

Despite its advantages, and its history, selling in retail box format is considerably more expensive than the digital download model. Retail box not only requires the production of the physical distribution media, manuals and packaging, but it also requires developers to maintain relationships with publishers and retailers in order to get their products on shelves, and not to mention with manufactures in order to have a physical product to distribute at all. Each of whom take a slice of the profit along the way.

Being more download orientated has allowed Chinese developers to sell their games at lower prices than their Western counterparts while maintaining higher profit margins due to decreased distribution and media costs.

The digital download model has also allowed them to decrease the time between development and retail, and to overcome many of the disadvantages of retailing a product in a large country with poor physical distribution channels. Equally, digital downloading has allowed Chinese developers to reach an international audience of overseas Chinese and Chinese speakers, including those in Western countries, with minimal fuss and at no additional cost. In contrast, the boxed retail model often leads Western companies to stagger their international releases between countries. Sometime by many months, even when there is no language barrier.

Western companies need increase their use of  download services such as Steam on the  PC and X-Box LIVE, in order to lower their distribution costs. They also need to look at making more after sales content available on line, including the distribution of updates and expansion packs, and subscription based play. Companies also need to make more use of subscription based online services, such as those used by World or Warcraft and the various online role playing communities. Which have proved to be a valuable revenue stream in China, where the original game can be pirated amongst multiple gamers, but not the paid for online account which each gamer must own individually.

On-line content delivery also has a hidden advantage for developers. Consumers cannot re sell digital content.

At present there is a notable market in the West for used games. Gamers purchase games, play them, then sell them on  privately, or through trade in services provided by conventional retailers. This puts retailed games back on the market, allowing several consumers to purchase a boxed game over a sustained period of time, but with the developer only making a profit when the first copy is sold. Paid for downloads cannot be moved between consumers in the same way. Each consumer must have their own copy of the game, and must pay for it individually, and they cannot transfer or re sell it. Thus putting ore revenue in the hands of the developer.

To some extent mobile games for smart phone and devices such as the iPhone have allowed Western manufacturers to catch up with their Chinese counterparts in terms of digital distribution, but when it comes to high powered games, such as those on the console or PC, Western companies lag significantly behind Chinese companies.

Learn from China?

Williams offered a number of case studies detailing the comparative strengths and weaknesses of the Western games development industry, and detailed a number of ways in which they could adopt models in play in China, including the changing of development models to lighter ones such as those used in China, and taking up greater digital distribution for their media. Though he did acknowledge that a pure China model would unlikely be suitable for Western companies given the different demands and expectations of consumers, and the different market situations.

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