Change in China’s Social Games Industry: New Entrants, Markets, and Models

China’s social games industry—the players, games, rules, and business models—is evolving at a blistering pace. China’s Top 10 Social Games and Top Social Networks, a new report by BloggerInsight, analyzes the latest changes.

Only a year ago, social games in China were developed by individuals or a small team on a shoestring budget, destined for RenRen (then Xiaonei) or other Chinese networks. Today, buoyed (and pressured) by investment (primarily foreign), developers have formed serious teams and launch their games in more lucrative markets.

The new business model for Chinese developers is to set sights on overseas markets, with Japan as a primary target. Average revenue per user (ARPU) in Japan is up to 12x greater than in China, according to an estimate by Jia Shen, CEO of RockYou. Most Chinese developers see Japan, Korea, Brazil, and Russia as easier markets than Facebook (and head-to-head competition with the like of Zynga), although the Chinese-language Facebook communities in Hong Kong and Taiwan are still good bets. Of course, it won’t be long before the Zyngas of the world also launch in lucrative markets like Japan.

In China, monetization remains a challenge for developers, despite the massive popularity of social games. The combination of low ARPU, powerful networks (read: zero or low revenue share), and an unstable regulatory environment, makes it exceedingly difficult for developers to reap significant profits. For this reason, most foreign developers have not tried launching games in China.

Instead, the top social game firms have come to China for the comparatively cheap and abundant talent. All the big boys—Zynga, Playfish, Playdom (rumored), PopCap, Slide, and WaterCooler–are now present, with several others players eyeing acquisitions. China’s market holds enormous promise—MMORPGs and Tencent make huge moneymakers via virtual goods—but that day has not yet arrived.

In terms of the top games, restaurant and pet games are now hot, while a few older hits have fallen off the map. Since the last edition of the report in December 2009, four of the top ten titles have been replaced: Parking Wars, Slave Manor, Animal Paradise, and Small Games. Among the newcomers, three are very localized (Promotion, X-World, and 361° Basketball) while one (Happy Baby) is a knockoff of a Western game.

#1  Happy Farm

Arguably the first SNS farming game worldwide, Happy Farm, was developed by Five Minutes, a Chinese developer. Its simple “plow, plant, water, pick, and repeat” formula has since conquered the world. Moreover, the addictive, log-in-every-hour mechanics have spawned countless copycats and variants. Chinese versions are more competitive than their Western counterparts: they allow users to steal and add worms and weeds to friends’ farms.

#2 RenRen Restaurant

Renren Restaurant is a copy of Restaurant City by Playfish on Facebook. The social network Renren, despite having a mostly open API, had its in-house game developers copy the game almost screen-for-screen. The game’s relative sophistication (3D graphics, high social interaction) indicates the future of China social games. As Chinese developers become more accustomed to such features, titles will undoubtedly become more original.

#3  Happy Aquarium

Happy Aquarium = pet game + Happy Farm underwater. Fish games are rapidly growing both in China (Happy Aquarium, Bubble Fish) and on Facebook (FishVille, Fish Isle). In fact, Hong Kong developer 6waves transferred Happy Aquarium to Facebook in Chinese, where it is has enjoyed remarkable success (1.9m DAU, No. 21 game overall). Game themes and mechanics translate across China and Facebook.

#4 Happy Baby (NEW entrant)

Happy Baby is a classic pet game in a cutesy style that copies Playfish’s Pet Society. There are plenty of variants and combinations for the user to create a “dream baby.” One industry insider cited this Happy Baby as the highest-grossing title on RenRen, the biggest open platform for social games in China.

#5 Building One

In Building One, users virtually live, work (e.g., by opening a hairdresser or spa), and socialize together in a single tall tower. Visually, this creates an appealing skyscraper to explore. Stealing customers and coins from other shops is a key part of the game. You can see from the picture you can develop different parts of the building, such as a restaurant with a dining area where you can serve cakes and whatever else you want to cook for your guests. It’s like a bunch of different simulations in one game.

#6 Promotion (NEW entrant)

Based on a popular Chinese book and film (The Promotion of Dulala), this workplace simulator allows Chinese white-collars to virtually become the star employee they always dreamed of. Users start out poor and lowly, for example with an internship at a fast food company, but can pull themselves up by their virtual bootstraps to become an online Donald Trump. The game has a sharp eye for Chinese humor that appeals to local users.

#7 House-buying

House Buying is the most popular game on Kaixin001, China’s hottest social network. House Buying innovatively combines a real estate section, Happy Farm, a pasture section, and Parking Wars into a single game with a common currency. For example, grow bamboo in your farm to feed pandas in the pasture, which can in turn be sold for cash to pimp-your-house. Because Kaixin001 develops all games in-house, it offers unparalleled integration.

#8 Wonder Hospital

In Wonder Hospital, users heal patients to acquire money and fame. The game includes innovative and controversial ads: a zeppelin flies overhead promoting the Yu Ting brand of contraceptives. Moveover, in-game actions are especially nasty. When visiting a friend’s hospital, players can enforce fines, steal patients, throw rubbish, let a dog loose, park a truck to block access, and ‘mystery mischief’ indicated by a bomb icon. This could change as the government “integrates” social games into its harmonious society.

#9 361° Basketball (NEW entrant)

361° Basketball is a team-management game that is fully branded by the Chinese sportswear brand 361°. To prepare for “PKs” against other teams, players train by watching brand videos from the “Equipment Shop,” where they can also buy virtual 361° products.

#10 X-World (NEW entrant)

X-World New York is a game in the style of Mafia Wars! The game has the same “task list” mechanics, but the theme is muddled as mafia games are officially banned in China. It’s one of five new 3rd party games included in Kaixin001’s new open platform experiment.

Kai Lukoff is an analyst at BloggerInsight and an editor on China Social Games. Follow Kai on Twitter @klukoff

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Targeted Positioning in the Age of Social Games

This is a guest post by Brice Morrison, former CrowdStar designer and editor of industry game design resource The Game Prodigy.

Commodities are products with no differentiation; oil, grain, and gold are some of the most common examples.  There are no competitive advantages, no deluxe features, no brand names or favorite companies that consumers like to buy from.  A commodity is bought by consumers based entirely on price; the cheaper the better.  If A is cheaper than B, then that’s all the information that’s needed to make a purchasing decision.

The early Facebook game ecosystem was made up of many commodities, games that originally were exactly the same as one another.  Farm Town and FarmVille, Mobsters and Mafia Wars, Happy Aquarium and FishVille, and countless others.  It led many players (and developers) to be confused by the early platform, asking, “Is this all this is?  Copies of cheap games?”  In the early massive user-grab time period, where virality was king and hundreds of thousands of users could be gained by clever features, it was often a race to who could get to the user first.  It didn’t matter that the games were very similar; since it was hard to tell the difference, why not just play the one that you found originally?

But as time has gone on, both the Facebook platform and Facebook players have matured, and commodity games are no longer acceptable.  As production values have skyrocketed, what used to be simple titles that could be copied in a few weeks have become massive undertakings, requiring dozens of developers, months of time, and careful understandings of the original game’s design.  With these production costs, players expectations have risen as well.

Thus, we are continually entering an age of a mature Facebook market, where game success isn’t defined by commodity rules of distribution and marketing muscle alone.  Instead, games are defined by differentiation, by a unique brand of fun, and by customer loyalty.  No one wants to play the game that is 90% as good as Cityville — they want to play Cityville.  While the games of yesterday appeared to be a crowd of clones, games of today and tomorrow look very different from one another and players are choosing what to play by comparison.

So what are today’s social game companies to do?  What kinds of games will resonate with consumers, and what kinds of games will no longer work?  Many of these answers can be provided by history, during a time when the game console market seemed very similar to today’s Facebook ecosystem.

Positioning in Early Console Days

In the early days of console games, developers for the original Nintendo Entertainment System were in a commodity-state as well.  Development was cheap, the platform and market was new, and ideas were easily copied and resold as new ideas.  All kinds of companies made all kinds of games, and early players were happy to try out whatever was in front of them…for the time being.

It’s interesting to look back and play some of the games from this era.  Many of the companies names you may recognize: Konami, Capcom, Enix.  But there are many other names you wouldn’t recognize: SOFEL, Electro Brain, or Bullet Proof Software.  While one group lives on, producing products that players love twenty years later, the other group has disappeared into obscurity, either through reluctant acquisition or bankruptcy.

Of course there are always outside factors to the success of a company, but it is telling to look at the lists of games that each group of developers made.  One group learned to focus their products into one type of game design they could be the best at, while the others continued to explore new genres with every release.  Companies that learned how to create a specific type of a game, with a style of gameplay, a common fanbase, a unique art treatment, these were the companies that survived.  They learned how to transition from a commodity-style game market to a positioning-style game market.

Companies that were unable to position themselves fell away.  ”What kind of games does XYZ make?”  ”Well, we make all kinds of games.”  This isn’t what a mature player wanted to hear.  While that absence of positioning worked during the early days of a platform, when players were still exploring and learning about their own preferences, the strategy no longer worked as the platform grew older.

Mature players wanted a positioned product, they said, “I want to play an action side-scroller; I’ll go play a Konami game.”  Or a slightly different type of player said, “I want to play a competitive fighting game, I’ll go play a Capcom game.”  Each of these positions were taken up by a company that became dedicated to their differentiation, and captured large numbers of players in the process.  And by training their development teams with each title to be able to deliver the best in that position, they allowed themselves to evolve successfully with the platform.

Commodity to Positioning Case Study: Blizzard

Blizzard is a company that is often cited as one of the most successful game companies in the world, citing massive success for titles like World of Warcraft, Diablo and Starcraft.  However, even Blizzard wasn’t always successful; in the early days of Blizzard, it was a “me too” company just like many of the others. RPM Racing, Battle Chess, MicroLeagues Baseball, and Blackthorne were all early Blizzard titles which barely managed to keep the company afloat.  These commodity titles all had similar game designs to competitors; Blizzard was mediocre at everything and master of none.

What made the difference?  Blizzard learned to position their games.  With the best selling “WarCraft: Orcs and Humans”, the game was a smash hit, far outselling any Blizzard title before it.  A less wise leadership team may have decided that it was marketing, advertising, or business strategy that had resulted in the success.  And while those undoubtedly played a factor, the key that made all the difference was the game design: what the game was, how it worked, and how players loved playing it.  And Blizzard’s team understood that.

Thus, after a string of mild successes from 1991-1994,  once WarCraft came out the company pivoted hard to focus entirely on creating one type of title: online competitive games.  Warcraft II in ’95, Diablo in ’97, Starcraft in ’98.  All competitive online titles.  By focusing on one style of gameplay and mastering it, Blizzard created a development team that was the best in the world at what they did, and a rabid fan base that loved what no one else could deliver.  By positioning themselves as the best developers of online competitive games in the world, they found their niche.  The rest is history.

The Cycle Repeats with Facebook

The cycle of platform release, commodity products, and differentiated products has repeated many times.  Each time, developers and designers that hit it big in the early stages but fail to evolve and differentiate themselves fall victim to the cycle and are forgotten.  Companies that learn to develop their specialty, their core experience, and their specific type of player find wild success in the later stages.

You can see much of this playing out now, as many social game companies are learning to find their niches and deliver experiences that no other company can.  Zynga is striving (and succeeding) to be king of the mass-market casual titles, simple games with great depth that focus on building, nurturing, and growing.  PopCap is continuing its tradition of elegant games that involve only a few player actions and lead to great depth and high scores.  Causal Collective is aiming to become a Facebook game company for violent and more male-oriented titles.

Other companies, on the other hand, have yet to understand what their “special sauce” is, the type of game that they are the best suited to make.  And until they figure their position out, DAU’s will continue to drop as players migrate to more targeted experiences.  As time goes on, more and more developers that try to copy others will burn through millions in dev and advertising costs without much to show for it.  While those strategies worked in a commodities market, it will not work in a mature market, where players are ready to settle down with their favorite game franchises and give their loyalty.

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A game designer who has worked at EA and CrowdStar, Brice Morrison is the editor of industry game design website The Game Prodigy and has been with teams for major titles like The Sims 3, Happy Aquarium, and It Girl.

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Are Social Games a Bubble? Future Growth Lies in Vertical Social Games

The moderator of the Financing for Social Games panel at ChinaJoy challenged panelists, “Is social gaming a fad? If so, let’s wrap this up in the next five minutes. Then we can all go home and start a Groupon clone instead.” Responses were mixed on the future financial fortunes of social game developers, though no one foresaw a collapse.

A consensus did emerge that more social games will target niche audiences. Panelist Atul Bagga, Vice President at ThinkEquity, commented, “So far we see horizontal applications, that is games that everybody is playing: your mom, your granny, your niece, your daughter. I think there is a lot room for vertical applications, for the smaller niche, for example, Watercooler’s Kingdoms of Camelot. It does not have huge usage, but the game kicks butt because the ARPU (average revenue per user) is very high.”

Chinese developers recognize the trend towards originality and verticality, but it’s a far greater challenge than producing farm game derivatives. First, they have to develop for a foreign audience, as revenues in China are still insufficient. Most Chinese developers see Japan, Korea, Brazil, and Russia as easier markets than Facebook (and head-to-head competition with the like of Zynga), although the Chinese-language Facebook communities in Hong Kong and Taiwan are still good bets.

Second, capturing a niche often requires an unfamiliar game design and appeals. Hans Tung, a partner at Qinming Venture, comments, “The hurdle for these developers to come up with very good vertical games… is much, much, much harder. In China all the massive multiplayer online game developers all know that social games are big. They all know that women are playing games now. But they don’t how to make those games for women. We talked to 11 listed game companies in New York and Hong Kong and most of them suck at making games for women.”

The growth market in vertical social games is a worldwide trend that will require still greater innovation on the part of Chinese and foreign developers alike. But the rewards could be rich: if developers are able to deliver, even the more closed Chinese social networks may open up their platforms—and valuable users—to third party developers.

Kai Lukoff is an analyst at BloggerInsight and an editor on China Social Games. Follow Kai on Twitter @klukoff

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