Virtually happy

"I've only been here 12 hours..."

In the midst of a chilly market for IPOs, investors behaved with uncharacteristic warmth last week when Changyou, a Chinese online gaming company, saw its share price shoot up by 25% on opening day. The Beijing-based company is also the first to list this year on New York’s Nasdaq exchange.

Changyou, a three-year old online gaming business, was being spun out of Sohu, China’s second-largest internet portal. According to the company’s prospectus, 94% of its 2008 revenue stemmed from a martial-arts game called Tian Long Ba Bu. The game is free, but gamers must purchase pre-paid cards to buy in-game extras like gems, weapons, magic medicine, or skill books. Although only 10% of the gamers are currently buying the cards, they translated to $202 million in revenue for Changyou last year.

The number of online game players in China has reached 75 million, of which 63% are paying customers. The market generated sales of Rmb18 billion ($2.6 billion) in 2008. Despite the financial crisis, analysts believe the sector is going to be one of the few bright spots in the current economic downturn.

Xing Hua at Analysys International, a Beijing consultancy, reckons: “Although not totally immune to the economic slump, historical data does show the gaming business has an anti-cyclical nature.” Fuelled by rising internet penetration, the industry could grow by another 50% this year, say more optimistic analysts.

The most popular games in China are massively multiplayer online role-playing games (MMORPGs), which have a 50% market share in the sector. They are forecast to grow by another 17% in 2009. Popular games include World of Warcraft, the blockbuster title developed by Blizzard but run by domestic operator The9, and God Punishment, developed and operated by domestic firm Perfect World. Many players battle monsters, villains and each other until late into the night, ignoring parental calls to get on with their homework.

Like Changyou, the leading game companies in China are publicly-traded. Perfect World and Shanda are both listed on Nasdaq. Giant which raised $887 million during a public offering on the New York Stock Exchange in 2008, was the single largest IPO from a Chinese private sector company last year. Its rapid growth stems from aggressive marketing at internet cafes in small towns and rural areas, where the entertainment options are limited. It also has a nationwide distribution network for selling pre-paid game cards, and game points in supermarkets and convenience stores.

Most of the games developed by Chinese firms are designed for the domestic market but a few have made their entrance overseas. Perfect World, for instance, has begun exporting its MMORPGs, generating an additional $20 million in revenues last year.

However, the sizzling industry may get a government cooling off. Industry observers are expecting the Chinese government to act to stem the growing incidence of gaming addiction.

To curb excesses the government has already mandated “Anti-Fatigue” warnings in gaming software. The first three hours of play each day is considered “healthy”. But after five hours, players will get warned every 15 minutes that they have entered “unhealthy game time”.

But the “Anti-Fatigue” system may not have been as effective as hoped. The Shanghai Evening News reported earlier this year that a local woman was filing for divorce, citing her husband’s frantic online gaming obsession. According to the self-termed ‘internet widow’, her marital partner was spending all day and most of the night at the keyboard. She says the couple exchanged no more than three sentences a day: “Are you going to bed?”; “Can you move over to your side of the bed”; and “Do you want breakfast?”

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