Uplink 8


The China Issue


April 2007




Contents:


• China’s Media Culture


• Online China


• Mapping Game Software


• PS3 European Launch





Introduction


First off, an apology to our readers for the delay in this issue of Uplink. This was due not to production difficulties, but the necessity to let the dust settle from the European launch of Sony’s Playstation 3 in late March. This issue provides some historical background on China’s booming mass media and gaming market, and provides some pointers for its possible future. Next, we analyze one of the key structural features of the videogame culture – its dependence on software franchises. Finally, we have a postmortem of the PS3 European launch. Nintendo’s Wii did quite well in Europe, but Microsoft’s 360 was coolly received, so the PS3’s success was by no means guaranteed. Yet succeed it did – and Uplink explains why.



China’s Media Culture

To understand China’s bourgeoning videogame culture, it’s helpful to review the history of its media culture. The Chinese mass media has had the unique distinction of being one of the most collectivized and one of the most marketized in the world, simultaneously. This miracle was due to China’s 1949 revolution and subsequent Cold War geopolitics in the East Asian region. The vast bulk of China’s peasantry – 90% of the population – was scarred by decades of colonialism, civil war and Japanese occupation, and justifiably considered the Revolution to be the best thing to ever happen to them.

There is no small irony in the fact that the Revolution was probably the best thing to ever happen to China’s film industry, too. Pre-revolutionary Shanghai had a thriving film industry, and one of its actresses, Jiang Qing, later became Mao’s wife and a powerful political leader during the last period of Mao’s rule. After the victory of the Chinese Community Party in 1949, the mainland inaugurated a massive program of land reform and crash industrialization. Money for films dried up, mostly because building schools, hospitals and factories took priority over entertainment. More importantly, any chance the mainland might have gone on to create a state-subsidized film industry on the Soviet model was dashed by the Korean War. The US slapped a trade embargo against China, making filmmaking almost impossible on the mainland (equipment and film stock had to be imported).

As a result, many of Shanghai’s leading actors, directors and studios migrated to Hong Kong. Yet what seemed to be a fatal blow to the Chinese media turned out to be a fathomless bounty. The city’s British-run entrepot economy began to boom in the 1950s, mostly because mainland China desperately needed a deep-water port to outflank the US embargo. China’s top leaders and the British struck a deal: the mainland would be able to buy what it needed from world markets via Hong Kong, and in return, China wouldn’t press for Hong Kong’s immediate return. Britain got to keep one of the finest ports in the Pacific, China got its indispensable trade link, and everyone was happy.1

The Hong Kong boom did two things. First, it allowed Hong Kong studios to tap into a vastly enlarged audience in Taiwan, Japan and the US, as well as Chinese diasporic communities all across the Pacific Rim. Film budgets went up dramatically, and the industry became commercially self-sustaining, without any official state support. Second, Hong Kong served as a key source of media equipment and cultural texts for the mainland. In the late 1950s and early 1960s, the mainland did finally begin to develop its own film industry. Though the scripts tended to be propagandistic, the industry did manage to produce some genuine classics, beloved to this day by Chinese audiences. Unfortunately, the industry was almost completely paralyzed by Mao’s disastrous 1965-1975 Cultural Revolution, one of history’s great exercises in political futility.

When Deng Xiaoping took the reins in the late 1970s and inaugurated China’s economic renascence, the inevitable happened: Hong Kong’s films, Cantopop music videos and television shows jump-started the mainland’s moribund media culture, in much the same way that the East Asian developmental states of Taiwan, Japan and South Korea provided a blueprint for China’s own developmental state. This is most evident in the work of the so-called “Fifth Generation” filmmakers such as Yimou Zhang and Kaige Chen, who infused a range of national forms such as the historical drama, the Chinese opera, and the landscape painting with an allegorical multinational content. In Hong Kong, film sales and budgets continued to increase, allowing filmmakers to create some of the most sublime works of the multinational media ever created, everywhere from Wong Kar-Wai’s wondrous romances to John Woo’s power-packed action thrillers.

While Hong Kong’s film industry has slowed down in recent years, due to the emigration of leading directors and the late 1990s Southeast Asian economic crisis, China’s total film production has continued to increase. To be sure, Chinese cinema is still relatively small compared to that of its India neighbor. According to Eurostat, China produced 181 films in 2005, while India produced 877 in 2003. On the other hand, China’s state-owned television industry has grown by leaps and bounds, and currently weighs in at three to four times the size of its Indian equivalent. Central broadcaster CCTV raked in revenues of nearly $1 billion in 2006, spurred by advertising contracts for the 2008 Beijing Olympics.

The big story in today’s Chinese media is the arrival of the mobile digital age. The infrastructure of cellphones, handheld devices and broadband services has reached the point where Internet TV and online games are becoming mainstream cultural phenomena. In fact, China’s broadband network is growing so fast that China may soon have the single largest broadband market in the world. In contrast to previous waves of mediatization, where locally-produced hardware played imported or pirated media content, the digital media has spawned a boom in indigenous Chinese software and media production, including online games. Though most of these games are still produced and consumed within China, it’s just a matter of time before China joins Korea and Japan and becomes a world-class exporter of game software.

-- DRR

Endnotes 1. Everyone was happy except the Americans, of course, who were furious about the deal. To its credit, the British government refused to change its policy despite intensive US lobbying. These were the days when the British were still unafraid of displaying backbone to the Americans.



Online Gaming in China

Online gaming in China, just like all its other mass media, is a success story scripted by the developmental state. The key is the rise of what might be termed the broadband industries – online gaming, television-on-demand, movie downloads and the like. China has been officially promoting online games since 2002, when the government rolled out a package of tax breaks and incentives designed to kick its online game industry into high gear. This package was consciously modeled on Korea’s enormously successful industrial policy for gaming, which involved tax breaks for game companies, the introduction of game design and programming into universities, and a national investment program for high-speed broadband. China’s government planners adroitly added one more element to this agenda, by employing the publicity drive for the upcoming 2008 Beijing Olympics to promote broadband services and Internet TV around the country.

The result is that China’s online games sector has taken off faster than a Long March rocket. The Peoples’ Daily estimates total sales hit 8 billion yuan ($1.04 billion) in 2006, and forecasts future growth of 30% per annum.1 Leading Chinese game company The9 earned 985.8 million yuan (US$127.1 million) in 2006, double its earnings in the previous year (465 million yuan, or US$60 million). Apparently, this is due mostly to its takeover of the franchise for Blizzard’s hugely popular World of Warcraft massive multiplayer (MMO) game in mainland China in mid-2005. That said, the vast bulk of Chinese online games don’t rely on foreign software or licenses. While Korean firms dominated the first wave of online games in China, the latest figures show Chinese-made games comprised 65 percent of the market in 2006.The success of online games also seems to be spreading to other software firms. Baidu, an online search and portal firm, raked in $100 million in revenues last year.2 Currently, 31 million out of China’s estimated 137 million Internet users play online games, making China one of the largest online game markets in the world.

-- DRR

1. “China’s Online Game Industry on a Roll.” Peoples’ Daily, April 13, 2007. Accessed April 13, 2007. Web: http://english.peopledaily.com.cn/200704/13/eng20070413_366346.html

2. Chinese Tech Stock Weekly Report. Accessed April 3, 2007. Web: http://china.seekingalpha.com/article/27656



Videogame Software

Game software has to be one of the oddest entities around. Like other forms of the mass media, its ultimate function is to entertain, enthrall or otherwise amuse us. Unlike other mass media, its social existence is a screaming bundle of contradictions. Games straddle the gap between open source software and hypercapitalist monopoly-rents, between innovative coding and exploitative merchandising, and between awe-inspiring creativity and hair-raising exploitation.

In the bad old days, software designers were heavily dependent on a unique hardware platform. Fortunately, the rise of broadband and widespread software emulation means that games can be archived on disc media and distributed via the Web for pennies on the dollar – a huge boost for casual and downloadable games, which hopefully will open up new avenues of creativity for artists.

What hasn’t changed, unfortunately, is the basic economic logic of the videogame market. The current break-even point for console videogames is 500,000. Sell fewer than that, and the developer loses money and eventually goes out of business. Sell more, and you turn a profit and continue to make games. The problem is, nine out of ten games won’t reach the 500,000 mark and will never be profitable. The profits come from a few blockbuster titles, which sell in the millions and pay for everything else.

The catch is, it is extraordinarily difficult to create blockbuster titles. Great games cannot be standardized like cars or computers. It’s easy to make a million separate copies of a single game, but each game is ultimately bought and played by individual human beings. Those human beings don’t exist in a cultural vacuum; videogames must compete with films, television, sports, gossip and a thousand other things. As such, games can’t simply replicate what other branches of the mass media already do. What they can offer is interactivity, namely the unique sensation of operating in a unique game-world, with its own set of rules, interfaces and narratives. This is why playing a sports videogame is a fundamentally different experience from watching an actual game, or actually playing in one.

The fundamental dilemma facing game designers is that their game-worlds must be real enough to be accessible to a media-literate audience, but fantastical enough to be different from anything else they’ve ever experienced. What designers have done is to create the equivalent of a restricted political economy – that is to say, a franchise. A franchise is simply a game-world complex and interesting enough to last longer than a single game. What makes the franchising strategy possible is that unlike previous cultural epochs, when modernist novelists, jazz musicians and atonal composers labored in obscurity for decades before audiences began to appreciate their achievements, videogame audiences have been much quicker to recognize and appreciate great works of art.

This isn’t to say sales success always equate to commercial success, but it doesn’t necessarily exclude such, either. True, Capcom’s Okami, Sony’s Shadow of the Colossus and Ubisoft’s Beyond Good and Evil are amazing works of art, but never sold particularly well. Yet Square Enix’s wondrous and evocative Final Fantasy sagas have been hugely popular, while Nintendo’s Legend of Zelda epics are sublime works of art as well as best-selling titles.

What this means is that quality franchises are fundamental to the game culture in ways which just don’t apply to other mass media. To map out just how important they are, videogame fansite VGCharts created a handy interactive map detailing sales of games which go gold (i.e. which sell over 1 million units), classified by publisher and platform. First off, it’s worth noting the complete dominance of console gaming over PC gaming:

Table 1. Videogame Platforms (world sales 1990-2006). Source: VGCharts

Platform (millions of

software units sold)

Total units sold

Percent of total game software market

Nintendo (Gameboy 245.8, NES 219.6, SuperNES 144.8, Nintendo64 143.0, Gameboy Advance 129.5, Gamecube 81.2, Wii 12.7)

976.6 million

45.1%

Sony (PS1 345.4, PS2 484.1, PSP 11.6, PS3 1.02)

842.1 million

38.9%

PC

123.4 million

5.7%

Microsoft (Xbox 68.2, X360 23.1, PC 7.3)

98.6 million

4.6%
While Sony is giving Nintendo a run for its money in terms of market share, Nintendo remains the undisputed leader of software publishing, generating an astonishing 39% of all software units sold (see Table 2 below). Approximately half of Nintendo’s sales derive from its awe-inspiring Mario franchise, which now includes nearly eighty hit titles. Leading publishers such as Electronic Arts, Sony, Square Enix, Capcom and Namco-Bandai have responded by developing diversified portfolios, balancing a number of key franchises with a variety of niche games. Smaller companies tend to rely on just one or two franchises: Take 2 is heavily dependent on the Grand Theft Auto games, while LucasArts relies exclusively on Star Wars- themed games.

Surprisingly, Microsoft is still very far from being a top publisher or game producer. Here are the numbers for publishers:

Table 2. Leading Game Publishers (1990-2006). Source: VGCharts

Publisher

Software Units Sold

Market Share

Nintendo

843.5 million

39.0%

Electronic Arts

253.0 million

11.7%

Sony

175.3 million

8.1%

Square Enix

117.1 million

5.4%

Capcom

79.3 million

3.7%

Namco-Bandai

78.0 million

3.6%

Take 2

70.9 million

3.3%

THQ

67.2 million

3.1%

Activision

65.3 million

3.0%

Sega

63.5 million

2.9%

Konami

51.9 million

2.4%

LucasArts

39.0 million

1.8%

Microsoft

35.4 million

1.6%

Eidos

33.1 million

1.5%

Ubisoft

26.7 million

1.2%

Acclaim*

26.5 million

1.2%

Vivendi

22.5 million

1.0%

Infogrames

18.5 million

0.9%

Midway

11.6 million

0.5%
* Company closed down in 2005.

Microsoft’s current difficulties are partly due to its historic roots as a maker of PC software. The firm heavily promoted PC gaming, and chose a more PC-centric design for the Xbox360 in an attempt to bridge the divide between PC game developers and console developers. Yet the stark reality is that PC gaming will never dislodge consoles, for the simple reason that $300 consoles will always reach a much larger audience – and therefore sell more high-profit software units – than $1000 computers requiring $100 graphics cards and $250 annual anti-virus, operating system and network security updates.

The PC game market also has a little-known internal weakness. It has only one true blockbuster franchise, Electronic Arts’ The Sims. About 46.6 million or 37.8% of all the PC games ever sold consist of Sims games (by comparison, console sales of The Sims totaled 7.7 million). The remaining PC franchises are much smaller than their console equivalents. Blizzard’s World of Warcraft has been widely cited in the mass media as the breakthrough MMO, but its total sales amount to only 6.56 million copies. This is respectable, but does not come close to the console franchises. The only other PC game which sold at least ten million copies is Broderbund’s Myst:

Table 3. Leading Game Franchises (1990-2006). Source: VGCharts

Leading Franchises

(at least 10 million lifetime unit sales)

Software units sold (as of April 3, 2006)

Publisher

Mario (including spin-offs)

368.2 million

Nintendo

Pokemon

147.5 million

Nintendo

Final Fantasy

58.1 million

Square Enix

Grand Theft Auto

56.8 million

Take Two

Sims

54.3 million

Electronic Arts

Zelda

49.1 million

Nintendo

Gran Turismo

46.1 million

Sony

Tetris

40.9 million

Nintendo

Crash Bandicoot

39.2 million

Vivendi, Sony

Star Wars

39.0 million

LucasArts

Dragon Quest

37.2 million

Square Enix

Sonic

36.5 million

Sega

Need for Speed

35.1 million

Electronic Arts

WWE/WCW

33.1 million

THQ

Madden NFL

32.9 million

Electronic Arts

Tony Hawk

29.4 million

Activision

Duck Hunt

28.3 million

Nintendo

Resident Evil

25.1 million

Capcom

Tekken

24.1 million

Namco-Bandai

Kirby

22.4 million

Nintendo

Tomb Raider

21.8 million

Eidos

Tom Clancy

18.9 million

Ubisoft

Medal of Honour

17.4 million

Electronic Arts

Spiderman

16.8 million

Activision

FIFA

15.6 million

Electronic Arts

Brain Training

15.1 million

Nintendo

Street Fighter

15.1 million

Capcom

Metal Gear Solid

15.0 million

Konami

Pro Evolution Soccer

14.5 million

Konami

Halo

14.3 million

Microsoft

NBA

13.7 million

Electronic Arts

Dragonball Z

13.6 million

Namco-Bandai

Nintendogs

12.1 million

Nintendo

Metroid

11.4 million

Nintendo

Kingdom of Hearts

10.9 million

Squaresoft

Myst

10.0 million

Broderbund
Surprisingly, Microsoft’s own PC gaming division accounts for only 7.4% of the PC game market. If Microsoft can’t create compelling franchises in its home market, it’s hard to imagine how it can ever seriously compete in the console space against the likes of Nintendo, Electronic Arts, Sony or Square Enix.

-- DRR



PS3 European Launch

Twenty years ago, Europe was the smallest and least important of the major game markets of the world, well behind the US and even further behind Japan. Times have changed. Nowadays, the fifty nations which make up the greater European region make up the largest single videogame market in the world – which makes sense, given that the region has become the single largest economic space on the planet.1 What makes Europe so interesting is that it is comprised of a vast multitude of different languages and cultures, which means game companies must deliver an artful blend of local customization plus global appeal.

It seems that European consumers know quality when they see it, because the launch of the PS3 in Europe was hugely successful. Confounding the predictions of Sony-bashers and Microsoft’s FUD campaign alike, at least half a million units sold in European markets on launch weekend alone. According to VGCharts, total sales quickly reached the 900,000 mark in a couple of weeks. This was in spite of the high price of the consoles – citing customer demand for media storage, Sony offered only the more expensive (599 EUR) 60GB version of the PS3. At the same time, Sony kept PS2 fanbase happy with the release of God of War 2 and the European release of Final Fantasy 12 – excellent games which somehow manage to outdo their superb predecessors.

Sony also resolved some of the remaining issues in their online service. A software patch has enabled background downloading of games and media for the PS3, while the Playstation Store is beginning to fill up with online goodies. Sony also drew applause from the hard-bitten game developer community by showcasing Home, a user-defined MMO which is something like the PS3 version of online community Second Life, and Little Big Planet, an entertaining and quirky multiplayer game which enables players to design and play through their own game-worlds.

Sony’s position is so strong, the firm decided to end sales of the cheaper, 20GB model of the PS3 in North America. While the 60GB model is a superb machine, analysts worried that its hefty $599 price tag would doom it to slow sales. As it turns out, consumers are more than willing to pay now to save later: the 60GB model outsold the 20GB version by ten to one. This isn’t surprising, when you consider that Sony’s strategy in the console market is exactly what Daimler does with Mercedes cars and Apple does with iPods – offer consumers a stylish, high-quality product which lasts forever and has tons of customization and upgrade features.

Sony’s job has been made easier by Microsoft’s self-inflicted travails. Sales of the 360 have finally started to outpace those of the original Xbox in North American markets, and there are some excellent games in its release pipeline. Yet even at this late hour, Microsoft has utterly failed to grasp the importance of high-definition television to the console market. HDTV sales may seem like a gentle breeze right now, but just you wait. This fall, Hurricane HDTV is going to blow through the home electronics sector like a Force 5 monster, and Microsoft has no shelter from the storm. The latest example of this lack of planning is the “360 Elite”, a 360 machine retrofitted with HDMI and a 120GB hard-drive. Leaving aside the question of why HDMI wasn’t included in the original unit in the first place, there’s still no HD-DVD or Blu-ray player, and its $479 price tag puts it into roughly the same bracket as the PS3. In the thirty year history of videogames, no console has ever succeeded by adding expensive additions to a basic model, though many have crashed and burned.

-- DRR

Endnotes 1. This is a market of nearly a billion people, generating almost 13 trillion EUR in annual output. The region include the twenty-seven countries of the European Union, plus twenty-four other countries which are (1) geographically adjacent to the EU, (2) have long-standing ties due to colonial and postcolonial migration; or (3) trade mostly with Europe. The list includes Albania, Algeria, Belarus, Bosnia-Herzegovina, Croatia, Egypt, Iceland, Israel, Jordan, Lebanon, Libya, Macedonia, Moldova, Morocco, Norway, Palestine, Russia, Serbia, Switzerland, Syria, Tunisia, Turkey and Ukraine.



Stay tuned for Uplink 9: The Euro-gaming Issue, coming July 2007!