Two cases – one from South Korea and one from Germany – examine the booming area of massive multiple-player online games. How should Korean company Nexon enter the Chinese market? What growth tactics should German company GameGoods.de adopt to develop its business of selling online ‘gold’?
Online Game Industry and Nexon’s Entry into China
Seoul National University, GSB
Professor Wujin Chu and Mi-Ja Im
ECCH reference SNU-09-03 and
GameGoods, The Cash is Real
WHU, Otto Beisheim School of Management
Professor Lutz Kaufmann and Oskar Hartmann
ECCH reference 309-055-1
People have always loved games. For the Romans it might have been a good gladiator’s combat. For medieval knights, perhaps a quick joust. In the shade of village squares, perhaps a game of cards, or bowls. Sociability and interaction are part of the fun.
Things changed in the mid-seventies when electronic games made their appearance. What came first – was it tennis pong on television sets, or PacMan on home computers? Or should pinball machines be considered the precursors of the modern day video arcade games?
Two recent case studies – one by professor Wujin Chu of South Korea’s Seoul National University and the other by professor Lutz Kaufmann of Otto Beisheim University – cover different aspects of the online gaming sector.
Both cases deal with massive multi-player online role-playing games, otherwise known as MMORPGs. These games are played on PCs and have become an industry in itself, and a universe of refuge for the oft-addicted players. The leading game, World of Warcraft (WoW), has over 6 million paying subscribers and rakes in $1.5 billion (yes BILLION!) for its owner, Vivendi Universal group of France.
What sets MMORPGs apart is their complexity. Players become co-creators in this universe: they choose and customize their roles, their attire, their armory, and their allies. These games allow interaction between players, who can gang up in order to slay some poor unsuspecting death knight or paladin. With such creativity allowed, it is no wonder that the average online gamer spends 20 to 40 hours per week in the universes of games such as WoW or Lineage or Maple Story. It sure beats hanging out with the parents!
Worldwide, about $4.4 billion was spent for online games in 2005. Quite a sum, and all the more impressive that there is a shift going on from ‘one-time’ purchases (e.g. a game console and game cartridges) to ongoing, continuous spending. Online gaming is at the forefront of this trend, with complex business models that combine upfront fees and ‘after-market’ extras that attract often-addicted players. At one extreme the WoW player is shelling out a monthly sbscription fee (perhaps $15/month), whereas players of other massive multiplayer role-playing games such as MapleStory will have free access but pay for all extras.
For professor Kaufmann, the interest in online gaming dates back to ___, when (fill in). His area of interest is a smaller German company, a 2006 start-up based in Cologne, called GameGoods.
GameGoods serves the online game ‘aftermarket’, and focuses solely on the best-selling online game, World of Warcraft (WoW). Launched on a stroke of intuitive genius, GameGoods provides WoW players with accessories that enable players to progress more quickly to higher levels of the the game. Cheating? Not at all. A little help from my friends is how one could describe this flourishing aftermarket for magical spears, fast elixirs, and gold – all items that players need to accumulate, usually after hours of playing, in order to advance to progressively higher levels of the game. “By purchasing these accessories from GameGoods,” explains professor Kaufmann, “players can focus on the interesting parts of the game, and outsource the repetitive combat required to acquire elixirs, swords or gold.”
Written in a simple flowing style, the GameGoods case presents the dilemmas of the fresh start-up that has hit a gold vein, more or less without expecting it. Indeed, GameGoods was started in 2006 on the intuition that WoW players needed a reliable and trustworthy source of accessories in order to advance in the game without spending hours slaying monsters, druids and undeads.
The case examines GameGoods barely a year after its creation. The underlying basics seem good: revenues from eBay sales and from direct web marketing are positive. From five founding partners, the start-up has grown to 20 employees, in order to handle the customer service needs and marketing. What should CEO Richard Stallmann do next? Branch out from WoW into other online games? Delocalize from expensive Cologne? How can he protect his position against Asian competition that is cheaper and will soon be trustworthy too?
By contrast to the small German start-up, Nexon of Korea presents a different set of issues. The case from Seoul provides good insight into the complex segmentation that exists. See box and chart. Arcade games are still the dominant force in Korea, and PC games are a close second, but the new entrant, online gaming, is gathering pace.
The interest of the Korean business school may reside in the concerted effort by the Korean government to stimulate the development of the national gaming industry. Professor Wujin Chu’s case focuses on the possible development strategy for Nexon, a $350 million (2006 revenues) game developer. What interests Nexon’s management is the entrance into the lucrative Chinese market.
For a game developer, entering a new market is not as easy as it may sound. “From one day to the next,” explains professor Chu, “you don’t just get new Chinese players on board. There is much preparatory work.” For players to enjoy a good online experience, there must be local computer servers, local marketing so that a critical mass of players start playing, and perhaps even localized content. This means the game developer needs to have arranged an agreement with a local partner for ongoing activities.
Need a closing paragraph.
Box 1 – Entry strategies into China
Which rules to use?
For online game publishers, international expansion gleams like the pot of gold over the horizon. Yet choosing between low-risk and higher-risk entry strategies can be complex
For Nexon in China, the first toe in the water had been via a licensing agreement with a company called Shanda. Shanda had been vastly successful, so much so that its founder became a multi-millionaire. So maybe Nexon should consider setting up its own subsidiary?
To understand the obstacles to the internationalization of a game, professor Wujin Chu and Mi-Ja Im examined how Nexon approached the Chinese market. The main constraints to expansion are three-fold:
- Massive multi-player online games require substantial computing time, in order to serve replies to the all the players in different locations. This means server parks, located as close to players as possible;
- Playing alone is no fun. The game publisher needs to generate buzz and attract players, so that a minimum critical mass is attained. This means local marketing, namely via online gaming circuits (blogs, magazines, chat rooms, viral marketing, etc.);
- Would you play a game in cyrillic, arabic, or some other foreign tongue that you neither read nor understand? Nope. So foreign editions need to be translated, and one step further, adapted to the new markets. For example, one version of Maple Story will have squirrels, whereas in another country these rodents are replaced by weasels (check).
Realizing the effort required, how can a publisher go about entering a new, foreign market? “Korean game publishers typically choose one of two routes,” explains professor Wujin Chu. “The first route is ‘build’: set up a local subsidiary, establish a local office, staff up and roll out the local version over a short period (say six months to a year).”
What helps game publishers here is that roll-out can be progressive, with a few hundred or thousand players in the first months and then hundreds of thousands later on. “The second route is strategic alliances or partnerships,” pursues Wujin Chu. “In this scenario the game publisher will seek a local partner who has the relevant expertise and can accelerate the roll-out and hopefully decrease the chances of a flop.”
Nexon’s developemtn strategy has been a mix of the two tactics, with subsidiaries being present in Europe, the USA and Japan. On the other hand, licensing agreements were the choice for China and Taiwan.
Box 2 – Value chain
Understanding the gaming value chain
Gaming has come a long way from Scrabble and Tetris. Market segmentation is complex since the industry is a moving target, with transparency leaving to be desired
For those of us from – shall we say – an older generation, the arcanes of online gaming may seem foreign. Let us provide some background on how these games function. And on how they work as businesses.
The majority of games sold around the world follow a simple business model: customer purchases game (physical version or computer download) and then plays game until she is fed up. Online games that are played on PCs follow different, more complex rules. That helps to explain their attractivenesss and their growth. For online games, different revenue models exist but the one that seems to be taking precedence is free access to the game and then pay for extras. Some online games
Segmentation in the gaming world is very, very complex. It is almost a Rubik’s cube of complexity. The difficulty arises from the dimensions along which games can be segmented:
- One segmentation is based on the ‘hardware’ (see chart), where one distinguishes between video games, PC games, online games, arcade games, mobile games, and other forms.
- Another segmentation is in game content. Almost all games have static content. What you purchase is what you play with thereafter. Other games have dynamic content, and this is where MMORPGs have a definitive advantage, since the games have a basic content matrix, but then evolve continuously.
- Another segmentation is in the revenue model. Most games have a one-time upfront fee (to purchase a cartridge or download). End of story. Online games have much more complex revenue models, which can incorporate upfront fees (susbcriptions) and then ‘add-on’ fees, for example to purchase options (equipment, access to special zones, etc.). The presence of advertising or sponsorship money in online games adds another variable.
Paragraph on the business models
Add chart on value chain.
Add chart from Nexon case illustrating the revenue models.