The Game

Starcraft 2 officially launched at the end of July this year, but really, gamers have been beta playing starting February of this year. Going further back, development was officially announced in 07, but had been in stealth mode since 2003 – making it a game 7 years in the making. That’s actually quite dangerous territory in video game development, since technology follows Moore’s Law – you may easily end up in vaporware territory like Duke Nukem Forever, the granddaddy of vaporware jokes. But Blizzard is probably in a league of its own, and has always been known for pushing back release dates. And if they think the game is going to flop, they just cancel it, which is why they have a perfect track record of hits.

Anyhow, the most interesting thing about Starcraft 2, from a content perspective, is in terms of the learning curve. For any Starcraft: Brood War veteran, the sequel is immediately approachable. I would say roughly speaking about 50% of the game is the same as before, in terms of buildings, units and spells, and even the hotkeys have not changed that much. So a Starcraft veteran can start playing instantly and feel very comfortable. But that’s deceptive, because the other 50% of the game which is new completely throws off the competitive play. Few battle-tested Brood War tactics still work in the sequel, and a lot more thinking has gone into the dynamics among units – which units counter which, which work well together. It feels familiar but it really is a new game – very well designed learning curve.

In terms of sales, Blizzard announced 3 million copies sold in the first month, which is a cool ~$200MM in terms of retail value. However, Starcraft 2 is not going to be beating video game sales (except for its own RTS category), since its tied to the PC platform (PC+Mac), whereas the mega box office hits (like Call of Duty Modern Warfare) are really cross platform on the Xbox 360 and PS3 consoles. Back in the day, RTS games have been ported to consoles, but they never really work out well in user experience – perhaps you really do need a mouse sometimes. It will be interesting to see how the new generation of input devices (Kinect etc.) inspires game development – can we see an RTS using a Minority Report type of input any day soon?

The Korean Pro Scene, and Blizzard vs. KeSPA

As said before, the biggest pro gaming scene is to be found in Korea, especially for RTS games. Interestingly, Blizzard used Starcraft 2 as an opportunity to regain control of the Starcraft “platform”. What had happened previously was that KeSPA (the Korean eSPorts Association) had been a driving force in pushing the commercialization of Starcraft in Korea, e.g. establishing the pro-leagues and handing out the TV distribution rights. Meanwhile Blizzard seemed to had taken a passive stance (it didn’t co-invest, but it didn’t charge licensing fees / royalties – it allowed KeSPA to use the game for commercial purposes, including TV broadcasting).

The growth of the sport in Korea probably surprised / delighted Blizzard, except for one thing – they weren’t getting any direct revenue from it. KeSPA had established such a strong control, to the point that pro-gamers needed licenses from KeSPA to compete in KeSPA competitions, and these licenses included some very restrictive terms (e.g.what types of commercial activities and matches the players could participate in, see this recent controversy over an exhibition match in Germany) – essentially, KeSPA was monopolizing the talent and therefore the entire market.

Blizzard saw Starcraft 2 as a chance to negotiate with KeSPA over royalties / licensing. Apparently the talks fell apart, and Starcraft 2 at one point got a “mature – 18+” rating in Korea by authorities (which people speculate as a retaliation move from KeSPA). Blizzard eventually struck a deal with GomTV, which seems to have had clashes with KeSPA before (the enemy of my enemy is my friend). One big implication, though, is that the best Brood War players will probably stick with KeSPA for a while, since that’s where the real money still is – although we have seen legendary players such as “Boxer” and “Nada” join the Starcraft 2 scene.

GomTV launched Season 1 of the GSL (Global SC2 League) in late August, and Season 2 is currently in full swing. Each season has a series of pre-season qualifiers, while the main season is a straight 64-player tournament. The total prize money for the 3 seasons planned this year is about $500,000. As expected, the tournament is dominated by Koreans, with non-Korean players collectively referred to as “Foreigners” – in Season 2, I think a total of 3 “Foreigners” qualified for the main tournament.

The Pro-Scene Outside of Korea

There are many semi-pro competitions organized via Battle.net globally, and players compete in the comfort of their own homes. The pro-scene has and probably always will be about big offline events (however Blizzard hampered that with the decision to remove LAN gaming from the game, which means even “offline” events are now actually battle.net gaming). In the US, the MLG (Major League Gaming) promotes a range of games (e.g. Halo3, Tekken 6) and has incorporated Starcraft 2 as of their Raleigh event in late August. In the recent MLG DC event, the top Starcraft 2 player walked away with $2,500, which indeed is exponentially lower than prize money of the Korean scene (and anyone can register, for $60, so not really a strong pro-scene). In Europe, ESL (Electronic Sports League) has incorporated Starcraft 2 into the Intel Extreme Masters competition.

To be continued…

In the next post, I’ll (finally) talk about the community and the social media related to Starcraft 2. Stay tuned!

I plan to cover this in a series of posts. This first post will give a quick overview of “esports“.

Overview

Gamers have played competitively since the inception video games (the wiki article linked above gives a historical perspective). Commercialization began in the late 90s, thanks to the popularity of First-Person-Shooters (FPS) such as Quake (which I think gave birth to a lot of the gamer vocabulary today – such as pwnage). But where commercialized gaming really took off, as most people probably knows, is South Korea. The common catalysts quoted are that Korea had great broadband infrastructure, and during the Asian Crisis of 97-98 many people took on Starcraft as a way to kill time (though this second one sounds more unlikely). Anyhow – Starcraft, the Real-Time-Strategy (RTS) from Blizzard, really took off in Korea, and starting from around 2000, Korea has had professional Starcraft gaming, involving professional teams, full-time players, television broadcasting, and around the year tournaments.

Globally, various organizations have attempted to create major global tournaments (the Olympics or World Cup of gaming). Two competitions that I believe have had good longevity are the World Cyber Games (WCG) and the Electronic Sports World Cup (ESWC). Total prize money for WCG has steadily risen to around $500,000 from $200,000 a decade ago, split over 10 or so games. This is by no means a huge jackpot (for majority of pro-gamers it’s not a sustainable career), but the growth has driven up the popularity of e-sports.

Major Game Genres

Judging by the prize money involved (check out the above links for WCG / ESWC, for prize money per type of game), FPS and RTS are by far the dominant genres, though there are a few up-and-comers such as MMORPG (World of Warcraft) and DotA (a custom map on Warcraft III, which really doesn’t fall under any major genre). Other popular genres including guitar hero, fighting, racing and sports simulation (football etc.).

Interestingly, by and large most of the competitive genres are solo play (one-on-one). While most games, such as Starcraft, support team-based play, the major competitive format has been solo gaming. This has given rise to a series of individual stars over the years, most of which only enjoying celebrity status within the community, but a few who have actually made legitimate money and fame (again, mostly Koreans – look up the Wiki entries on “Nada” Lee Yun-Yeol and “Boxer” Lim Yo-Hwan, probably the two most famous professional Starcraft players ever).

In contrast, the only major team-based genre is FPS, and especially the hit game Counter-Strike. Counter-Strike popularized the 5v5 format, which has been adopted into DotA. Of course, many FPS games are competed in solo, such as Quake.

Major Countries

In terms of where most pro-players are, this is heavily biased by game genre. Korea by and large “owns” RTS, especially Starcraft and now Starcraft 2. The Korean pro-leagues offer the highest prize money (the recent first Starcraft 2 pro-league, GSL Season 1, featured a ~$90,000 cash top prize) and attracts the best players globally, however most of the top players are Korean.

Warcraft III, another popular RTS, is slightly more diversified, with good European and Chinese players alongside the usual Korean suspects. My personal opinion is this is due to Starcraft’s overwhelming popularity in Korea, which has kept many great players away from Warcraft III.

In FPS, the scene is very different, heavily dominated by North American and European teams and players.

Business model of professional teams

Again probably pioneered by the Koreans, the professional team setup involves a manager (who also acts as the agent for his players) and anything from a handful to dozens of players. Players earn salary and are often provided accommodation and food; any prize money won is split between the player and team (I’m not sure of typical ratios).

Teams get income from competition winnings and sponsorships / advertising. Typical sponsors are major IT manufacturers (Intel, Samsung etc.) as well as specialized gaming equipment makers (e.g. Razer, which offers professional gaming grade mice / keyboards). Teams may be based out of a Internet cafe (which sponsors the team), which offers an environment to train in.

Growth Issues

There are several major issues with e-sports / pro-gaming that have hindered commercialization efforts. First of all, outside of Korea, where Starcraft is a national past-time, core gaming remains a subculture in society, mainly followed by adolescent males – the demographics base makes a big media play (such as a dedicated gaming channel on cable) very difficult. Furthermore, this base of core gamers are further segmented by the types of games and the specific games they play (again in contrast to Korea, where most of the commercialization revolves around Blizzard RTS games, such as Starcraft, Warcraft III, and now Starcraft 2). This limits the total advertising dollars and overall market size.

Secondly, the inherent short product life-cycle of video games goes against the needs to build stable spectator sports. New games, even sequels such as Starcraft 2, need to innovate on the gaming mechanics to sell; this however makes following the games harder (imagine if football or any other sport had major changes to its rules and therefore strategies every 2-3 years).

Thirdly, the steep learning curve for a spectator who has not played the games also blocks market growth. Most of these core games are incredibly complex, for example any RTS would feature 30 or more different types of units, each with unique attributes and mechanics. Also, the mechanics of certain games makes spectating boring at times (in Counter-Strike, there is usually pro-longed periods of stalemate with short bursts of intense action).

Last Friday, a day before Chinese New Year’s Eve, China’s General Administration of Press and Publication (GAPP) finally approved (via QQ Tech – link in Chinese) Activision Blizzard Inc.’s (NASDAQ: ATVI) massively multiplayer online role playing game (MMORPG), World of Warcraft: The  Burning Crusade. This is good news for the 4 million Mainland Chinese subscribers who since mid-last year have been torn with uncertainty over the future of their beloved game.

GAPP issued a very simple statement, stating that since Netease.com, Inc. ((ADR) NASDAQ: NTES) “has taken necessary corrective measures” to address issues highlighted before by GAPP, it now has been given the license to operate the game in Mainland China.

Incidentally, one of the biggest Internet memes in China over the last month has been a fan-made film about the World of Warcraft approval fiasco, with a shocking parody of all the major players involved – Netease, The9 Limited ((ADR) NASDAQ: NCTY), GAPP and the Ministry of Culture. Veteran expat twitterer / blogger @niubi has a nice summary post of the video. (Part 1 of the video on Youtube, with English subtitles, is here.)

Tencent Holdings Limited (HKG: 0700 | (ADR) PINK: TCEHY) announced impressive Q3 results on Nov. 11th (WSJ article, Tencent PR). Quarterly revenues were USD 493.3 MM, 17% QoQ growth and 66% YoY growth; profit growth was even more impressive at USD 209.9 MM (42% net margin), 19% QoQ growth and 92% growth YoY. And as a Bloomberg articlenotes, Tencent has been the best performing stock in the Hang Seng Index this year.

Not all segments were growing though. While Internet VAS (QQ Zone, QQ Games) grew 22% QoQ and represents 78% of total revenue, Mobile VAS dropped 5% QoQ and accounted for 13% of revenue, and the outlook continues to be uncertain despite 3G networks being rolled out. Online advertising grew 20% QoQ and accounted for 9% of revenue, however, outlook for the next quarter seemed poor:

“Sustainability of the recovery in the advertising market is still uncertain… We also expect our search-based advertising revenues to reduce substantially due to amendments to service contract with our partner and the gradual transition into our self-developed search engine.”
– Mr. Ma Huateng, Chairman and CEO of Tencent Holdings Limited.

The ad recession issue aside, Tencent’s fundamentals look great. Active users of QQ increased to 485MM (in comparison, Facebook has >300 MM); peak concurrent users were 75MM (in comparison, Skype has around 20MM peak concurrent users). In terms of monetizing its massive user-base, Internet VAS paying subscribers reached 48MM, a 20% QoQ growth – this is one of the drivers of that impressive top-line growth.

The other driver is of course online games, which generated 58% of Internet VAS revenue (45% of total revenue) and grew 23% QoQ, though Tencent management noted that it was driven by strong summer holiday seasonality. Management also notes that they were facing strong competition from SNS casual games. As an interesting side-story to this, last month rumors surfaced (and then denied) that Tencent had acquired the developers of Happy Farm, the ridiculously addictive casual game that inspired Zynga’s FarmVille. Some people estimate that Tencent was grossing USD 8MM a month on Happy Farm, which would be strong reason to acquire the company while it was still small. (Tencent’s M&A head was actually at Berkeley Haas last week for recruiting, though he was very secretive about their deals, only commenting that they have been very active.)

There has been a ton of new development in the ongoing saga of the General Administration of Press and Publication (GAPP), the Ministry of Culture (MoC), NetEase.com, Inc. ((ADR) NASDAQ: NTES) and its troubled World of Warcraft (WoW) operations in mainland China.

On November 2nd, GAPP put out a notice on its website (link in Chinese) that it has formally rejected Netease’s license application for WoW. (Below quotes my translation)

Today GAPP announced that it has terminated the approval process for World of Warcraft (The Burning Legion), and has rejected the application for World of Warcraft.

During the approval process, GAPP took into consideration the amount of data being transferred during the changing of the operators, and to protect consumers’ interests, allowed EaseNet [the Netease affiliate operating the game] to operate the game in private beta since July 30th while working on removing the inappropriate content within the game, with the focus on restoring consumers’ data. It was clearly stated that EaseNet could not charge users or open the game for new user registration during this period, which EaseNet acknowledged and fully accepted.

However, EaseNet has opened user registration and charging for use since Sep 19th, without approval from GAPP, which is in effect publicly operating the game, and which has seriously violated state regulations that online games and foreign games must receive approval from GAPP prior to launch. Therefore, GAPP has terminated the approval process and has rejected the application.

…EaseNet must cease its illegal operations immediately, and stop user registration and fee collection. Based on the conduct of EaseNet, GAPP will determine the appropriate disciplinary action, including terminating EaseNet’s ISP rights.

The night of the 2nd, Netease announced a “scheduled update downtime” and WoW China servers went offline for 12 hours. They were back in operation as of the afternoon of Nov 3rd.

Also on Nov. 3rd, during its regular press update on illegal online games, Li Xiong, the chief of the Department of Cultural Markets at MoC, went on record stating (link in Chinese):

“…Both GAPP and MoC should closely follow State Council’s prior regulations…GAPP’s action to reject the WoW application is a clear violation of its jurisdiction… the MoC approved WoW on July 21st, therefore the game is operating legally… We will report our work upwards to the State Council, per usual communication channels…”
– Li Xiong, Chief of the Department of Cultural Markets, Ministry of Culture

The last sentence hints that a final resolution will probably only come via a verdict by the State Council. This ongoing drama of course not only affects Netease; indeed all online gaming operators in China are closely watching to see how the mess untangles, and therefore who they need to lobby to in future.

Phoenix TV and various other Chinese media, as well as lots of Internet forums, are picking up on rumors that the long-awaited World of Warcraft (W0W) expansion Wrath of the Lich King (WLK) is close to release.

The rumor is interesting considering the issues that NetEase.com, Inc.((ADR) NASDAQ: NTES) has had surrounding the operations of the massively multiplayer online game in China. The fact that it’s caught between an apparent power struggle between General Administration of Press and Publication (GAPP) and Ministry of Culture (MoC) has made the future of the game extremely unclear. Indeed, an article on People.com.cn (the state owned paper) claims that many retailers of point cards are not selling WoW cards and waiting for the situation to clear, which means that even if fans wanted to play (and pay), they are currently having a hard time getting access. In addition, Netease has put a hold (from official Chinese WoW website, link in Chinese) on registering new characters in certain servers. This could be purely due to technical reasons, but one could also speculate that it’s due to uncertainty regarding the game.

While it’s probably not good practice to over-analyze Internet forum rumors, Phoenix TV is generally a well-respected source. According to their article, “informed sources” claim that Netease CEO William Ding has resolved the company entity issue regarding the JV between Netease and Activision Blizzard Inc. (NASDAQ: ATVI) which operates WoW in China. According to Chinese regulations, foreign companies are not allowed to operate online games in China; sources claim that William Ding and the Netease team has purchased shares of the JV to overcome the regulatory hurdle.

At the same time, Netease and Blizzard has finished most changes to the WLK game content as required by Chinese regulators (including major changes to the “Death Knight” character). Phoenix TV’s sources claim that WLK could be online for testing in as soon as 2 weeks, while other publications have pointed out that the game still needs to go through the approval process by the MoC, which could last as long as 60 days.

Regardless, it seems that William Ding has the support of the MoC. Now the question is how GAPP will respond to these new rumors, especially if any of them materializes.

We reported last month on the return to China of Activision Blizzard Inc.’s (NASDAQ: ATVI) World of Warcraft, and how administrative rights over who regulates what regarding online games have beensorted out. Well, it appears that the General Administration of Press and Publication (GAPP) is having its own interpretation of the government guidelines, as they have undertaken a crackdown covering more than 200 games that has led to the shutdown of 45 online games so far. They also came out with a circularwhich bans foreign investors from operating online games “in any form” in the country.

Interestingly, a Ministry of Culture (MoC) official“expressed his shock” (link in Chinese) at GAPP’s latest announcements, saying it clearly violates the State Council’s earlier guidelines. It’s quite rare to see different branches of the government argue in public, but the MoC will probably take some further actions to protect their turf.

While this power grab is interesting to watch, it certainly isn’t fun for the businesses affected.CCW.com.cn reports (link in Chinese) that Mainfirst Securities (based in Hong Kong) has come out with a new report claiming that WoW is in danger of shutting down. Mainfirst’s point of view is that the MoC has lost the power grab to GAPP, and therefore WoW cannot avoid a shut-down since it has not received approval from GAPP. Mainfirst also believes that the best that NetEase.com, Inc.((ADR) NASDAQ: NTES) can do at this point is to apologize, pay a fine, and try to minimize the down-time while getting through the approval.

Mainfirst maintains its “sell” rating on Netease with a target price of $35. The stock’s ADR price fell 2.8% on Friday to close at $40.51.