Hurray! Holding Co., a wireless value-added service provider listed on the Nasdaq, agreed on December 30, 2005, to pay $4.1 million for a 100% stake in Shanghai Magma Digital Technology Co., a mobile game developer and publisher. Hurray! said it may pay a higher price depending on Magma Digital’s business performance following the acquisition.
Hurray! didn’t enter the mobile game market until 2004. Hindered by its late market entry and lack of gaming development capabilities, it has had trouble jump starting that business. So far, it has released only about 50 titles. Buying Magma Digital shows Hurray!’s commitment to this market, and will also give it a bigger market share.
The dust of the Hurray! case has not been settled, there were two more deals announced early this year. On Jan. 18, 2006, Linktone Ltd., the first Chinese wireless value added service provider listed on the Nasdaq, announced that it completed a strategic investment of paying approximately US$1.8 million in cash for a 51% equity interest in Ojava Overseas Ltd. (Ojava), a mobile game developer and game publisher in China.
On Jan. 20, British mobile ring tone and game developer Monstermob acquired M-Dream, a Chinese wireless game developer, for an estimated $30 million to $35 million. Hangzhou based M-Dream was established in 2002 and now has 120 employees, it’s the top provider of cell phone games on China Mobile’s Treasure Box game portal. Monstermob plans to use M-Dream as a development center for creating new mobile phone games. “We believe the growth prospects for the overall Chinese mobile content market are unparalleled globally, and the games segment is forecast to be the fastest growing segment of the market,” said Monstermob CEO Martin Higginson.
The recent round of consolidation switched the industry’s attention to wireless games and to whether their sales may prove to be the industry’s next growth driver.
China‘s wireless value-added service industry, led by text messaging service, has experienced explosive growth in the past few years. The country even coined the term “thumb economy’ to describe the rise of an industry that is driven by quick thumb moves on a cell phone keypad.
Profit margins from the text messaging service industry are narrowing, however, sending the industry to find its next killer application. As color-screen mobile phones that support Internet connections and downloading become mainstream, different wireless value-added services have been introduced, including MMS, Multimedia Messaging Service, customized ring tones, interactive voice response service (IVR), wireless access protocol (WAP) and mobile games. Meanwhile, mobile games have evolved from simple text messaging games and wireless access protocol games to what the industry hopes will be its next bit hit — downloaded JAVA or BREW wireless games and JAVA or BREW-enabled multi-party role playing games.
How Big Is the Pie?
Sales in China’s mobile game market rose last year to $175 million, 79% higher than in 2004, according to a report published by Analysys International, a Beijing-based IT and telecommunications market researcher. That growth came on top of a 150% surge in sales in 2004, up to $98 million, compared to $39 million in 2003, the report said. By 2008, China’s mobile game sales are expected to reach 5.86 billion yuan, based mainly on downloaded game sales. However, multi-party network games are expected to grow even faster, registering sales that are seven times higher than the 720 million yuan registered in 2004.
The number of cellular phone users in China stands at more than 388 million as of November 2005, according to China’s Ministry of Information Industry. A top-notch mobile game was downloaded about 1,000 times a day at its peak popularity level in 2005. Even an average-quality game was downloaded about 500 to 600 times a day at its peak level. “The average price of a downloaded mobile game in China rose to 8 yuan in 2005 from an average of 5 yuan in 2004,’ said Zhang Yu, head of the mobile game department at Tom Online, a Nasdaq-listed Chinese web portal. “The price of the most sophisticated mobile game has climbed to 15 yuan, not far from the cap price of 20 yuan that China Mobile set.’ Zhang estimated that the average price of a mobile game in China will increase to 10 yuan this year.
Mobile operators such as China Mobile and China Unicom take 15% of the revenue of each downloaded game, with the rest of the pie shared by service providers and content providers. “Game developers are often willing to take a smaller cut of the profit and sell their games to large service providers with more resources to promote and distribute their games so that those titles get more downloads,” said Li Jin, market director of Shenfa Software Co., a Shanghai-based wireless game developer with Japanese backing. “In that case, a service provider may demand as much as 60% of the download revenue.’
“The mobile game industry is entering a fast growth period,” Su Liang, chief executive of Shenzhen-based game developer Digifun, told China Knowledge at Wharton. “The top five service providers will end up getting 80% share of the market even as major players are still defining their separate competitive edges. ‘
First Mover Advantage
Each player in the entire supply chain of China’s mobile game industry is trying to get a first mover advantage in anticipation of a surge in growth. So far, leading mobile game companies in China include Internet portals such as Sina Corp.; traditional wireless value-added service providers Linktone Ltd. and Kongzhong Corp., and specialized game developers including Magma Digital and Digifun.
Mobile operators are also working with game companies to introduce platforms that will better accommodate the next generation of more sophisticated games. Last year, China Mobile increased its gaming platform capacity and started a trial plan that charged a flat monthly fee for unlimited online data transfer and download. The two moves were each ranked No. 3 and No. 4 among the top 10 mobile game news events in 2005 compiled by Chinese website ezIT. The capacity expansion allows the release of games that are more sophisticated and have better picture quality but take up huge data space, the website said. Throughout the second half of last year, China Mobile’s subsidiary offices also rolled out an unlimited wireless data plan for 20 yuan per month. The plan lowered the cost for game players who have to download games from the Internet, and for those multi-party online mobile game players who have to engage in huge amounts of data exchange.
China Unicom isn’t falling behind. In an October 2005 trade show in Beijing that featured the latest telecommunications-supplies technology, China Unicom introduced its GPRS value-added service platform, which will offer users on its GSM network value-added services such as UniJava mobile games.
Cellular phone makers want to get their share of the pie, too. They have introduced models with features that support newer games. Nokia’s N-Gage phone was considered the first gaming phone. Other popular mobile game phones include Sony-Ericsson’s K750 model embedded with 3D Java technology, Nokia’s N-Gage QD, the Dopod 818 model that targets female players of 3D Java games, Samsung’s SPH-G1000 with a slider design and LG’s KV3600 that it says enables the world’s fastest 3D mobile game play. Lately, many mobile phone equipment makers have switched their research focus to developing models that will support higher-level and more sophisticated multi-party online role-playing games.
The Road Ahead
It remains to be seen if China’s mobile game market will turn out to be as lucrative and promising as it seems. Or could it turn out to be just another Internet bubble? Several roadblocks still have to be removed.
First, game quality has to be improved. Mobile games were mostly imported in the beginning. Even though many games are now domestically produced, they are cheap copies of their foreign counterparts. “Almost 90% of the games on China Mobile’s platform were developed domestically as of the second half of 2005,’ said Li Jin of Shenfa Software. “Having more domestically produced games doesn’t mean an improvement of game quality level at the same time. Many Chinese mobile games are poorly developed and at risk of becoming commodities.”
Second, mobile operators have too much control over value-added service providers. Game developers and service providers rely on the platforms of mobile operators to have their games published. They need to cultivate good relationships with mobile operators so their games can be released early and prominently featured. They wine and dine business managers from mobile operators regularly. How much service providers and content providers make also depend largely on how and whether mobile operators approve game pricing and how they determine a bad debt.
“We will release our products in the overseas market in the short term,’ Yu Bin, chief executive of Shanghai Mana Mobile Software Co., a small Shanghai-based game developer founded in 2003, told China Knowledge at Wharton. “The Chinese market is too immature in many respects. The success of a game often doesn’t depend on how well it’s developed.’
The market also has to deal with the challenge of the 2.5 Generation network used by both China Mobile and China Unicom. Data transmission and download speed on that system is very slow, with no promise of any download success. That will make it hard to release higher-end and more sophisticated online multi-party mobile games.
In addition, there is no standard rule governing competition in the market. On December 3, 2005, service providers, including Kongzhong and Magma Digital, signed an industry self-regulation treaty which seeks to set up an industry pricing structure and reduce fees inappropriately charged by some providers.
These various challenges have led to sluggish business at many mobile game companies, especially small and medium size ones. “The market is still too fragmented,’ Lu Jian, CEO of a Beijing-based wireless value-added service provider Moloon, told China Knowledge at Wharton. “Many mobile game companies are operating at a loss and keeping their businesses going through risk investment in the hope of establishing a strong market position in the future.”
According to Su Liang of Digifun, “about 20 JAVA online multi-party role-playing mobile games have been released. The market for those types of games will probably take off in early 2006 and eventually grow to a 200 million yuan market.”
Many industry participants remain optimistic, despite the challenges the market faces.
“Mobile games will become a new growth driver for the wireless value-added service industry,’ Su Liang said. “Most of the new mobile phones support Java functions. Wireless carriers are upgrading their platforms and increasing system capacity to accommodate large data files and faster data transmission. Downloaded Java game sales on China Mobile’s platform have had a big increase since the second half of 2005. Even by conservative estimates, the market size will double each year for the next three years.”
As Hurray! CEO Wang Qindai said in a statement after the announcement to buy Magma Digital: “We anticipate that the acquisition will significantly strengthen our mobile game development capabilities. We believe that the combination of Magma’s experienced product development team, our proven wireless distribution channels and broad customer base will put Hurray! in a strong position to capture opportunities in the fast-growing mobile games market in China.”