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Forthcoming in Journal of Contemporary Asia. 2018
Windows of Opportunity, Capability, and Catch-up: Findings from the Chinese Game Industry Jun Youn Kim* Software Policy & Research Institute, Seoul, Korea
Song Hee Kang Software Policy & Research Institute, Seoul, Korea
This study examines the catch-up experiences of the Chinese game industry from a neo-Schumpeterian perspective. The present study determined that Chinese indigenous firms succeeded in catch-up by strategically responding to favourable policy changes, such as a quota system that limited the import of overseas games, protection of intellectual property rights, and content inspection by the government. We found that China has established its capabilities in the direction opposite to that of advanced countries (service operation → profit models → content development and design) during the entire catch-up process. Similar to Hobday (1995), this finding shows that the order of capability development of latecomer countries can be different from that of advanced countries. Despite numerous studies on the role of the government, we argue that, even when the market is unsegmented, if foreign knowledge is accessible, then the necessary intervention can be merely the protection of the initial market in the form of exclusive licensing or import restriction and not sharing R&D cost or promoting marketing activity. And despite exclusive licensing, import restriction, and piracy, overseas game firms continued cooperating with China in the form of publishing contract and IP sales due to massive home market opportunities in China, which indicates that a large country with an immense domestic market can differentiate their catch-up strategies from that of small market countries. Keywords: sectoral systems of innovation; windows of opportunity; capability; catch-up; China; game
Introduction During the 1970s to 1980s, Korea demonstrated a typical example of the technological catch-up of a latecomer country. However, after the 1990s to 2000s, China has emerged as a new latecomer model in various areas, such as telecommunication (Mu and Lee 2005),
automobile (Chu 2011), mobile phone (Lee, Cho, and Jin 2009), and semiconductor (Rho, Lee, and Kim 2015) industries. Recently, China has also demonstrated remarkable catchup performance in creative industries, such as digital games. Industrial leadership of the game industry was transferred from the US, which was represented by the legendary games company Atari, to Japan in the 1980s with the emergence of Nintendo. Then, Korea entered the scene by developing a new genre called “online games.” However, China subsequently caught up with Korea in the online game industry and emerged as a world leader by exhibiting good performance in mobile games. China, with a sales volume of USD 27.55 billion, ranked no. 1 among the world’s top 100 game companies in 2017 in terms of sale volume, thereby besting the USD 25.59 billion sale volume of the US (Perez 2017). Thus, this study focused on technological catch-up by China in the digital game industry. Specifically, we examined the catch-up process of indigenous firms in the digital game industry. Existing studies on the Chinese game industry can be largely classified based on three perspectives. The first group investigated the unique profit model and distribution characteristics from the business perspective (Ren and Yang 1997; Chung and Yuan 2011; Hu and Jull Sørensen 2011; Kshetri 2009; MacInnes and Hu 2007; Ren and Hardwick 2008; De Prato, Feijóo, and Simon 2014; Cheung and Fung 2016). The second group focused on the regulations and institutional environment of the online game industry from the policy perspective (Cao and Downing 2008; Damm 2007; Ernkvist and Ström 2008; Golub and Lingley 2008; Zhang 2006; Zhao 2008; Chung and Fung 2013). Studies in this group analyzed the effect of exclusive license permit system and content censorship of the Chinese government in innovation in the Chinese game industry. The third group analyzed the unique cultural characteristics of Chinese games from the cultural
perspective, such as content, gamers’ culture, originality, and game design (Lindtner and Szablewicz 2010; Nie 2013; Chew 2016; Liboriussen and Martin 2016; Toftedahl et al. 2016). Studies in this group mainly analyzed the characteristics of Chinese-style game users, which are different from that of other countries, and differences in contents. The three preceding perspectives mentioned explain the effects of unique factors in the innovation of the Chinese game industry, such as profit model, government policy, and social-cultural characteristics, on the development of the game industry. However, the systematic and comprehensive explanation on the evolution of catch-up through interaction with various factors during the catch-up process and opportunity factors that internally and externally emerged is still insufficient. In particular, all of the three preceding perspectives mentioned cannot be used to analyze the process of capability build-up for sustainable catch-up by indigenous firms, as emphasized by Amsden and Chu (2003) and Lee, Gao, and Li (2017). In other words, capability build-up pertains to the indigenous firms’ dynamic learning efforts while overcoming the latecomer disadvantage in the market competition. Therefore, this study attempted to explain two questions in an integrated manner: (i) How have Chinese indigenous firms interacted with various actors, such as different opportunity factors, local governments, and overseas firms, to learn from and gain access to foreign knowledge bases, thereby succeeding in catch-up? (ii) How have Chinese firms accumulated a variety of capabilities required in the game industry in the catch-up process? The sectoral systems of innovation (SSI) framework of Malerba (2004), which has evolved from the national systems literature advocated by neo-Schumpeterian economists, was utilized to explain the questions. The application of the SSI framework in the catch-up context indicates that catch-up dynamics can be explained by referring to the ease or difficulty associated with the particular nature of the regimes of technologies
and markets and subsequently analysing the response of actors, such as firms and governments, to exploit the potentials or overcome the limits imposed by these regimes. Details of dynamics diverge, and such divergence reflects the heterogeneity of sectors as well as the responses of actors. Similar to Mu and Lee (2005) and Lee, Gao, and Li (2017), we modified the SSI framework to fit the context of China’s digital game sector. This paper is organized as follows. Chapter 2 provides the theoretical background and framework. Chapter 3 analyzes the digital game technology and knowledge system, market and demand system, and the role of the government in digital games. Chapters 4 and 5 analyze the role of the Chinese government in the evolution process of online and mobile games and the capability build-up process of companies interacting with the Chinese government, respectively. Chapter 6 describes the results of catch-up, and Chapter 7 provides the summary and implications.
Theoretical Background and Framework Sectoral Systems of Innovation Gerschenkron (1962) and Abramovitz (1986) first investigated the catch-up process of latecomer countries, followed by Verspagen (1991), Nelson (1995), Nelson and Pack (1999), Godinho (2005), Lee (2005), and Mazzoleni and Nelson (2007). Recently, Schumpeterian technology economists, such as Nelson (2008), have mainly examined the technological catch-up of latecomer countries and newly emerging markets. As a characteristic of their studies, technological capabilities were emphasized as a factor promoting catch-up. In the study of the technological catch-up of latecomer countries, “catch-up” is the process of narrowing the gap between latecomer and forerunner countries, such as technological capabilities and market share. Catch-up can be divided
into technological and market catch-up, which are dependent on each other and are closely related (Lee and Lim 2001). Most of the previous catch-up studies focused on old technology acquisition of latecomer countries from advanced countries and successfully caught up with them by applying the acquired technologies to the industry. A product life cycle is a representative methodology. Several studies analyzed how latecomer countries acquired and updated the outdated technologies of advanced countries to enhance the technological capabilities (Posner 1961; Vernon 1966; Utterback and Abernathy 1975; Kim 1997; Bloom 1992; Westphal, Kim, and Dahlman 1984) . These studies regarded technology learning and catch-up of the latecomer company as a race following predetermined tracks. Consequently, these studies revealed that the success of catch-up depends on the relative speed difference from advanced countries. However, as indicated by Lee and Lim (2001), latecomer countries do not necessarily follow forerunner countries (stage-following, i.e. South Korea’s home appliance and machine tools) and occasionally skip the path of forerunner countries (stage-skipping, i.e. South Korea’s Semiconductor) or create a new path (stage-creating, i.e. South Korea’s CDMA). The sectoral system of innovation is a theory attempting a comprehensive approach that includes various participants in the industry, policies, and their interactions, thereby considering the characteristics of unique technologies and knowledge in each industry as well as market and demand characteristics (Malerba and Orsenigo 1996, 1997; Malerba 2004). According to Malerba (2004), a sector is a set of activities unified by linked product groups that share some common knowledge. The building blocks of SSI are as follows: (a) regimes of knowledge and technologies, (b) demand conditions (or market regimes), (c) actors and their networks, and (d) surrounding institutions, including intellectual property rights (IPRs), laws, and culture. The sectoral system of innovation
can be defined as the system of a firm that is active in developing/manufacturing products in one sector and utilizing the technology of the sector (Breschi and Malerba 1997; Malerba 2004). Firms in one sector have a common characteristic: they belong to the same sector but are heterogeneous in terms of learning process and holding capabilities.
Window of Opportunity “Sectoral system of innovation” theory mainly analyses the sector of advanced countries, whereas “window of opportunity” theory explains the leapfrogging possibilities for latecomer countries. The leapfrogging thesis of Soete (1988) indicates that the shift in generations of technologies could be a window of opportunity for latecomer countries to surge ahead with the rapid adoption of modern technologies, whereas incumbents could fall into the “incumbent trap,” that is, being locked in existing technologies given the superiority associated with such technologies. Based on the SSI and window of opportunity thesis, many studies have examined industrial catch-up in emerging economies (Soete 1988; Freeman 1997; Freeman 1989). In addition, the business cycle, emergence of new demand, abrupt demand change (Mathews 2006; Lee and Mathews 2012), government intervention, and policy change can be opportunities for path-creating catch-up for latecomer countries (Guennif and Ramani 2012; Lee, Park, and Krishnan 2014; Kim, Park, and Lee 2013).
Research Framework The study of Lee and Lim (2001) attempted to link the technological regime to the catch-up possibility. Their study focused on the elements of the regimes, such as frequency of innovations, fluidity of technological trajectories, and degree of access to foreign knowledge. Jung and Lee (2010) found that catch-up tends to occur in sectors with technologies where the knowledge involved is highly explicit and easily embodied
in machinery and equipment. Lee (2013) confirmed that technologies with short cycle time could lead to a high possibility of catch-up, which is consistent with the leapfrogging thesis. Mu and Lee (2005) noted that the segmentation of the Chinese market into several tiers (low to high end) is a unique trait, and low-end markets may serve as entry points and nurturing bases for indigenous firms. Lee, Gao, and Li (2017), who further modified the existing catch-up model following the first framework modification of Lee and Lim (2001) by Mu and Lee (2005) in the context of China, included the role of market segmentation as a nurturing ground for indigenous firms, technology cycle time of sectors as an additional element in the technology regime, and role complexity of the government in China. Considering the characteristics of digital games, the present study utilized the analytical framework used by Lee and Malerba (2017) and reflected several perspectives on the analytical framework, which will be described in the subsequent paragraphs. First, similar to the study of Lee, Gao, and Li (2017), which stressed the paramount importance and complexity of the role of China’s, the present study also focused on the role of the government. Existing studies on the issue of China’s technological catch-up analyzed the inconsistency between central and local governments and standard role while mainly covering the hardware industry (Mu and Lee 2005). However, digital games belong to the Internet service and can be accessed by anyone once opened online. Therefore, we examine the response of indigenous firms to favorable policy changes. The Chinese government intervened in the game industry in various ways, such as exclusive service permit, import control, content censorship, and dynamic response to IPR (Ernkvist and Ström 2008; Ren and Yang 1997; Zhang 2006; Golub and Lingley 2008).
Second, as emphasized by Amsden (1989), Amsden and Chu (2003), and Lee and Malerba (2017), the growth promotion of indigenous firms by cultivating their own inhouse capabilities is a core factor in successful catch-up and continuous innovation, rather than passive reliance on Foreign Direct Investment (FDI). From a similar standpoint, this study defined the capabilities required by the game industry and analyzed the acquisition capabilities of indigenous firms in China. Regarding the capabilities of the game industry, Tsang and Tschang (2012) separated four components of online games (which include programming, contents, design, and business model) and emphasized the importance of the business model apart from technological development capabilities. By contrast, Ström and Ernkvist (2014) emphasized that interaction with users is an important operation capability from the service provisioning perspective. Game companies carefully adjust their game design and features according to user feedback in the alpha and beta testing phases of the game. The official launch of a game occurs at the end of the development period after users have provided feedback. Successful online games have a life cycle of many years after launch, during which constant service is necessary to retain current users and attract new ones. The operating service for games requires seamless interaction between many services and different providers (Tsang and Tschang 2012). Therefore, product–service interaction is the most important part of the development process. This study identifies the capabilities required by the game industry by integrating “programming, contents, design, and business model” emphasized by Tsang and Tschang (2012) as well as operation (user interaction) by Ström and Ernkvist (2014) and analyzes how Chinese indigenous companies have secured those capabilities. Capability build-up through user interaction has drawn the attention of the Internet-based industry, whose
importance continues to increase daily was not regarded as important by the existing catch-up study focusing on the manufacturing industry. Table 1. Operational definitions of core digital game capabilities. Category
Contents
Operational definition
Capabilities are exercised by constructing game mechanics (such as game rules and characters)
Design
Capabilities are demonstrated in designing narratives (story)
Programming
Capabilities can be found in the game program code
Business model
Capabilities primarily comprise value propositions and profit models
Operating
Capabilities include close user interaction and service operations
Figure 1 summarizes the preceding discussion and presents the theoretical framework. This framework is applied to the Chinese game industry, and catch-up performance is explained as an outcome of the technological– knowledge regime interaction and the responses by the actors (Lee, Gao, and Li 2017).
Figure 1. Modified model of dynamic multi-sectoral catch-up.
Innovation System of the Games Sector Technological Regime in the Game Industry Online games emerged in the late 1990s, thereby producing various genres, such as 2D, 3D, massively multiplayer online role-playing game, casual game, and first-person shooter. Recently, online games have been integrated with smartphones, and innovative technologies, such as augmented and virtual reality (VR), are rapidly adopted. As a place for combining information and communications technology, cultural technology, and cultural emotion, digital games can be divided by platform (such as video, PC, arcade, online, mobile, and VR games)(KOCCA 2002~2016). The technological regime of digital games is as follows1 : Reliance on technological advancements is low, whereas technological opportunities of new service development are high. If the essence of games is to implement contents using technologies as a tool, then technology is a means of ultimately implementing such contents. Moreover, the core factor that appeals to the customer is the cultural/emotional/intellectual game characteristics (entertainment characteristics) rather than the technology or performance. Therefore, a game with advanced technology and high technical specification does not necessarily replace digital games based on all old technologies in the game industry. Rather, even though the underlying technology is obsolete, many new game genres and products can be developed as needed if various contents are recombined and (highly amusing) game characteristics that appeal to the customer are properly demonstrated. In this respect, the opportunity for developing a new service is high. Knowledge tacitness and appropriability of innovation are low in the game sector. From the technological aspect, digital games can be largely grouped into game engine, contents (e.g., game item), graphics, and game story planning in relation to game
characteristics (entertainment characteristics). First, the game engine can be easily obtained in the market (e.g., Unreal Engine) because it has already been commercialized, and graphics performance can be analysed when the user plays a game. In addition, even though the digital game, which is created by innovative content planning, provides high specification and performance, the basic entertainment characteristics of the game can be freely experienced externally, thus making it vulnerable to imitation from the outside.
Sources for Competitive Advantage The game market reached the size of 99.6 billion dollars in 2016 (Newzoo 2016b), which is approximately 2.5 times larger than the music market (39.7 billion dollars in 2016)(Newsis 2016) and approximately 2 times larger than the global box office sales (50 billion dollars in 2016)(Statistia 2016). China has the largest mobile game market (based on mobile revenues), followed by Japan, US, and Korea. In 2016, China recorded 24.4 billion dollars, followed by the US (23.6 billion dollars), Japan (12.4 billion dollars), Korea (4.0 billion dollars), and European countries (in the order of Germany, the UK, and France; the order slightly changes every year)(Newzoo 2016a). Second, the manufacturing industry (e.g., communication and semiconductor) is segmented into the low- and high-end markets according to price and performance (Mu and Lee 2005; Lee and Malerba 2017), whereas the game industry is subdivided according to platform and genre (Newzoo 2016a). In addition, the game industry has a unique market demand structure in each market because it is strongly influenced by user preferences. [Table 2] shows that video and arcade games account for a substantial proportion in traditional advanced game countries (e.g., the US and Europe). However, Japan, which is a leader in arcade and video games, also led mobile games in the beginning by releasing various games. By contrast, China and Korea, which started with
online games, recorded a low demand in console games but accounted for an absolutely substantial proportion in online and mobile games.
Table 2. Revenue size by game platform and country in 2016 (unit: million $) Country
Online games
Video games
Arcade games
Mobile games
PC games
US
3,427
11,820
6,181
7,461
797
Europe
3,453
15,758
14,482
9,861
2,203
Japan
635
3,170
5,512
8,930
182
Korea
4,004
226
134
3,731
28
China
11,752
13
291
8,255
1,181
Sources: White Paper on Korean Games (Reciting PwC 2017, Enterbrain 2017, JOGA 2017, iResearch 2017, Playmeter 2016, NPD 2017) (KOCCA 2017)
Third, interaction with user groups is important. In contrast to the manufacturing industry, which basically releases a complete product, online games are characterized by the co-creation of the player community and game developers. Updating the game content, which updates and corrects the code when the player asks for feedback, and re-adjusting the game according to the preference of the game population is critical in this sector (Taylor 2006; Ström and Ernkvist 2014). The maturity of online games, surveyed by Choi et al. (2007) who conducted surveys on Korean online game companies, is about 80-90% during the closed beta test stage. Then, the online game is developed as a totally new product during 3– 10 years of service. Therefore, patches are applied to various bugs nearly every day, with a large-scale update frequently conducted. At this time, understanding the requirements and preferences of the game user becomes a source of innovation. Moreover, maintaining an appropriate level of customer satisfaction (game and entertainment characteristics) by reflecting customer requirements and preferences is important. In order to successfully implement such innovation, the playfulness demanded
by game players in the market should be continuously identified and systematically and consistently realized throughout the entire value chain (which include planning, development, operation, and advertising of the game) rather than the game programming technology. The commercialization rate of the online game is extremely low, which indicates the importance of improving completeness through interaction with users to be successful in the market rather than the initial development of the online game. Only 20% of games that start production will end up with a finished product. And of that percentage of finished games, 20% will make a profit (Forbes 2008).
Roles of the Chinese Government Exclusive License and Publishing Number(ISBN) In 2000, the Chinese government banned the sale of console game devices in China by announcing the Game Console Prohibition Order (Chen 2013). This order also stipulates that all enterprises attempting to provide online games in the Chinese market should pass through the complex approval and permit procedure, such as business permit, server access permit (ISP), server permit for commercial use (ICP), electronic notice permit, additional mobile service permit, Internet publishing permit, publishing number of the imported game, product registration number, Internet culture management permit, and game content screening ([Table 3]2). Worse, the Chinese government only issued the server access permit (ISP), server permit for commercial use (ICP), and Internet publishing permit (IPP3) to local companies and controlled the issuance of the electronic notice permit and Internet culture management permit to foreign companies, thus making it impossible for foreign companies to independently distribute their games in China4. In addition, games in China can only be officially distributed when the unique number (ISBN, a publishing number issued to a publication) is issued. In particular, Chinese–
foreigner partnership companies, Chinese–foreigner joint ventures, and foreign capital companies can only receive the publishing number when reviewed and agreed to by the information industry management department of the State Council in advance. Publishing number issuance review has been strictly applied to online games since January 1998, thereby becoming mandatory for mobile games since July 2016.
Copyright Protection Policy of the Government The Chinese government did not impose any sanctions on the IPR in the online area in the early 2000 and even took an ambiguous interpretation and standpoint when a lawsuit was raised by a developer company. A representative case is a lawsuit between Shanda and Wemade (Korea). In 2003, Shanda provided the “Mir-World” service that imitated “The Legend of Mir”. Thus, the developer Wemade (Korea) filed a lawsuit in the Chinese court. Nonetheless, Shanda continued to provide the imitated game service while the lawsuit was ongoing and secured considerable funding by listing on NASDAQ in March 2004. With the lawsuit became protracted due to the equivocal position of the Chinese government, Wemade settled with Shanda and dropped the lawsuit in 2007 considering the difficulty in entering the Chinese market if it lost the case. At that time, the loose IPR policy of the Chinese government was regarded as a policy that implicitly allows an indigenous company to duplicate overseas games. Hence, many overseas games were duplicated and distributed in the market. By contrast, Chinese companies began to file patent litigation against foreign companies in and after 2008, and the Chinese government demanded strong protection of IPR by announcing the “Summary of the National Intellectual Property Right Strategy” in 2008(Council 2008). Approximately 2.6 million patent applications were filed in 2013, of which 820,000 (approximately 32%) were by China. The annual growth of patents also rapidly increased (average annual growth of 20%).
Table 3. Policies related to the game industry in China Enforcement date
Policy name
Licensing organization
Description
General Administration of
1998.1.1
Electronic publication
Press and
The publishing number should be obtained to
management regulation
Publication/National
distribute foreign games.
Copyright Administration Permit for the commercial Internet information
2000.9.25
Internet information service management method
service. More than 50% foreign capital is not allowed, State Council
and screening and approval are required for listing on the domestic or overseas stock market and entering into foreign capital partnership.
General Tentative regulations for
2002.8.1
Internet publication management
Administration of Press and Publication/Ministry of Information Industry
Establishing a game company requires an Internet information service operation permit (ICP) from the Ministry of Information Industry, an Internet Publishing Permit (IPP) from the General Administration of Press and Publication, and an Internet Culture Operation License (ICOL) from the
2003.5.10
Tentative regulations for Internet culture management
Ministry of Culture
Ministry of Culture. Internet game permit and right regulation of the
2009.7.1
Notice on imported game
General
General Administration of Press and Publication. The
screening and strengthened
Administration of
imported Internet game must be screened and
permit management
Press and Publication permitted by the General Administration of Press and Publication in advance. State Administration Regarding mobile games, the publishing number of the
2016.7.1
Strengthening the publishing
of Press, Publication,
State Administration of Press, Publication, Radio,
number issuance policy
Radio, Film, and
Film, and Television is changed from
Television
“recommendation” to “obligation.”
Sources: Korea IT Industry Promotion Agency 2003, Korea Creative Content Agency 2015, and State Administration of Press, Publication, Radio, Film, and Television of the People’s Republic of China 2016.
Content Censorship The Chinese government inspects and monitors Internet contents with public security services (i.e. Internet real name system and compulsory registration system on
the Internet café). Indigenous companies, such as Tencent and Baidu, complied with the government policy by conducting self-censorship. By contrast, global enterprises, such as Google, ran into serious conflict with the government policy. Google, which entered the Chinese market in 2006, agreed to government censorship in the initial stages but ran into conflict regarding the level and method of censorship, such as connection redirection through Great Firewall, IP blocking, site blocking, URL filtering, DNS interference, keyword blocking (e.g., Tibet and Taiwan independence), packet filtering, and centralized concentrated censorship. Ultimately, Google moved to Hong Kong in March 2010 and Facebook withdrew from China in 2009 due to conflicts with government censorship. As of 2017, Google is blocked in China, and no Google Apps (e.g., Play Store and YouTube) are installed in Chinese smartphones
Roles of the Chinese Government Catch-up in Online Games: Publishing → Copying → In-house R&D, M&A
Game Operation through Publishing and Revenue Model From the year 2000 when online games were booming in the world game market, the Chinese government implemented an exclusive license permit system to protect their local market. Consequently, overseas companies had to sign a publishing (distribution) contract with local companies in China to enter the market. At that time, indigenous companies that distributed online games overseas could provide services if they could operate the necessary server and network for game publishing, even without developing their own game contents. Therefore, many companies working in the software and Internet-related areas started to enter the online game market. At that time, representative game publishers Sina, NetEase, and Tencent were initially Internet service companies; CATV, CNC, and Optisp were IDC and communication service providers; KingHope,
Softworld, and AEC were PC package distributors; and Kingsoft was a software developer. At that time, Internet service providers suffered from financial difficulties because they could not find a feasible revenue model. However, the online game market has various types of payment methods, such as prepaid (point) card, pay-to-play or subscription model based on the play time, and an item-based revenue model (17Games of CDC). These unique payment methods made games a major service that enabled Internet service companies to generate revenue (Ren and Hardwick 2008). The analysis of the structure of Internet market sales in 2004 showed that games were the main revenue source of Internet service providers, accounting for 24% (3.9 billion yuan) after wireless service (33%), such as mobile portal (iResearch 2004). From the capability aspect, overseas developers provided Chinese companies a learning opportunity by signing a development publishing agreement. Specifically, Chinese companies could learn the know-how of operating the necessary billing system to provide game services and experience various aspects of online game operation, such as stable management of the large-scale network, while publishing imported games in the local market. Furthermore, Chinese companies could have the opportunity to accumulate basic data to analyse the game characteristics (entertainment characteristics), such as preferences, demands, and requirements of the local game users, which are indispensable in new game content planning and development. For example, Fantasy Westward Journey of NetEase had 2.6 million concurrent access users in 2010, which is the largest number of single games. Tencent has approximately eight million concurrent users who access the games in total. Dungeon Fighter, the Korean game provided by Tencent, had 2.5 million concurrent access users in the first week of July 2017. Considering that the maximum number of concurrent access users of The Kingdom of the Winds (Nexon) in 2011 was 410,000 and that of
Lineage in the same year was 100,000 to 140,000, the number of concurrent users in China is undeniably significant. Chinese companies, which stably provide game services to such an enormous number of users, have already secured server and network management capabilities and advanced information, such as user information, game preferences, and trends, through close communication with local game users. Chinese companies have also accumulated an advanced level of service operation know-how in terms of response capability against various unexpected incidents. Table 4. Overseas online game publishing in China from 2000 to 2003 Overseas developer Company name
Country
Local publisher (distributor)
Three Kingdoms Online
Bookmark
Korea
Sanya
2001
Mir
Wemade
Korea
Shanda
2001
Stone Age
Digi Park
Japan
Waei
2001
Red Moon
JC Entertainment
Korea
Asiagame
2001
Tombstone in Heaven
Synopex
Korea
Asiagame
2001
Millennium
Actoz Soft
Korea
Asiagame
2002
MU
Webzen
Korea
The 9
2002
Heroes of Jin Yong
Softworld
Taiwan
Softworld
2002
King of Kings
Soft China
Taiwan
Asiagame
2002
Cross Gate
Square-Enix
Japan
Square-Enix (China)
2002
Helbreath
Soft Family
Korea
Asiagame
2002
Dragon Raja
eSofnet
Korea
Asiagame
2002
Shining Lore
Pantagram
Korea
Jing He
2002
Laghaim
Barunson
Korea
Gamania
2003
Mir 3
Wemade
Korea
Optisp
2003
Lineage
NCSoft
Korea
Sina
Entry time
Online games
2000
Sources: Whitepaper on Korean games (KOCCA 2002), Whitepaper on the digital contents industry (KIPA 2004~2005), 2006 overseas digital contents market research: Game part (KIPA 2007).
[Table 4] shows the online game publishing status from 2000 to 2003 in China. At that time, online games were developed mainly in Korea and published by indigenous
firms in China, such as Shanda and The 9, due to the permit system and regulations of the Chinese government (see [Table 5]). By contrast, the Chinese government tightened the regulations on overseas online game screening and distribution. The government established the Game Screening Committee (游戏评审委员会) in 2003 to tighten the criteria (such as religious, obscene, or political contents) for screening and permitting online publication distribution in China and implemented the “Overseas Online Game Import Quarter System” (2004) that controls the import and distribution permits of imported games. The exclusive permit system for foreign firms has been maintained until now in 2017. Table 5. Place of origin and number of game titles operated in China (2002 – 2007)
Sources:
Countries of origin
Year
Total Number of Online games in China
China
Korea
EU & US
Japan
2002
61
30
27
2
2
2003
114
47
60
4
3
2004
164
73
81
6
4
2005
209
109
91
5
4
2006
222
154
50
12
6
2007
203
133
64
3
3
Chinese
game
market
research
(http://games.sina.com.cn/n/2008-01-
07/1454230275.shtml)
Learning Development by Imitating Overseas Games The online game market in China has rapidly grown due to several successful imported games—37 million dollars in 2001, 110 million dollars in 2002, and 708 million dollars in 2005(iResearch 2006). With the rapid growth of the local market, competition among Chinese publishers has intensified, thereby resulting in an increase in imported game publishing prices, that is, down payment and royalty. A Chinese publisher must
make a large initial down payment by taking the risk of uncertain market success and pay 30%–50% of its profit to the game developer as royalty even if it successfully operates the service. Worse, the Chinese publisher still has to consult the game developer if it wants to change or replace a character, add a story, or develop an item to keep pace with the change in user demand5. Therefore, securing their own online games was most urgent for Chinese publishers to reduce the burden of excessive royalty. Thus, Chinese publishers decided to implement a strategy of imitating well-known overseas games. In terms of online game development, game engines are already commercialized and available in the market. Moreover, a latecomer company can easily duplicate the graphics part because it can be understood while playing the game. As such, the forerunner company also encounters considerable difficulty in protecting its game. However, the game story planning is closely related to the game characteristics, that is, the design is closely related to the analysis and insight into the game preferences and inclination of the actual game user, and core know-how determines the success of the game to be developed in the market. As well indicated by the low commercialization rate, the design is the most difficult part for the latecomer and forerunner companies. Furthermore, the possibility that a newly developed online game bests existing games in the competition can be quite low considering the network externality of the online game, that is, additional users are accessing the game because they can enjoy together in cyberspace. Therefore, Chinese developers continued to learn development and design by analyzing the well-known game engines, graphics, and preferences and tendencies of the game users and imitating well-known overseas games that include story planning based on such analysis. From the standpoint of indigenous Chinese companies, the duplication of proven well-known games in overseas markets was the best alternative to remove the burden of
royalty and minimize the risk of market failure occurrence if they develop their own game, with the Chinese government imposing no particular sanctions on intellectual property violation, such as illegal copy. Overseas game developers could not enter the Chinese market without receiving the publishing number (ISBN) from the Chinese government and the assistance of local distributors. Therefore, overseas game developers could not actively file a lawsuit even though a game imitating their creation appears in the Chinese market. [Table 6] shows the games duplicated by Chinese companies from 2003 to 2008. All of these games were well-known online games that ranked high in terms of market share, which are strategically and competitively duplicated and distributed in the market mainly by main local publishers, such as Shanda, Tencent, and The 9. Ultimately, Chinese companies could accumulate game development capability by audaciously copying various game and entertainment characteristics implemented in overseas games and adapting them to the local market. Table 6. Duplicated online games in China (2003–2008) Duplicated game
Original game
Game name
Duplicated company (China)
Crazy Kart
Shanda
Kart Racer
88Joy
QQ Tang
Game name
Developer
Kart Rider
Nexon
Tencent
Crazy Arcade
Nexon
Super Musician
9You
o2jam
Nowcomm
Dancing Star
9You Audition
T3
Young Raddish Party
Perfect World
East
China BL Tech
Elsword
KOG
Crazy Guitar
Yinyou Xiangsi
Guitar Hero
Harmonix Music Systems
Patricks
Shanghai Magic Grid
Paper Man
Cykan Entertainment
Aurora Blade
IGG
Ragnarok
Gravity
Magical Land
Shanda
Cream Poo
Wemade
The World of Legend
Shanda
Dungeon and Dragon
Shanda
Great Commander Three
The 9
Kingdoms WOF
The Legend of Mir
Actoz
Dungeon and Fighter
Neople
Dragon Nest
Shanda
Joyxy
The 9
Maple Story
Nexon
Mu X
The 9
Mu
Webzen
Extreme Basket Ball
9You
Free Style
JC Entertainment
Sources: Report on the copyright infringement status of the Chinese online game in 2009, (KOCCA 2009), http://www.chosun.com/site/data/html_dir/2009/10/05/2009100501369.html
In-house R&D and M&A for Self-development Chinese game companies that have improved their technological competence by publishing overseas games and creating imitation games have continuously secured external development competence through heavy investment in in-house R&D and drastic M&A. First, Chinese game companies aggressively invested in internal R&D to develop local games. Compared with the small R&D investment of Korean companies (approximately 200 million dollars by Nexon, NCSoft, and Netmarble) in 2016, the total R&D investment by Tencent and NetEase reached 2.42 billion dollars (approximately 2.737 trillion won) (see [Table 7].) Table 7. R&D investment amount of major game developers by year (million dollars)
China
Tencent
2011 415.5
2012 661.9
2013 828.8
2014 1,230.5
2015 1,467.1
2016 1,922.6
NetEase
5.5
8.8
12.1
17.0
350.4
494.6
Shanda
116.9
Total size
Korea
537.9
112.9 783.6
116.2 957.1
34.7
106.7 1,354.2
50.0
1,817.5 65.7
– 2,417.2
Nexon
–
66.8
NCSoft
72.1
78.1
59.2
65.4
88.7
106
Netmarble
0.3
8.6
47.1
47.8
47.8
26.8
Total size
72.4
86.7
141.0
166.2
202.2
199.6
Sources: IR data of each company and financial data of Bloomberg and Thomson Reuters.
In addition, Chinese game developers invested in external game developers or promoted M&A. Considering that market verification is the most secure method of analyzing the game characteristics of online games rather than successful development, investment in M&A of several game developers have the benefit of verifying various game contents in the market faster than self-development. Tencent was particularly active in M&A. Tencent secured shares in Netmarble and Party Games in Korea and became the largest shareholder of Activision Blizzard in the US (24.9%). Tencent has also emerged as a strong mobile game company by acquiring Supercell, the developer of “Clash of Clans.” [Table 8] shows the investment in overseas companies by Chinese game companies. Table 8. Investment of major Chinese game companies in overseas game companies Invested company
Country
Company
Invested time
Invested amount
Netmarble Games
2014.3
533 billion won (33%, third largest shareholder)
PATI Games
2014.9
20 billion won (20%, second largest shareholder)
Carboneyed
2014.10
10 billion won (10%)
4:33 Creative Lab
2014.11
150 billion won (25%)
Whiteout
2013
4 billion won
NSE Entertainment
2013
4 billion won
Kakao
2012.4
72 billion won (14%, second largest shareholder)
Reloaded Studio
2010
5.5 billion won
Korea
Tencent
US
Redduck
2010
1.5 billion won
Identity Games
2010
4 billion won
Toppig
2010
2 billion won
Nextplay
2010
1.5 billion won
Studio Hon
2010
1 billion and 450 million won
Riot Games
2011
100%
Activision Blizzard
2013
Largest shareholder (24.9%)
Epic Games
2013.3
Acquired the share (40%)
TapZen
2014.6
–
Kamcord
2014.12
–
playdots
2014.12
–
Kamcord
2014.12
34 million and 770,000 dollars
Pocket Gems
2015.5
65 million dollars
Outspark
2008.1
23 million and 200,000 dollars
Discord
2015.1
22 million dollars
This Means WAR!
2015.1
18 million dollars
Altspace VR
2014.9
15 million and 600,000 dollars
Playdots Inc.
2014.12
9 million and 600,000 dollars
VC Mobile Entertainment
2015.5
4 million and 500,000 dollars
Artillery
2015.10
250,000 dollars
Finland
Supercell
2016.6
8.6 billion dollars
Singapore
Garena
2015.3
172 million dollars
Iceland
Plain Vanilla Games
2013.12
39 million and 900,000 dollars
Japan
Aiming Inc.
2014.12
26 million and 900,000 dollars
Actoz Soft
2004.11
96.1 billion won (29%)
Identity Games
2010.9
120 billion won (100%)
Identity Games
2010.9
–
Actoz Soft
2004
Publication right of The Legend of Mir
US Zona
2004
Secured the share (100%)
MochiMedia
2010.1
Secured the mobile platform, developed the US market
Shenzhen Fenglin Houshan
2003
Secured the share (51%)
Shanghai Shulong Tech
2003
Secured the share (51%)
Shanghai Shenhda Xinhua
2003
Secured the share (70%)
Bianfeng
2004
Secured the share (100%)
Japan
Japan Bothtec Inc.
2003
Secured the share (11.2%)
Taiwan
Global InterServ (Caymans)
2009.12
Development center, testing, and service operation
Runic Games
2010
Development team of “Diablo” and “Hellgate London”
Cryptic Studios
2011.6
Added genres and secured the basis of developing the US market
CC Media
2010
Developed a game portal and secured operation know-how
Red 5
2010.2
Added genres and secured the basis of developing the US market
Aurora Feint (OpenFeint)
2010.7
Developed the mobile game platform market
Korea
US Shanda
China
Perfect World
US
Japan
The 9
US
Sohu.com
Korea
Keyeast
2014.8
15 billion won (6.4%, second largest shareholder)
Huace Film & TV
Korea
NEW
2014.10
53.5 billion won (15%, second largest shareholder)
Longtu Games
Korea
Longtu Korea
2015.2
21.7 billion won (44.53%)
Changyou
China
7Road Technology
2011.4
Diversified the genre to the web game market
Sources:
http://mdev.pann.nate.com/info/250437150;
http://www.mt.co.kr/view/mtview.php?type=1&no=2010052607536073461&outlink=1; http://www.mud4u.com/gnews/news_view.php?mc=news&sc=china&seq=41651;
(KIPA
2007), (KIPA 2008) were referred and recompiled.
Catch-up in Mobile Games: Overseas IP Purchase → Development of Local Game Contents Characteristics of the Chinese Smartphone Market and Mobile App Ecosystem Low-priced smartphones (approximately 2,000 yuan) account for the largest proportion in the Chinese mobile phone market6. Chinese smartphone manufacturers have started to manufacture low-priced, low-specification smartphones since 2010, such as MIUI of Xiaomi, EMUI of Huawei, and Funtouch OS of Vivo. Among these smartphones, Xiaomi only sold its products online. Chinese smartphone manufacturers have developed and used their own OS using the Android open source, which did not require royalty payment to Google. Since Google left China in 2010, and high-end products such as iPhone were not widely distributed7 , indigenous companies, such as Tencent (MyApp), Qihoo 360 (360 Market), and Baidu (Baidu Market), began to preoccupy the local mobile App market where mobile Apps can be distributed. As shown in [Table 8], China has a unique market structure as of 2016, that is, China has more than 300 indigenous Android markets and more than 6 iOS markets in contrast to the world market, which is divided by Google and Apple by half. Indigenous companies, such as Tencent, Qihoo 360, Baidu, and Wandoujia, constitute approximately 84% of the Android App market, with Apple App Store recording an 83.7% market share even with the existence of five markets (see [Table 8]). Owing to the formation of a unique App market in China, Chinese game companies pay commission to the local App market instead of paying approximately 30% brokerage commission to Google and Apple, which dominate the world’s mobile App market. Tencent has laid the foundation for
rapidly dominating the market by securing game development capability as well as the mobile App market. Ranking no. 1 among mobile App markets, Tencent charges 50% more commission than Google or Apple (see [Table 9]). Table 9. Market share of Chinese mobile game platforms in 2016 Ranking
App Store
Company
Market share
1
MyApp
Tencent
24%
2
360 Market
Qihoo 360
21%
3
Baidu Market
Baidu
19%
4
MIUI App Store
Xiaomi
13%
5
Wandoujia
Wandou
7%
Others
16%
Total
100%
Sources: STATISTA, KIUM Securities 2016.
In contrast to the game market of advanced countries such as the US and Japan which focuses on video games, video games are not widely distributed in China. Consequently, as the mobile communication infrastructure rapidly expanded and the number of service users increased, Chinese consumers started to enjoy games they used to play online using their mobile device 8 . [Table 10] shows the sales percentage of Chinese digital games by year. Online games accounted for 76% in 2011, but mobile games accounted for more than 56% in 2016 (Park 2017). By contrast, Japanese and the US mobile games increased by 5.8% and 15.2%, respectively, in 2015, but the Chinese mobile game market increased by as much as 46.5% in the same year (Newzoo 2015). Table 10. Sales share of Chinese digital games by year (2011–2016) Year
Mobile games
Online games
Web games
2011
11.6%
76.0%
12.4%
2012
13.1%
72.3%
14.6%
2013
16.6%
65.7%
17.7%
2014
25.0%
56.3%
18.7%
2015
39.2%
45.8%
15.1%
2016
56.3%
34.3%
9.4%
Sources: iResearch consulting group 2017.01.10.
Game Development using well-known Overseas IPs Although Chinese companies have improved their online game development capabilities by learning and imitating the operation technology while publishing overseas games (e.g., Korea and Japan), illegally copying overseas games became more difficult for Chinese game companies when the Patent Law was amended in 2008 due to the internal necessity of China, that is, to promote economic development by improving the patent right protection level in China. However, the development expense of mobile games is low, and implementation and design of mobile games are easier than that of online games due to their smaller screen size and lower data processing performance. Therefore, switching the IP (i.e., game brand) of the well-known overseas game to the mobile version can be a strategy for Chinese game companies to gradually dominate the market. In addition, overseas game companies have the benefit of generating additional revenue in the market with their proven game products without making additional investments by selling their IP because they cannot independently enter the Chinese game market. For example, King Net in China developed a mobile game (Mu Origin) based on Mu Online developed by WebZen in Korea, which runs on mobile phones. The game ranked no. 1 as soon as it was released in China. Subsequently, this game was imported by Korea and ranked no. 1 in the Korean mobile game market. Owing to the popularity of the mobile game developed by the Chinese development company, the market capitalization of the KOSDAQ-listed WebZen exceeded one trillion won. [Table 11] presents a summary of overseas IPs secured by Chinese game companies. Indigenous Chinese companies that have released many well-known online games have mainly secured Korean game IP.
Table 11. Status of overseas IP secured by major Chinese game companies Chinese company
Time
Game IP
Original game developer
2015.09
Crossfire
Smilegate (Korea)
2016.03
Blade and Soul
NCSoft (Korea)
2016.03
My Love from the Star
2016.03
Naruto
2016.03
Dragon Ball
2016.05
Zheng Tu Online
2016.05
Ensemble Stars
2016.06
Wuxia Online
2016.05
Zhan Hun
2016.05
A Chinese Ghost Story
2016.05
Fantasy Westward Journey
2015.09
Crossfire
Smilegate (Korea)
2015.06
Re Xue Jiang Hu
Taigon Mobile (Korea)
2016.01
MU
WebZen (Korea)
Network Technology
2014.07
MU
WebZen (Korea)
Changyou
2014.11
Cabal Online
ESTsoft (Korea)
Shanghai Ringwi
2014.11
Cabal Online
ESTsoft (Korea)
Locojoy
2015.09
Dragon Raja
Lee Yeongdo (Korea)
ATME
2015.10
Seal Online
Playwith (Korea)
Qihoo 360
2015.12
Sun
WebZen (Korea)
Sanda
2015.01
The Legend of Mir 2
Wemade (Korea)
Dream Square
2015.01
Ragnarok 1, 2
Gravity (Korea)
Tencent
NetEase
Longtu
Kingsoft (China)
Shanghai Kaiying
Sources: App Annie, as of June 2016.
Local Game Development by Integrating with Indigenous Contents Chinese game companies have released many local online/mobile games by integrating with local cultural contents, such as History of
Three
States, Bandit Kings of
Ancient China, Journey to the West, and Hero Gate. At that time, many well-known games were released, such as A Chinese Odyssey( 大 話 西 游 ), Fantasy Westward Journey(梦幻西游), Xun Xian(尋仙), Assault Fire(逆戰), My Own Swordsman(武林外
傳), Jade Dynasty(诛仙), Heroes of Three Kingdoms(大三國志), Ether Saga Odyssey(口 袋西游), Romance of the Three Kingdoms(夢三國), Dragon Oath (天龍八部), Zheng Tu Online(征途 Online), Hua Xia Online (華夏 Online), Wen Ding Online (问鼎), Wen Dao Feng Shen (问道), Under the Heaven (天下), Da Tang Warriors (大唐无双), A Chinese Ghost Story (倩女幽魂), and Glorious Mission (光荣使命). These games indicate that Chinese game developers are expanding games by pioneering a Chinese-style fantasy genre based on stories of characters that appear in their history and myth after securing operation, development, and design capabilities by publishing foreign online games and developing their own games. [Table 12] shows the ranking of Chinese mobile games in June 2017. Games developed by indigenous Chinese companies, including GAEA Mobile in Hong Kong, ranked among the top 10. Table 12. Ranking of Chinese mobile games Ranking
Name in Chinese
Developer
Remark
1
梦幻西游
NetEase
Based on Journey to the West
2
王者荣耀
Tencent
Based on History of Three States
3
诛仙
完美世界
Based on Chinese martial arts novels
4
大话西游
NetEase
Based on Journey to the West
5
倩女幽魂
NetEase
Based on Chinese martial arts movies
6
剑侠情缘
Tencent
Based on Chinese martial arts novels
7
仙劍奇俠傳
Gaea Mobile
–
8
天堂2: 血盟
Snail Games
Mobile version of Lineage in Korea
9
御龍在天
Tencent
Based on History of Three States
10
火影忍者
Tencent
Mobile version of Naruto in Japan
Sources: App Annie, Mobile game sales ranking of Apple App Store in China as of June 2016.
Catch-up Performance The Chinese game industry has grown by importing and publishing Korean and Japanese online games for the
past
17 years. However, Chinese indigenous game
companies have achieved successful catch-up in their local market through the
government’s policy support and improvement of their development capability. [Table 13] shows the change in the percentage of Chinese games by year. Chinese indigenous games accounted for only 28% of the local market in 2004 but exceeded 70% in 2015. By contrast, Korean online game companies, which once dominated the Chinese market, have recorded a continuous decrease in market share, with only 20% in 2007 (ChosunIlbo 2008). Table 13. Trend of the percentage change in Chinese games by year (unit: 100 million RMB) Category
2008
2009
2010
2011
2012
2013
2014
2015
Chinese games
110.1
165.3
193
271.5
368.1
476.6
726.6
986.7
75.5
97.5
140
174.6
234.7
355.1
418.2
420.3
62.9%
58%
60.9%
61.1%
57.3%
69.3%
70.1%
Imported games
Proportion of Chinese games 59.3%
Sources: China Audio-video & Digital Publishing Association 2016
Tencent is a representative success case in terms of service provider. Tencent recorded a game business revenue of 10.2 billion dollars in 2016, with mobile game revenue for Q4/2016 pegged at 5.8 billion dollars (10.7 billion yuan)(Herald Economy, 2017). [Figure 2] shows the annual sales volume of game companies worldwide. Since 2013, Tencent has ranked no. 1, thereby Nintendo.
besting
MS, Sony, Activision Blizzard, EA, and
Figure 2. Changes in sales amount for global game companies by year (2011–2016) Sources: Top 25 Companies by Game Revenues (2011–2016) (https://newzoo.com/insights/ran kings/top-25-companies-game-revenues/)
By contrast, [Table 14] shows the achievements of Chinese game companies at the global level. In 2016, China recorded sales of 22.2 billion dollars compared with the 21.9 billion dollars of the US and the 12.3 billion dollars of Japan. Reviewing the sales volume of the top 100 game companies in the world as of June 2017, Chinese companies posted sales of 27.547 billion dollars compared with the 25.059 billion dollars of the US.
Table 14. Sales amount of the top 100 game companies in the world as of June 2017 Rank Country
Total sales (US$)
Rank
Country
Total sales (US$)
1
China
27,547,038,245
6
Korea
4,187,710,343
2
US
25,059,882,690
7
France
2,967,051,801
3
Japan
12,545,658,648
8
Canada
1,947,370,765
4
Germany
4,378,065,542
9
Spain
1,913,049,387
5
UK
4,217,714,650
10
Italy
1,874,607,316
Sources: Newzoo 2017.6.
Summary and Implications This study focused on two questions: (i) How have Chinese indigenous firms interacted with various actors, such as local government and overseas firms, to learn and gain access to foreign knowledge bases, thereby succeeding in catch-up? (ii) How have Chinese firms accumulated a variety of capabilities required in the game industry in the catch-up process? To answer the first question, one has to consider the decision of the Chinese government in the late 1990s to only grant game service permits for online games to Chinese companies, along with the implementation of a quota system that restricted the import of foreign games. Therefore, foreign companies could not directly publish their games in China. Chinese local firms could copy the well-known foreign games and grow unhindered due to the low level of IPR protection at that time. With the emergence of mobile games on the market and the increase of IPR protection level by the government, Chinese local enterprises purchased IPRs of foreign games and redeveloped them to mobile versions. Chinese local enterprises also developed their own games using local contents rather than adopting a copy-and-develop strategy while gradually catch-up with the high level of technological capabilities. Meanwhile, content censorship by the Chinese government expelled leading companies, such as Google, from China and provided local companies an opportunity to dominate the mobile application distribution market. Consequently, Chinese local companies succeeded in catch-up by responding to favourable policy changes. To answer the second question, the leading Chinese indigenous firms accumulated capability in the following order: service operation and profit model → program development → content and design. First, the business model capabilities began to be acquired by introducing the prepaid card model while publishing imported games from 2001 to 2002, and pay-to-play or subscription model (2005-2007) was introduced
between 2005 and 2007. In recent years, Chinese indigenous firms have been upgrading its business model with free-to-play and pay-to-win. Second, in terms of operational capabilities, in the early 2000s, while publishing foreign games, Chinese indigenous firms replaced or added Chinese characters and stories according to Chinese user demands. They also promoted marketing activities such as advertising. As a result, the Fantasy Westward Journey of NetEase had 2.6 million concurrent access users in 2010, which is the largest number of single games. This is far beyond Facebook's record of 485k concurrent users in 2013 (Facebook 2013). Third, about the programming capabilities, Chinese indigenous firms originally imported overseas games and were only in charge of distribution, thereby improving their programming capabilities while copying overseas games (see Table 6). Since 2008, the IPR system has been strengthened, and self-development has also been intensified. Fourth, Since Chinese indigenous firms published overseas games, design and content capabilities have been limited to applying Chinese characters only at the beginning. However, they re-developed mobile games in the Chinese context based on overseas game IPs, and they had been successful in the Chinese market (see [Table 11]). As self-development began since 2008, Chinese indigenous firms further applied Chinese characters based on Chinese history and myths such as the story of Three Kingdoms, and even game rules that meet the demands of local users. [Figure 3] shows a comprehensive interlink between two spheres of opportunity emerging from the process of PC → online game→ mobile game, response strategy of Chinese enterprises, and order of capability upgrading.
Figure 3. Summary of Chinese digital game industry catch-up
This order was in sharp contrast to the practice followed by overseas firms, that is, content design, programming development, operation, and business model development. This finding shows that the order of capability development of latecomer countries can be different from that of advanced countries, which is consistent with the OEM model of the manufacturing industry (Hobday 1995). However, as observed in the OEM trap of latecomer countries in the manufacturing industry, the publishing model of latecomer countries is not free from attacks from the leading game developers, such as a high level of revenue sharing rate (royalty), deliberate delay of content updating, unilateral termination of contract, and launching of copycat games. Therefore, movement of latecomer countries from publishing to the higher position of value chain is difficult. This case can also be observed in Korea, wherein game publishers that appeared in the early stage of online game development fell behind competitors who undertook development and publishing over time. Meanwhile, in the case of China, the successful interaction between the Chinese government and the local companies has resulted in capability upgrading, which made the catch-up by the game industry possible. As previously broadly mentioned by Lee and Lim (2001), this study reaffirms the hypothesis that the nature of the industry-specific technological regime, market regime,
appropriate sectoral policies by the government, and effective catch-up strategies by the firms that respond to these factors are all closely interlinked This study indicates that in the case of an unsegmented industry, such as digital game, a successful catch-up can only be possible with indirect governmental intervention when the external knowledge base is easily accessible. In a segmented market, the lowfunction and low-price market segment available to latecomer companies plays an important role in determining the success or failure of the catch-up attempt (Lee and Malerba 2017). However, entering an unsegmented market at the initial stage is difficult for latecomer companies. This result is consistent with that of a previous study. Rho, Lee, and Kim (2015) reported that China succeeded in catch-up in mobile phones, telecommunication systems, and automobiles where the markets were segmented; by contrast, the catch-up was relatively slow in the IC chips industry, where market segmentation does not exist. Notably, China still succeeded in catch-up in the game industry with unsegmented market. Chinese indigenous firms continued catch-up while picking-up external knowledge and technologies when the entry of foreign companies was blocked by indirect government interventions, such as import quota system and exclusive license policy. This finding is also in line with the role of the Korean government as a form of market protection by using high customs duties in the automobile (Lee and Lim 2001; Lee, Cho, and Jin 2009), where foreign knowledge access and learning were easy. However, in memory chips (Kim 1997; Kim and Lee 2003) and telecommunication equipment (Lee, Mani, and Mu 2012) where knowledge access and R&D were difficult and risky, the government was directly involved in cosponsoring and conducting joint R&D with private firms. Second, over the entire course of catch-up in the Chinese game industry since the late 1990s, foreign companies continued cooperating with Chinese firms despite the
unfavourable and exclusive environment imposed by the government. The question is why they did so. Even in the unfavourable business environment, foreign companies are assumed to indirectly enter the Chinese market due to its immense potential. Such finding is in line with the so-called “trading market for technology” policy, which was intended to attract foreign companies or secure favourable conditions in their negotiations (Mu and Lee 2005). By contrast, the immense size of the domestic market enabled local companies to accumulate capital and use it for M&As, thereby allowing the acquisition of external technology and market development. Chinese enterprises, such as Tencent and NetEase, selected equity in a number of foreign game companies, including LOL and Supercell, with the capital obtained in the domestic market and globalized themselves through M&As rather than attempting to enter foreign markets with their own games. This finding indicates that large market countries can utilize a different catch-up strategy from the export-oriented strategy of small market countries, such as Korea and Taiwan, in terms of the internationalization process.
Notes
1
For more information on the technical characteristics of online games, refer to “Innovation characteristics and R&D strategy of the technology-based cultural contents service industry”, pp. 254–272 (Choi 2007)
2 For more information on running an online game service in China, refer to “Value Chain Analysis on the Chinese Online Game Publishing Industry,” p. 94 (KIPA 2004) 3 Article 10 of the regulation related to the Internet publishing service, “A company falling under the category of Chinese–foreigner partnership company, Chinese–foreigner joint venture, or foreign capital company cannot work in the Internet publishing service.” 4 The permit system of the Internet service becomes a kind of entry barrier to foreign companies. Online games could only be distributed by a local distribution company, and overseas game development companies were not allowed. The same thing happened to the search portal—HNH that established a partnership company with Hihong Group (海鸿集
团), Yahoo provided services through Yahoo Hong Kong and Yahoo China, and Google provided services using the ICP permit of Ganjimang (赶集网) in China. 5 For more information on the royalty proportion of Korean–Chinese online game developers, refer to http://www.dt.co.kr/contents.html?article_no=2003090302011559658005, 2008 Overseas digital contents market research: Game part, KIPA, p. 294.(KIPA 2008) 6 Upper low-end smartphones priced under 400$ had more than 90% share in the Chinese market from 2008 to 2011 (Haselton 2012). The average price of Android smartphones in the world was over 400$ in 2008 and that of the expensive iPhone was over 620$ (Richter 2016). 7 Market share of iOS has been below 20% in china since Jan. 2013 till Dec. 2017. See www.statista.com/statistics/262176/market-share-held-by-mobile-operating-systems-inchina/ (Statista 2017) 8 In 2004, mobile games began with “Tetris” installed on Hagenuk MT-2000, a mobile phone model of Hagenuk in Germany. Tetris was the first game in the world that could be played on mobile phones, and Nokia subsequently distributed another mobile phone game called “Snake.” Owing to the small screen size and low hardware specification, the number of games that could be implemented was.
Acknowledgement An earlier version of this article was presented at 2018 Korea Economic Outlook Workshop (2017) hosted by the center for economic catch-up. The authors would like to thank Keun Lee.and Gang Min Park for his valuable comments.
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