Mar 09, 2010 05:36 PM

Warcraft Row: An Industry Game Changer

NetEase is a veteran of Chinese online gaming, with seven years of industry experience. So it was stunned when a seemingly straight development path suddenly descended into a dark maze after the company sought government permission to operate China's version of World of Warcraft: The Burning Crusade, an online role-playing game enjoyed by millions of Chinese.
NetEase eventually succeeded. But along the way, the company lost a lot of money and had to play games with a pair of competing bureaucracies that each sought an upper hand in regulating the online gaming business.

Now more than ever, NetEase understands how necessary it is to play the government's license game and the regulatory contest between the Ministry of Culture and the General Administration of Press and Publication (GAPP). The company also learned that good government relation is the key to winning in the online gaming sector.

And NetEase is not out of the woods. World of Warcraft is back online after a long blackout, but the dispute between the culture ministry and GAPP over gaming regulation has yet to be settled.

Moreover, NetEase is facing the possibility of another regulatory run-in, while at the same time trying to restore revenue levels as well as peace over World of Warcraft.

Passing the Buck
In its early days in China, online gaming was an industry without a clear regulator. During the prehistoric era of 1992-'96, the text-based medieval fantasy game Mud was about all that was available.

The industry back then attracted little attention; no official government organization was in charge of oversight. The industry also lacked a business model, with no clear way to generate profits.

Like other startup companies, the early and successful developer Ourgame struggled with funding before finding a sugar daddy in the form of Chinese Internet entrepreneur Xie Wen, who bought 79 percent of the company after its first year. From that platform, Xie laid the groundwork for legitimizing and expanding the industry.

Xie knew the industry faced an uncertain future in China without a government regulator. According to a person familiar with the situation, Xie sought government support by "begging everywhere for someone to regulate him." He had limited success.

The culture ministry declined responsibility, passing the buck to the Network Management Office, which is under the State Council Information Office. In turn, Network Management shuffled responsibility to GAPP. But GAPP showed little interest.

A turning point came in 2001 when Chen Tianqiao, chairman and CEO of Shanda Interactive, tried to introduce the South Korean multiplayer online role-playing game Three Heroes in China. The move put Chen on track to become one of China's richest men, and his influence had a deep impact on the industry's development.

The push for Three Heroes compelled the government to write regulations for online gaming. Since Shanda's plan called for introducing a foreign copyrighted game to China, government policy required a review process led by GAPP, which would then have the power to issue an approval.

Eventually signing off on the license for Three Heroes was Kou Xiaowei, deputy director of the GAPP Department of Audiovisual, Electronic and Internet Publishing Management. The industry saw Kou as the first government official to recognize the value of online gaming, and it was with his encouragement that, starting in 2000, GAPP gradually brought the industry under its purview.

Kou personally took charge of forming and developing various policies relating to the industry. He also proposed organizing the China Digital Entertainment Expo and Conference, called ChinaJoy. And he was responsible for preparing the first China Game Industry Report.

Three Heroes achieved significant commercial success, helping Shanda earn 139 million yuan on revenues of 326 million yuan in 2002. Chen's wealth and the Chinese online gaming industry exploded.

GAPP was assigned to be lead regulator for online games in September 2000 by the State Council, which ruled that Internet "information services" were part of the "Internet publishing industry." Since then, applying for a GAPP "Internet publishing permit" has been the first step for any company hoping to operate an online game in China.

And many have taken that step. China's online gaming revenues soared from 1.9 billion yuan in 2003 to 12 billion yuan four years later. Now, online gaming is the place to be for companies seeking huge profits and rapid growth.

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