China's Online Gaming Market Explodes -- Here's Who Benefits

 

TAIPEI, Taiwan (TheStreet) -- China's online gaming market could surpass the U.S. next year, offering  an enormous opportunity for both Chinese and foreign game makers.

Sales of online games in China reached $18.4 billion last year, up 37.7% over 2013, the Taipei-based tech research firm Market Intelligence & Consulting Institute says, citing data from the China Game Publishers Association Publications Committee. By next year, the figure will top $24.5 billion, higher than the U.S. online gaming market of 2014, the report says.

Among the reasons for China's gaming growth: improved Internet access, adoption of 4G services, an increase in mobile devices and more leisure time across China as wages go up. Young urban mobile users spend as much as 43% of their time on phones playing games or using related services, some research suggests.

Foreign companies such as Sony (SNE) and Microsoft (MSFT) will be allowed to sell game consoles to the Chinese starting this year, another incentive for people to play.

PC gaming still leads the online space, but mobile has made quick gains since 2012. There's more room to grow, meaning there are voids for a range of companies to come make money.

"The most important reason behind its growth is monetization," said consulting institute analyst Li Yi-hong. "Chinese online gaming may not have the most innovative game play features, but certainly have the most sophisticated design for monetization."

Acceleration and complexity of online gaming bring obvious benefits to Chinese tech firms, many of them listed in the U.S. or traded there as ADRs. Local firms can handily match China's unique tastes since the mobile online gaming started in 2012.

"What separates China historically is that it has almost developed its own ecosystem of online games that are hugely popular inside the country but almost entirely unheard of outside of it," said Matthieu David-Experton, founder of Daxue Consulting in Beijing and Shanghai.

Chinese content providers such as Tencent (TCEHY) and Changyou.com (CYOU) are top game sources today. They have learned to monetize their apps in China and enjoy at least tacit support from Beijing as the government has signaled it will back domestic private enterprises.

Foreign game developers with strong reputations overseas will be well received, though they are advised to partner with Chinese firms as market entry rules can be sticky.

"The overseas companies that stand to gain the most from China's robust gaming market are mainly those that have strong game portfolios in their home markets and that have taken investment from or otherwise allied with any of China's top internet firms," said Mark Natkin, managing director with market research firm Marbridge Consulting in Beijing.

Firms that already fit the description include American interactive entertainment provider Activision Blizzard (ATVI) and several from South Korea, Natkin said.

Developers or suppliers of over-the-top boxes that stream games to the television sets of Chinese players stand to earn money long-term as the market matures.

A Chinese firm leads for now in this category: New York Stock Exchange-traded e-commerce behemoth Alibaba (BABA) has "invested heavily" in building higher-end boxes to expand on games that are "quite simplistic" today, David-Experton said.

Faster Internet speeds will further accelerate that market segment, he added.

No confirmed all-out winners have emerged yet in China's online gaming space, analysts say.

"With mobile devices becoming the mainstream device for Internet access, mobile games have created 'blue oceans' of untapped new market spaces for the game industry," the Taipei market research firm said in its statement.

This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.

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