China’s Gaming Market
It should come with little or no surprise, that China possesses a huge market for games and electronics. And as this article explains, that market can be very difficult to penetrate, especially for foreign game developers. In fact, many companies tend to avoid China altogether, as the Chinese government’s strict regulations make it very challenging to enter this already-crowed market. However, there are those companies that simply cannot turn away from the billion-plus potential customers that reside in China. For these corporations, what should they do to be successful? More specifically, this article by Christian Nutt addresses mobile gaming companies, and what they must do to survive in this competitive environment.
As the 21st century progresses, smartphones are becoming more prevalent among the Chinese people. Following that trend, there has also been a rise in mobile gaming, among the working class and younger generations. This has led to a much wider market for mobile gaming, and thus, more gaming companies to fulfill desires for entertainment at our fingertips. Now, the only question remaining is what strategy best suits this growing market. Interestingly enough, as many mobile companies have discovered, there seems to be one dominant strategy when working with the Chinese market. As Christian Nutt explains in his article, the games should be free-to-play, but with purchasable in-game items that help progression. That way, it will almost guarantee that all gamers will have access to the games, and the more impatient of the bunch will spend money to progress faster. This is a model that seems to work for many Chinese games, and the reason why should be clear with a simple buyer-seller analogy.
First, a little background information is needed. The key notion to remember in this situation is that piracy is very widespread in the Chinese population. It may be better now than it was several years ago, but it still presents a serious problem among developers looking to approach this market. To put it simply, if a worthwhile game is created, there will be a way to pirate it. The sentiment here is much the same as why many people cannot resist returning from Chinatown with some cheap DVDs of their favorite movies. People want cheaper goods, and free is as close as you can get without the developers paying you to play their games. Now, if the developers of the games are sellers, the people creating pirated copies of games (let’s call them pirators) are also sellers, and the rest of the population are buyers, it is clear to see why the free-to-play model seems to work best.
In this scenario, both sellers are tied to the same group of buyers. If the developers charge $60 for their new release, and the pirators charge nothing, then all of the buyers will “buy” from the pirators. In this situation, the only Nash Equilibrium is when both sellers are charging $0. That way, the buyers are indifferent about which buyer to buy from. However, there is another factor to consider. The developers of the game has purchasable in-game items, while the pirators do not. Thus, more of the buyers will turn to the developer’s release of the game, rather than pirate it. The revenue to the company comes from these in-game purchases, and not from the actual game itself. According to the article, this free-to-play model has decreased the jailbreak and piracy rates of mobile phones and applications, and has led to more successful experiences for companies in China.