The move to online and social gaming is a rather clear trend.

Shanghai. March 26. INTERFAX-CHINA - In the latest Interfax TMT guest column, Benjamin Joffe, founder of consulting firm Plus Eight Star as well as the Beijing chapter of the Mobile Monday organization, looks back at the roots of gaming, and gives an insight into where the industry is heading.

Observing the evolution of a product over a long period of time is often full of surprises: growing in size, shrinking, getting color variations, becoming cheap, expensive, trendy, out of fashion, changing business model and sometimes disappearing to be replaced by or merged into a more complex one.

Mobiles are for sure an interesting product to look at, but after meeting numerous video game companies in Japan, Korea, China and the United States in the past few months, this article will look into toys.

From hardware to software

From wood, earth and stone to metal, toys have come in all shapes and forms. When two American scientists found they could make a simple game of tennis they named "Cathode-Ray Tube Amusement Device" back in 1947, little did they know their little game would spark the creation of a multi-billion dollar industry and revolutionize the world of toys.

• In 1977, Atari released its Atari 2600 game console, which initiated console gaming as we know it.
• In 1985, 26 years ago, Russian programmer Alex Pajitnov created what is possibly the most famous video game of all time: Tetris.
• In 1994, Sony ventured into game consoles and its PlayStation ended up selling over 100 million units.
• In 2004, Nintendo brought a new paradigm with its portable touch-screen DS console, selling also over 100 million devices.
• In 2006, Nintendo again showed that video games could entertain a demographic that was not limited to young boys by launching it Wii console, selling about 50 million consoles in a mere two years and beating both Sony's PS3 and Microsoft's Xbox 360 in worldwide sales.

While Japan and Western countries were exploring the path of packaged software with dedicated hardware, Korea was following a different track.

Korea was in a special situation: as many developing economies, it suffered from rampant piracy, making console and PC game makers unlikely to promote their products. However, Korea had a special characteristic: an early deployment of broadband Internet. Some Korean game enthusiasts decided to leverage this advanced infrastructure by making online games, as the necessity of connecting to a server would prevent piracy. In 1996, Nexon released Nexus: The Kingdom of the Wind, its first 2D MMORPG, marking the beginning of a new era.

From software to service

Korea was among the first countries to take the step from packaged product to game-as-a-service. In addition it started a new paradigm in gaming - online games now represent over 75 percent of Korea's entire video game market. In 2008, its market was worth over $2 billion, about $50 per Internet user. Inspired by its neighbor, China stepped into online gaming in the early 2000s. Partnering at first with Korean publishers, several companies moved into creating and publishing their own games.

Could you say which the most successful gaming companies in the world are? Activision Blizzard with World of Warcraft and Electronic Arts are the most well-known in the West, but few know that in China, Shanda, NetEase, Perfect World and Giant Interactive had revenue of several hundred million dollars in 2008, profit margins above 50 percent and market capitalizations above a billion dollars for three of them - getting close to half that of industry veteran Electronic Arts. Even companies whose main business is not online gaming have ventured into it: China's largest instant messaging provider Tencent made close to $90 million (33 percent of its revenues) from online games in the third quarter of 2008, and Sohu - China's second largest portal - is now deriving about half of its income from its gaming business. In Korea, Nexon's games have such global appeal that it managed to grow successfully in the U.S. market with Maple Story, a five-year-old product, leveraging their experience.

Due to the inertia of their production and distribution systems, Western and Japanese publishers have been slower in embracing this structural change. Could you name a successful Japanese online gaming company? Most large publishers missed the train and in most cases, successful players are new entrants, nimble and pragmatic.

From bills to coins to small change

While the main apparent change has been to go from offline to online, there is another key ingredient in this secret sauce: its business model in association with payment systems.

The traditional business model has been that you buy the game, it's yours. End of story. Alright, maybe we'll sell you a sequel. It looked more and more like movie production, with its hits and flops. This model works well when you don't need maintenance, support and evolutions for the game. Of course, it is not viable for most online games. Korean companies initially tried to offer monthly subscriptions but the market became so competitive that customers would not pay without a trial period, and most would drop out later when asked to pay.

Instead of abandoning a game that had lost its users, several Korean companies realized many users were interested in buying in-game assets: weapons, clothes, you name it. Another shift happened: the free-to-play model was born. No package, no subscription, you pay when you want to in order to enhance your gaming experience.

Micro-entertainment

In March, I was in Silicon Valley meeting with various content providers developing game content on Facebook's platform and Apple's iPhone. If both types of publishers were generally run by just one or a few people, some of them have already grown to over a hundred staff.

Instead of taking a year or more to produce a game like most massively multiplayer online games, or weeks and months like casual games, many were creating bite-sized entertainment - some of the games produced in a matter of days. Two elements were particularly interesting:

• Their revenues came from bite-sized advertising, bite-sized affiliate marketing, bite-sized direct payments. All those making money from bite-sized games offering bite-sized entertainment; or bite-size interruptions requiring bite-sized attention.
• Instead of "games units sold" and "sequels" they were talking about "K-factor" (an indicator of virality for social applications), "conversion rates" (a metric familiar to direct marketers) and "A/B testing," which describes the process of making small adjustments to design, wording or game mechanics to enhance its spreading or stickiness. The process is closer to stock trading than software publishing.

Overall, it looked like game production had moved from planning a war, with strategy and logistics, to sending special operatives with light-weight equipment who could easily react, improvise and modify plans on-the-go.

It is difficult to predict how the gaming market will be structured in a few years time, but the move to online and "social gaming" is a rather clear trend. Most packaged software publishers are having a hard time moving to online and even more integrating with social platforms. Will established players - including currently successful online game companies - be able to embrace this new change?

Presentations can be found on www.slideshare.net/plus8star/. The author can be contacted at benjamin@plus8star.com.

The above is a personal opinion piece by the author. Its publication in no way implies that Interfax shares the views expressed in the article.

About the author: Benjamin Joffe is a renowned expert in mobile and Internet innovation, from social networking to FMC (fixed-mobile convergence) and digital worlds, leveraging over eight years of telecom, mobile and Internet experience in Japan, South Korea and China.

In 2005, he founded Plus Eight Star to bring best practices and innovative ideas from advanced Asian markets to companies worldwide. Joffe is also the founder of Mobile Monday in Beijing, a community of over 3,000 mobile professionals in China and a member of the global Mobile Monday global network to enhance information and connections in the mobile industry.

03/26 12:27
Tagged as: WebGames